Our view is that mobile operator marketing strategy was the key determinant of the rate of apparent growth in mobile penetration across Europe in 2000. We use this report to show that operator 'push' was responsible for the increase in apparent subscribers. We examine the evidence on actual rates of ownership and usage in the three of the largest markets and show that underlying mobile penetration is probably around 60% of adults in these markets. Will the reduction in estimated levels of penetration, which the operators also acknowledge, mean continuing high growth rates in future? We think it unlikely. First of all, of course, operator 'push' is reducing. Second, ownership in key demographics, such as 15-24 year olds is already close to saturation. Third, those that do not own a mobile, particularly in the older age groups, appear relatively uninterested in the product.

Our pessimism derives from our view, firstly, that subscriber growth in NTL's UK cable franchises has all but ceased and, secondly, that further price rises will inevitably cause loss of subscribers as NTL's telephony and television offerings have already become uncompetitive. Broadband is important but will not generate significant amounts of extra revenue.

In this report Chris Goodall carries out a brief analysis of Sky's results published today and compares them to our projections.

Our emphasis in this note is on ITV Digital. What are the options open to the two shareholders of ITV Digital, Carlton and Granada? How can they reduce the burden of supporting ITV Digital through the next few years? What is the likelihood (or otherwise) of substantial improvement in that company’s results, in particular break even in 2003?

At the current CSFB tech conference in Barcelona Ericsson stated that the expected handset market for 2001 will now be at lower end of its previously stated range of 430-480m; both it & Nokia said the reason was cuts to handset subsidies in Europe. Whilst we are relieved that our early emphasis on the impact of changes in operator strategies on the handset market in Europe has been proved right, we are in the process of revising upwards our own forecast of 300-350 million units based on growth in China (this forecast and spreadsheet will shortly be available).

For the future, we expect data traffic to slow given strong signs of a plateau in demand among businesses and changing residential payment models. However, we forecast a gradual evolution towards profitable ISP business models based on unsubsidised pricing for all forms of access. Indeed, we expect overall pure Internet access revenues to continue to grow until the latter part of the decade. This is plainly contrary to all those who predicted access would be free for all and a loss-leader for other forms of revenue, such as online advertising, e-commerce commissions and eCRM (direct marketing).

Mobile Phone Users

We have published extensively on digital TV in the past 18 months, consistently casting doubt on the potential of TV-centric interactive platforms to (a) generate enough income for operators to repay hardware subsidies and (b) compete with the PC for home shopping activity (t-commerce).

We see a clear distinction between the relative success of Sky and the continued slow growth of ITVdigital and the real difficulties being experienced by cable operators. Sky is gaining business while the other operators are struggling to retain their share. This is the first of two notes. In the first (attached), Chris Goodall examines the financial prospects of Sky in advance of its results next week. Chris looks at what would be good or bad numbers for Sky's results in all the main categories, and suggests reasons for short-term optimism. In our next note, which will be sent out on Monday, I analyse ITVdigital and question whether anything can be done to improve its prospects. The launch of ITVsport does not help, with its huge programming budget and limited opportunities.

Chris Goodall has dissected the economics of the major pay-TV operators. He finds that if current trends continue, BSkyB, NTL and Telewest will not generate the cash to pay back their debt in the foreseeable future. In the case of the cable companies this leaves the debt holders exposed. Equity holders should be concerned about further dilution from future debt to equity conversion.

This note considers the so-called 'digital dividend' in light of the recent ITV licence renewals.

The UK online population reached 17 million in February 2001, up around one-quarter on the year, on the strength of rising participation of women (to 44% of users) and of young people. We expect 4 million users to be added to the online population by February 2002, to reach 21 million, with growth at a lower rate than in 2000.

This report updates our July 2000 report on European B2C e-commerce, with a special focus on the UK market.

We estimate that global net adds were 48m in Q2, down from 58m in Q1 2001. The total net adds so far this year of 106m is 53% of our full year forecast of 201m for these territories, which supports our forecast of 375 million units shipped given that net adds will likely continue to decline in Q3 followed by the seasonally strong Q4.

The UK online market is among the most mature in Europe: while strong growth continued during 2000 (60% increase in home users), this was less dramatic than in Germany and France.

Microsoft has never made much impact on the Internet. As a result, we still have a proliferation of standards and competing suppliers of the underlying technology, of which the most obvious is Java. Almost all the new generation of Internet access devices, such as phones, PDAs and TVs, all use underlying software that does not work well with Microsoft technology. Genuine interoperability is not yet available.

The key points we make are as follows: