The mobile operators in the UK and elsewhere probably make a higher margin on SMS than on any other product. We think that about 30% of a UK operator's gross margin in derived from SMS and the percentage is rising. This report asks the question 'why should mobile operators launch any other mobile data products aimed at consumers?'. SMS now generates about £800 per megabyte of traffic. GPRS prices fall to about £1 per megabyte to heavy users. We conclude that operators may say that they are focusing on new consumer data services, but the reality will be very different as they work to protect their golden goose. In the long run, we think that SMS is vulnerable to Instant Messaging services introduced onto networks by innovative third parties. (In the US, where SMS has not really taken off, and thus the operators have no profits to protect, these applications are already available on some GSM networks).

The survey showed the typical UK consumer expects to keep his or her phone an average of 39 months. The most likely reason for changing would that the owner's existing phone no longer works. Younger consumers will replace their phone much more swiftly than the average.

The painful restructuring process at NTL is probably well underway. Holders of NTL bonds will have to accept a significant reduction in the nominal value of their holdings. To us, the crucial question is how much debt the slimmed-down UK businesses of NTL can afford to have on the balance sheet. If everything goes right, the number is something over £3 billion. But things will not go right, and the underlying debt capacity of NTL is probably considerably less than a billion pounds.

As noted, TV viewing did indeed fall sharply in the first quarter. Viewership of the main analogue channel, ITV, fell faster. And this is not caused by multichannel competition. ITV's share has fallen fastest in analogue terrestrial-only homes. Sky has been a beneficiary, as have ITV2 and E4, the digital offspring of the main commercial channels.

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.

The charges imposed by the mobile operators for handling incoming calls are a very important part of their revenue stream. The UK telecoms regulator is attempting to force the networks to reduce their prices significantly. The row has just been referred to the UK competition authorities. We look at the arguments used by Oftel to justify its harsh stance. We conclude that the evidence supports the regulator's view that incoming call charges are held artificially high. As a result, analysts should expect that the UK networks will fail to see the charge cap reversed. The impact on revenue will be about 7% in the next four-year period. This will flow straight to the profit line. Increases in fixed to mobile call volumes, as a result of the lower prices, will partly offset this.

Wanadoo's aim of being the #2 broadband ISP in Europe (behind T-Online, way ahead) was adversely affected in Q1 2002 by the decision of the French Competition Commission to halt the marketing of the company's product through the network of France Telecom, so other ISPs can also have a chance to establish a foothold. Wanadoo has had to resort to other, more expensive, marketing platforms, and sales are running at about 70% of the pace before the decision. Wanadoo is also looking for a strong showing on broadband from Freeserve, just entering the market now: 70,000 broadband subscribers by year-end, and a quarter million by mid-2003. We are sceptical whether the brand can shake its reputation for cheap Internet service, which continues to attract a large PAYG base.

This report is a companion to Broadband Europe (2002-02), issued concurrently, and looks more closely at cable’s ability to compete with incumbents on marketing broadband. Key points include:

The outlook for the industry is further enhanced by the impact of much lower paper costs, allied with cost measures on print usage, and reduction in expenditure on online ventures. The industry is increasingly benefiting from best practice although anomalies remain in margins that indicate further room for improvement. Editorial investment has not alas managed to halt continuing slow declines in circulation that are inevitable in our opinion.

The potential for residential broadband connectivity in France, Germany and the UK depends on the availability of low-priced broadband products (hardware, installation and monthly subscriptions) and a narrow pricing gap with existing Internet access packages. Unless monthly subscriptions fall below €30 (from current comparable levels of €45 and up) and hassle-free self-installation is ubiquitous, consumers will not migrate from narrowband, even if they appreciate the faster surfing and download speeds of broadband. But regulators are guarding against any price declines from the incumbents, having put their faith in infrastructure-based competition through local loop unbundling (LLU) and upgrading of cable infrastructure. We believe that expectations of alternative supply of broadband through either of these routes in France and Germany are misplaced; in the UK, broadband cable will make more headway due to specific historical and regulatory factors, while there will be no effective alternative supply of residential DSL through LLU.

In its projections supporting its £3.2 billion debt financing, H3G projects 172,000 subs in 2002, 1.2 million by end 2003 and 9 million by end 2010.

Combined with projected ARPU of £40/month (or about current contract ARPU in the UK), H3G’s revenue projections come to £2 billion in 2005 (note UK mobile market in total = £10 billion today).

In this note we summarise the available evidence on trends in ARPU among European mobile operators. We demonstrate the increasing trend towards stable or increasing revenue per subscriber in key markets. The end to the long downward trend in voice ARPU is clearly in sight. This new stability is derived from increasingly firm call charges and slow growth in minutes of use. Local competitive conditions may disrupt this pattern in individual countries – and we demonstrate the countervailing trend in Finland – but, overall, the pattern is clear and will probably become more so in the next few months.

More important, perhaps, the current economics look acceptable both for BT's Wholesale and Openworld divisions - this note includes some detailed financial analysis. But even at the lower price levels, we remain unconvinced whether subscriber numbers will grow as rapidly as BT predicts. (BT is now saying that ADSL subscribers will be more numerous in 2005 than unmetered customers are today!)

Nokia's recent guidance suggested a modest recovery in handset sales in 2002, followed by a strong resurgence thereafter. We think the position will be different and look for unit sales of about 450m next year, with only 3-7% growth in the years 2003-2005.

In this short note, we look at trends in mobile design and features. We show that the steady decline in size and weight is now over, and manufacturers are focusing on adding new functions, such as digital cameras, and even, in one case, a thermometer.

In this issue, Toby looks at recent evidence on UK multichannel viewing, particularly in the period immediately prior to the start of the new BARB audience panel.

Mobile operators’ marketing strategies are the primary determinant of the size of the market for handsets. The level of handset subsidy dramatically affects retailer sales. In this brief note, we look at the changes in retail subsidies in the UK during the past 6 months. We show how the emphasis on the acquisition of contract customers has meant higher levels of subsidy for the phones taken by these customers. By contrast, pre-pay subsidies have fallen.