As the various separations in the BT family draw closer, we use this report to assess the likely prospects of the core UK fixed line division, Wholesale and Retail.

The key points are:

The UK mobile operators have made much of their honesty in ceasing to record subscribers that have not made calls within six months. This will help analysts make a clearer judgment of how many people actually use mobiles, and what the correct figure is for ARPU. But pleasure at the apparent increase in openness should be tempered somewhat. Operators are starting to make active efforts to stop subscribers becoming 'inactive'. In the last few weeks all the UK operators appear to have adopted similar policies. These policies state that the operator will take back a subscriber's telephone number unless one call is made or one SMS is sent from the phone during each six-month period.

As important, the mobile operators are keeping a much tighter rein on inventories, effectively shifting stock risk to retailers such as Carphone Warehouse. Inventory levels throughout the supply chain will be lower. Retail price levels will be more robust – improving operator margins. But we expect total sales over the Christmas period to be lower than expected because of the higher prices in the retail chain.

This report provides our model for global handset sales in 2001 to 2005. We continue to forecast 375 million units shipped in 2001. The forecast for 2002 is 470 million units. Key constraints on the level of shipments in Europe:

At current pricing levels, we see pay-TV penetration struggling to exceed 60% by 2010. And the rapid continued price inflation in the pay-TV offerings of Sky, the cable companies and ITV Digital will make even this target difficult to achieve. As our recent note on household expenditure (Time and Money) indicated, the poorest 40% of the population have very little surplus cash. Increasing prices means that pay-TV is moving even further beyond the reach of this group.

We look at the recent improvements in NTL performance but suggest that continued progress towards cash generation in unlikely. In our view, NTL will miss its guidance for cash flow in 2002 and 2003 by substantial amounts, making its financial position increasingly unstable. Our view is that NTL will use up its existing cash resources long before it turns cash positive. The problems are exacerbated by the large amounts of NTL's debt that need to refinanced in 2004 and 2005.

But market comments on NTL's liquidity position have not been as insightful as they might be. This is where the real attention should have been focused.

Marconi blames reduced capital expenditure budgets for its troubles. We suspect the truth is more complex. Operators and CLECs have put a lot of optical bandwidth into Europe. This looked sensible when expected traffic growth was 100%+ a year. Now, operators see much lower demand growth, so they have little incentive to invest in Marconi's bandwidth-enhancing DWDM technologies. New investment will not come in volume until existing capacity is used. We think this will occur in late 2002, not at the turn of this year as Marconi predicts. Demand will then rise again at a healthy clip. But will Marconi be able to retain its position in Europe or will Ciena or Cisco, with their newer technologies, have captured its major customers?

We examine the impact of a potential decrease in consumers' expenditure by looking at the experience of the early 1990's recession in the UK. We put forward a simple model of how consumers' TMT expenditure might change in the event of recession in 2002.

We have analysed the latest numbers from the EMC world database.  The countries covered represented 68% of year-end 2000 global subs, so are incomplete but give a fair indication of progress so far this year.  In addition to updating countries to end Q2, EMC has also made retrospective adjustments to US and China numbers (both of which make the numbers more consistent with bottom-up sources we have looked at).  The countries given partially or mostly cover Western Europe, North America and Asia Pacific, and the analysis below extrapolates the missing countries and regions.

Q1: 97m

Q2: 91m

This report is based on more than 40 interviews with existing online advertisers, agencies and online properties. It highlights the main barriers to growth and sets a challenging agenda for industry participants.

This is the first of a series of notes on the outlook for the core fixed-line businesses of BT and the other European incumbent telcos. In order to prepare investors for the coming rights issue we briefly consider the issues that face BT's core operations. The follow-on note will provide a more in-depth analysis.

Our main points are as follows:

Estimates of the cost of building 3G networks in large European countries have tended to cluster around $5 billion per operator. This, in addition to the embarrassing large licence fees paid to governments, is acting as a drag on stock market performance.

This figure is exactly what we would have predicted based on our modelling of 3G costs contained in our June report. Sweden is nearly twice the size of the UK, and the regulator's coverage requirements are probably the strictest in Europe - in theory the whole of population has to be covered. But costs are reduced because Europolitan will share its network with the Hutchison 3G venture in all areas of the country outside the four biggest cities.

Despite the bad news it offered the markets last week, Nokia still wields massive power in the handset market. Its market share goal of 40% is well within reach. This makes mobile phones a very unusual business; with the exception of handheld electronic games, we can think of no other major hardware market that is dominated by one manufacturer to the same extent. Moreover, even though mobile phone manufacture is a huge global business, only a handful of firms can actually design and build a new handset. Sendo is a new UK company trying to break into this brutal business. Its business strategy is compellingly different; it focuses entirely on own-brand manufacturing for operators. It already has impressive technical achievements. Will it succeed? Who knows. But we think its business strategy is worth exploring.

UK regional newspapers are better positioned than most media to withstand a downturn given the existence of multiple streams of revenue (advertising, circulation) and the unique nature of local franchises.

However, the underlying trends are poor and likely to get worse, particularly in recruitment advertising, with greater consolidation inevitable over the medium term.