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.

Market revenue growth dipped to below zero in Q4 2019, as pricing pressures bite and smaller players gather share.

2020 is off to a challenging start, with new customer pricing dipping down again, and existing customer pricing under regulatory assault.

With expensive full fibre networks being built, persuading consumers to pay more for the higher speeds they enable will be key.

Virgin Media’s subscriber base fell again in Q4, although strong ARPU growth allowed a slight acceleration in cable revenue growth to 1.8%, and a deceleration in OCF decline to 1%.

Liberty Global group OCF guidance of mid-single digit decline in 2020 is likely to be mirrored at Virgin Media, as regulatory pressure and market competitiveness continue to bite, and mass-market demand for ultrafast remains nascent.

We continue to believe that the best way for Virgin Media to capitalise on full fibre rollouts is to use a wholesale deal with Openreach to expand its footprint to (eventually) nationwide.

Despite two decades of online disruption, the UK remains reliant on traditional platforms and brands across the media sector—more so for older cohorts, but also for younger generations.

13% of adults still do not use the internet and, in reality, an online-only media ecosystem remains a distant prospect.

Traditional providers, particularly within TV, radio and news, look set to endure for the long term, aided by the trajectory of the UK’s ageing population.

TalkTalk’s subscriber base and revenue fell again in Q3, and ARPU continued to decline despite good growth in its higher ARPU (but even higher wholesale cost) high speed base.

The sale of FibreNation to CityFibre and the accompanying wholesale deal provides much needed cash and de-risking, although the migration to full fibre still brings challenges to TalkTalk given its low price focus.

TalkTalk’s shorter term operational outlook is also still very challenging, with growing EBITDA in 2020/21 particularly difficult given stable/declining ARPU and the rising wholesale costs of migrating to high speed broadband.

Despite operating in a challenging market, Sky has continued to increase revenues, with the resilient performance of its direct-to-consumer and content businesses offsetting the disappointing drop in advertising income.

Across FY 2019, EBITDA was up 12.2%; profit growth driven by a significant reduction in “other” costs as large one-off effects disappear and cost-cutting continues.

Extended distribution deals with Netflix and WarnerMedia will protect Sky’s content proposition for the coming future, as would the mooted integration of Disney+.

BT had a weak December quarter, with revenue falling 3% and EBITDA 4%, despite a recovery at Openreach, mainly driven by tough competition and regulatory hits, with operating metrics solid but not noticeably improving.

These hits look set to continue, so the company’s hopes of a return to EBITDA growth in 2020/21 probably hinge on brand and service improvements actually becoming visible in operating performance.

A successful full fibre roll-out would be a boon for BT in the longer term, and regulatory developments are headed in the right direction, if not quite there yet. However, its affordability without a dividend cut remains questionable in the current challenging environment.

 

The speeds made possible by full fibre build are unnecessary for most users in the short term, giving limited commercial advantage to those that can offer them, but are likely to prove essential in the medium/long term.

The economics of full-scale, independent alternative networks look very challenging in our view – especially without the support of Sky – although there are some limited arbitrage/cherry-picking opportunities.

The Openreach full fibre model makes economic sense under Ofcom’s proposed regulatory framework, provided it retains the lion’s share of the market, although considerable risks remain.

Market revenue growth fell in Q3 to below 1%, and may drop below zero next quarter as existing customer pricing comes under more pressure

New customer pricing is however rising, and average pricing should rise much further as ultrafast increases in availability and popularity 

Political enthusiasm for full fibre should be welcomed, although some specific plans are likely to do more harm than good if implemented literally
 

TalkTalk enjoyed impressive EBITDA growth of 14% in H1 19/20, despite revenue growth pitching down sharply in Q2, and gross margin falling due to the rapid adoption of high speed broadband

The fall in costs was driven by a combination of good expense control and lower subscriber acquisition costs, in part due to improved efficiency, but in part due to a falling subscriber base, which is not a sustainable route to earnings growth

While the current dynamics are challenging, market prices have been firming recently, and should firm further as ultrafast becomes more popular, but TalkTalk needs to move to a more premium pricing position to take full advantage