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.

UK national newspapers are in poor shape. The inherent problem of the industry – too many papers chasing too few readers – has been exacerbated by a sharp decline in advertising revenue since September. As a result of these challenges coupled with the implications of forthcoming media legislation, we expect to see significant changes in newspaper ownership over the next two years.

The likely development of overall advertising in Europe in 2002 and 2003;

The development of overall online advertising in the same period;

Telewest has drawn away from its key competitor in terms of UK performance. However, we still believe Telewest's bonds are worth less than 50% of their face value. This note explains why.

In this note, we provide some evidence for this unpopular view. We look at BSkyB in the UK in the period from prior to the start of its digital service to today. We show four main points: (1) Digital TV has not resulted in digital viewers buying more channels or spending significant sums on pay-per-view. In fact the key 'pay-to-basic' ratio has fallen; (2) Sky's increased TV ARPU has resulted entirely from price increases in the various Sky packages, rather than increased purchasing; (3) The move to digital has caused a significant, and possibly permanent, deterioration in the costs of operating the Sky service. All the main categories of Sky's costs have risen as a percentage of turnover; (4) The ability to run more sophisticated interactive services on a digital platform has had little positive effect on Sky's economics. Though Sky disguises the costs attached to interactive services, it almost certainly loses money on this part of its activities.

This report is the first of a quarterly series by Toby Syfret, one of Europe's best known commentators on viewing trends.

We believe it will opt for the BBC offering. This note shows why.

The UK Internet population continued to grow very slowly in the fall of 2001, reaching 14.7 million home users (30% adult penetration rate). Although this slow pace of customer growth may give dot.com investors pause for concern, we found some good news on e-tailing to report, such as higher numbers of purchasers - to almost 9 million - and positive experiences online that will lead to repeat shopping. Books, clothes, DVDs and computer games were especially popular items. Bricks-and-clicks e-tailers like WHSmith, Argos and John Lewis are well positioned to take advantage of offline/online marketing synergies, but Amazon (around 3 million unique visitors) is impressive in execution. Tesco has retained its very wide lead over other online supermarkets, almost doubling reach to 9% of home Internet users in 2001, and Argos is also doing well.

This note looks in detail at the reseller business model, and in particular for BT service providers taking over BT lines, where Oftel has just mandated a ‘wholesale line rental’ product. We think the small international call segment is unappealing for entry as competition is already fierce. The new entrant will also find it difficult to establish a foothold on the local and national calls segments where substitution of mobile telephony is draining any dynamism from the market. Even more ominous is the advantage the BT Together packages have given BT over resellers in the customer segment most likely to be aggressively marketed by stretchy brands: families making off-peak and weekend calls to family and friends.

Sky's continued excellent performance has attracted favourable comment in the weeks since its half yearly results. But much of the commentary missed some critical points. The analysts did not question Sky's assertions that it was successfully targeting high value customers. Actually, the last half-year saw a fall in the numbers taking the top-priced package. Similarly, few commentators noticed that despite the favourable comments in the results announcement, interactive revenues actually fell last quarter. The steepest rate of decline was seen in betting, which a year ago was going to be application that formed the core of Sky's interactive ARPU. Similarly nobody seemed to have noticed that Sky's overall share of TV viewing declined in the quarter, despite the addition of two hundred thousand new subscribers.

According to the Financial Times (27/03/2002), the European Commission is planning ‘to clamp down on the cost of calling mobiles’ and issue ‘tough new rules’, which ‘would make it easier for national telecoms regulators to force mobile phone companies to reduce excessive call termination charges’. According to our research, this is an exaggerated assessment: the likeliest outcome would be a Commission recommendation on ‘best practice’ guidelines, rather than new rules. Our research also shows that the pressures from NRAs on MNOs to lower mobile termination charges are highly uneven in the top three markets: they are most acute in the UK (predictably, given the pro-consumer orientation of Oftel), less significant but nevertheless present in Italy, and non-existent in Germany. Thus, if the UK Competition Commission endorses Oftel’s proposed charge cap in its forthcoming ruling, we can expect the four leading UK MNOs to lose about £880 million in revenues for the 2002-2006 period, with the annual reduction in 2002-2003 estimated at about £265 million.

This brief note concerns further evidence of strong price sensitivity to broadband prices, as provided by Oftel's recent qualitative research. Since we expect an announcement from BT Group on February 26th regarding reduction of DSL wholesale prices to levels consistent with retail pricing of £30/month or slightly less, this is topical. In addition, we point to BTopenworld's very high market share (75% plus) in residential DSL installations so far.