This report provides an insight into the effect on consumers of the significant changes in retail pricing and promotion of broadband, as well as an update on the size and dynamics of the UK Internet population. The main points:

This report addresses four principal questions:

In The Digital Bomb II (2002-21), we asserted that the worldwide switch to digital TV would take place more slowly than most commentators expect. We base this view on our assessment that there is no financial incentive for the operator to make the switch from analogue to digital TV.

1. The evidence of a rapid slowing of the growth in multichannel homes is increasingly clear. We predict that Sky will miss its target of 7 million subscribers by the end of 2003 by 300,000 homes, if current trends continue.

2. TV viewing levels appear to have returned to 2001 levels, after a fall in the first months of this year. The evidence for a secular decline in overall viewing is weak. But ITV1 continues to plummet.

Digital terrestrial television in the UK and elsewhere faces three enormous problems: (1) the paucity of attractive programming available for free distribution; (2) the uncertainty of the coverage and picture quality; and (3) the low channel capacity compared to satellite and cable. The four bids for the UK DTT licences try to address these problems, but with limited success. In the next two weeks the Independent Television Commission will try to choose the least worst proposal.

The rationale behind the deal appears to be that management needed to demonstrate their continued commitment to building a successful US business, an ambition that all EMI managers have had for the last twenty years. Robbie Williams has never sold well in the US, and we regard EMI’s public commitment to make him in a star in America as an extremely testing challenge. Robbie’s brand of cheery mainstream pop is not as attractive to US record buyers as, say, Radiohead’s gloomy rock. And the market for European music in the US has rarely been weaker.

Despite the bad press it is receiving, the BARB TV viewing panel appears to us to be settling down and providing robust results. In this note, Toby Syfret shows that UK viewing trends now appear to be clear-cut and not artefacts of BARB panel design.

This note contains our latest update on Wanadoo, France's leading ISP and broadband service provider, following on from the report we issued in April. Wanadoo's Q1 2002 results are on target with the company's objectives for the year, despite sharp declines in portal and e-commerce revenues. The reason is Freeserve: a better deal from its network provider has raised ARPU to €5.7/month from €3.7/month in Q4 2001, and its PAYG customer base has expanded under continued marketing efforts.

This is the third in our series of notes on UK newspapers and concerns regional newspapers. Unlike other media sectors, 2002 has got off to a positive start (as we predicted) due to resilience in newspaper advertising, particularly recruitment. This can deliver 25% plus of revenues. We expect recruitment to remain resilient, primarily due to continued government recruitment. As a result, we forecast 2-3% growth in advertising to this media sector in 2002.

But the overall conclusion of this report is that installing the infrastructure has, so far, changed very little. Old patterns of consumer behaviour largely remain. Three key points emerge. First, Internet behaviour is actually still very similar to Europe. Second, though wireless data use is rising, it is still a small fraction of voice usage. Popular data applications remain almost exclusively heavily focused on teenage ephemera, including ring tones, graphic messages and SMS/email. Third, the massive investment in digital TV capability, through satellite, terrestrial, cable and DSL is not being driven by consumer demand for High Definition TV. If South Korea is a good predictor of what is likely to happen in the rest of the world, the development of new content industries will continue to be slow and painful.

This report explains why we are pessimistic about the short and medium term prospects of the global digital TV supply chain. While some recently published forecasts of digital TV penetration remain unremittingly optimistic, our own estimates suggest the number of digital homes may reach only 160 million by 2005. Not only are we bearish on demand but we find an industry that is concentrating on consolidation rather than unsustainable subscriber growth. Although some operators such as BSkyB are well on their way to profitability others face huge uncertainty over subscriber numbers and margins. But operator consolidation will not entirely solve the core issue facing the industry: that the current cost of an STB cannot be recouped by increased ARPU. To become profitable operators will require lower costs of content rights and STBs - and lower churn. These are all negative trends for the supply chain and will lead we believe to a 17% decline in global STB shipments during 2002 - a shortfall of 6m units over 2001. Furthermore due to declining average selling prices, we expect the STB market will not recover to 2001 value (approximately $7bn) until 2004.

lack of a price advantage over GPRS or 3G tariffs

a small base of prospective users

We think that ITV Digital will eventually be forced to close. What will replace the service on the digital terrestrial spectrum? This note looks at the possible outcomes once the commercial television regulator decides to re-licence the spectrum.

We identify the main external factors, such as the current strong video game cycle, mobile phone expenditure and piracy that will continue to reduce consumers’ expenditure on music. Format maturity is the main industry factor in its decline and we see no grounds for optimism about digital delivery for up to 10 years. As a result, we believe that, excluding exchange rate effects, the global music market will continue the decline that began in 2001 (-9%), with further declines in 2002 (-9%), 2003 (-7%), and 2004 (-4%), with a prospect – but no certainty – of stabilisation in 2005. If economic conditions deteriorate further in the US, Europe and Japan, our forecasts may look optimistic. In contrast, recent industry studies forecast 3-5% growth from 2004 onwards.

Wanadoo is a business combining extensive interests in European ISPs with a strongly cash-generative directory business. Wanadoo's position as the leading French ISP is secure. Its position as an ISP in other markets is much less happy; in particular, Freeserve in the UK is not performing well. In this report, we address the underlying reasons why the French ISP business is healthy while the low ARPUs and poor or negative access margins in other countries are draining the company's profitability. Section A of the report provides detailed projections of 2002 for Wanadoo ISP operations. We try to show why the unmetered access model for narrowband ISPs is dangerous.

This note inquires into the difficult question of what really drives the capital expenditure of mobile operators. We try to show that since much capital investment is actually replacement of existing assets, the importance of the declining growth rate in call minutes in reducing capex is overstated. Our - very rough - estimate is that a mature European 2G operator will probably have to spend about 15% of sales on capital expenditure for years to come. This is in marked contrast to the more optimistic operators, who have publicly offered targets of below 10%. Similarly, we see little relief from 3G. While it is undoubtedly true that 3G provides more bits per buck, the costs of running a 3G network alongside a 2G infrastructure more than outweigh this advantage. Observers should also note that the capital efficiency benefits of 3G are largely illusory, since the savings in the network are wiped out by the higher handset costs.