COVID, potential consolidation, implications for ALF pricing and non-contiguous blocks have conspired to make the forthcoming second 5G spectrum auction a highly complicated affair.

H3G seems unlikely to bid in a meaningful way for the 5G spectrum (3.6GHz+) but is expected to share the 700MHz band with EE. With the three leading operators likely to split the 3.6GHz+ spectrum between them, proceeds of £1bn-£2.7bn are conceivable.

The non-contiguous nature of the spectrum blocks on offer risks the operators ending up with fragmented holdings in spite of Ofcom’s endeavours to encourage trading—an efficiency loss of up to 20%.

EE has announced the ending of its relationship with Carphone Warehouse, hot on the heels of a similar announcement from O2 a few months ago and the recent closure of Carphone Warehouse high-street stores.

Representing less than a third of the market gross adds, Carphone Warehouse is going to struggle to be viewed as a true comparison distribution channel. Its future probably lies elsewhere.

The closure of Carphone Warehouse stores, and now the diminished appeal of its website/off-high street stores, is positive for the operators.

Growth deteriorated by 3.5ppts, with the UK the weakest and Italy most robust thanks to its early onslaught of COVID-19, usage pickup in a largely pre-pay market and reprieve from a particularly competitive environment.

More operators (Orange and Telecom Italia) cut their guidance at the Q2 results and others (Deutsche Telekom and Iliad) sounded a note of caution regarding the likelihood of them reaching their full year targets.

The outlook for next quarter is mixed—roaming revenues will be even harder hit and competitive intensity is bouncing back but where usage has been depressed it will begin to recover well post-lockdown.

The slow recovery in UK mobile continued this quarter with a 1ppt improvement in service revenue trends.

In spite of operator guidance to the negative, the sector is likely to remain relatively resilient in the face of COVID-19 in the short term, with its various impacts affecting operators differently depending on their business mix.

The outlook is relatively robust with the impact of some regulatory initiatives muted by lockdown measures and the annualization of some financial drags from the middle of next quarter.
 

Demand for telecoms capacity is booming, and the networks can (broadly) cope, with the increase primarily in off-peak demand. However, as the crisis continues, maintaining resilience becomes more challenging.

In the short term, the demand for ample, reliable connectivity coupled with reduced churn will add resilience to operator financials, although there may be significant weak spots especially in business markets.

However, as the crisis goes on, the pressure on capacity and network maintenance may grow, and the impact of the dramatic economic slowdown on consumers and businesses will also put pressure on financials.

The UK mobile market was steady this quarter at around -2% ahead of out-of-contract notifications hitting from February.

The mobile sector is playing an important role in tackling COVID-19 and is likely to be relatively resilient in the short term with a broadly-neutral financial impact. Longer term it will be exposed to the fortunes of the economy.

Elsewhere, there have been green shoots of positivity in the outlook: some good regulatory news; a degree of price inflation; Carphone Warehouse’s retreat is a positive for the operators, and some financial drags will drop out as the year progresses.

At the Enders/Deloitte Media & Telecoms 2020 and Beyond conference the economic and policy importance of telecoms infrastructure was a major theme, particularly in the current climate.

Operators envisage a pricing environment that will continue to be very challenging.

Help is required to secure infrastructure investment, deliver the economic upside from 5G, and level the playing field between sub-sectors.

UK mobile market service revenue grew by 2.4% in Q3, a level not seen since early 2011. However, this 0.6ppt improvement on the growth rate in Q2 was very disappointing in the context of an expected 2-3ppt revenue growth bolster from the annualisation of roaming tariff cuts 

EE and O2 shared the top spot for growth, more than double the growth rate of H3G and far ahead of Vodafone which remains in negative territory and had only the slightest uptick this quarter

O2 is likely to be hit by its well-publicised network blackout in December, but experience from a similar problem back in 2012 suggests this will be modest and temporary, and it is otherwise performing well

UK mobile market service revenue grew by 1.7% in Q2, up from 1.3% in the previous quarter, a disappointing result in the context of boosts from both IFRS 15 accounting and the annual price rises in the quarter

O2 was the star performer this quarter, with its service revenue growth leaping ahead to claim the top spot. BT/EE’s service revenue growth declined on an underlying basis, with weak contract net adds over the last six months catching up with it, and H3G and Vodafone were slightly improved and steady respectively excluding some one-off effects

Next quarter, the impact from the EU roaming cuts will annualise out, providing a substantial fillip to all operators. Ceteris paribus, this would put market growth in the vicinity of 4%, a figure not reached for years

Service revenue growth for the UK mobile market improved in the first quarter of the year, lifting from 1.0% to 1.2%. There was an easing of the EU roaming regulatory impact helping growth improve, but the SIM-only drag likely grew to counteract this, suggesting a modest underlying improvement overall

We expect continued market growth improvement in the coming year due to a number of tailwinds, namely annual price rises, the arrival of IFRS 15, and the EU roaming impact dropping out

The fundamentals of the market remain solid: competition is rational; pricing is firm; data demand is strongly rising; supply is partially constrained; MVNOs and convergence do not appear a threat