This report on Sky Italia and Sky Deutschland, News Corporation’s Continental Europe pay-TV assets, complements our coverage of BSkyB in the UK. We look at the market environment, including regulation and competition. The report also provides subscriber, revenue and earnings forecasts and SWOT analysis.

VMed’s Q3 results showed continuing strength in the face of heavy marketing by BT Retail and BSkyB, although cable churn increased significantly

There are plenty of further challenges on the horizon, including a downturn in consumer confidence and later, the launch of YouView and wider deployment by BT of next generation access

The broad based nature of the company’s growth and its plans for further product development in TV and broadband continue to give us confidence in the potential for further growth in cash flow, albeit at a more modest pace

A switch in marketing focus from HD to home communications and sports appeared chiefly responsible for a record quarter in multiproduct take-up, with the biggest increases being registered in broadband, telephony and line rental

Although Q1 2011 net HD take-up halved against the previous quarter, partly reflecting reduced emphasis in marketing plus the World Cup factor, there is abundant room for growth and we expect a strong Q2 as Sky enlarges its HD offer with the ITV digital channels, and prepares for the launch of Sky Atlantic HD in early calendar 2011

The exceptional leap in home communications product sales underlines Sky’s competitive strengths against the rest of the sector using its existing LLU platform, suggesting Sky is under little pressure to sign up to BT’s more expensive high speed broadband access product

Microsoft’s new Windows Phone 7 operating system is launching with a big bang: ten handsets, eighteen operators, and a massive marketing campaign

The OS itself is positioned firmly in between iPhone and Android in terms of ease-of-use and customisability; it is as fast as the best-in-class but no faster; and its interface is bold but will not be to everybody’s taste

A lack of apps, limited distribution, and expensive handsets will likely limit sales in the short term. Longer term, being late in the game with no truly compelling unique feature will make building a major position very challenging, but not impossible

Ofcom’s decision not to investigate Project Canvas under the Competition Act removes one more regulatory obstacle to the launch of the broadband connected TV service with the brand name YouView

It looks increasingly as if the YouView launch will experience further delay, with autumn 2011 looking steadily more likely as disputes continue over the satisfactoriness of the technical specifications released by YouView for meeting manufacturer needs

Although backed by powerful broadcast and ISP interests, YouView faces stiff challenges to achieving widespread adoption among ‘Freeverse’ homes, with much depending on YouView’s ability both to deliver consistent product quality and to get its message across

The decline in UK residential broadband market growth has paused due to accelerating adoption by older householders and increased household formation. We expect 970,000 net additions in 2010 and 20.5 million broadband households by 2015. However we expect growth will continue to decline from 2011 as the impact of the government spending review feeds into consumer confidence and the market becomes increasingly saturated

As BT’s next generation access network is deployed, there is likely to be accelerated improvement in DSL price/performance, with DSL customers migrating to a 40 Mbit/s headline speed as it becomes available. The impact of this is likely to be compounded by Virgin Media up-rating its broadband portfolio from speeds of 10, 20 and 50 Mbit/s to 20, 50 and 100 Mbit/s

In the absence of further consolidation, in market share terms the industry appears set to remain divided into three strategic segments: the ‘big three’, brand extenders, and Sky. We expect residential broadband market revenue (excluding content) to continue to decline gradually, stabilising by 2015 as the impact of market share gain by lower priced ISPs attenuates due to a combination of a maturing market and reduced price differentials caused by NGA

 In Q3, Google’s UK revenue increased 14% YoY to £520 million – in line with our expectations of slowing growth in H2 – our forecast for 2010 remains at £2,075 million (all figures excluding estimated hedging gains)

In its earnings call, the company shared global display and mobile revenue numbers – on an annualised basis these now represent $2.5 billion and $1 billion respectively (with some overlap) – much higher than previous estimates

We have adjusted our 2010 forecast for UK internet advertising to account for higher than expected classified growth and previously unreported spend to £3,900 million

Google has confirmed the first content partners for the US version of Google TV – including Turner, HBO and Netflix – which is expected to launch within the next 2 weeks

No new distribution partners have been announced and rumoured pricing for enabled Sony TV sets suggests that Google TV will initially be a premium product

At present, Google TV’s main selling point appears to be providing a decent web surfing experience to the TV set – in our view, better content is needed if it is to compete with Apple TV and other internet TV devices

Total UK media advertising will grow 3.7% to £15 billion in 2010, on a bounce back of TV, internet and national newspapers from the recession

If UK economic growth slows to a crawl, UK media advertising could decline by about 1.1% in 2011

For local and regional newspapers and magazines, ongoing structural pressures are dominating the recovery in 2010, and we expect the headwinds will be even stronger in 2011

US recorded music sales continued to slide in H1 2010 (-9% year-on-year for physical and digital formats (excluding ringtones), on a track equivalent basis). The UK recorded music market has been stronger than the US in recent years, and H1 2010 was no exception (down -1.5%)

Music major revenue declines on recorded music are being partly offset by growing licensing fees paid by music streaming services, as well as artist and merchandising services under 360 degree contracts

High margin music publishing revenues remain the pillar of music major profitability. These declined in H1 2010 due to the delayed impact on current quarterly results of the advertising recession in 2008/09, and we expect the advertising bounceback to be reflected in future results