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

Everything Everywhere’s maiden investor day presentation was soured by the disappointing results it reported for Q2 2010, with service revenue growth underperforming its UK competitors by 7 percentage points. At current relative growth rates, O2 will retake its lead by June 2011

The synergy savings targets have been maintained, but focused more towards back office functions and away from front line assets such as shops and network base station sites, with the brands being kept separate for the time being. This is a sensible enough approach, and the cost savings still look eminently achievable

Going forward, the company will have the advantage of a better network but the disadvantage of disruptive integration for the next few years. Its main challenge will be to reverse the current negative revenue momentum, which puts both its revenue and margin targets at risk

The unlimited mobile data plan, rightfully credited with being a key part of the current boom in handset-based mobile internet use, is now being scaled back across the US and UK, with capped data bundles of various sizes now preferred

The economics of data are such that current price plans (including unlimited ones) combined with current average smartphone data usage rates are still respectably profitable for the mobile operators on an incremental basis, provided they do not substitute for the far more profitable voice and text messaging services

However, current average smartphone usage rates are around 1/50th of home broadband usage rates, and smartphones’ improving screens, increased storage capabilities and faster processors are enabling some users to push well beyond profitable usage levels, leading to the danger that average usage may surge in the future (possibly even within current 2 year contract periods), to the point where current plans are not profitable

Usage caps are therefore probably a long term necessary evil to guard against this risk, but mobile operators need to be sympathetic to most consumers having no idea how much data various activities might use, and protect them against the bill shock that might result from out-of-bundle charges

H3G Group’s reported results claimed strong growth and rapidly improving profitability, but, taking out the effect of an accounting change, an acquisition and some one off income, underlying revenue was flat and profitability improved only marginally
The parent company is still guiding to positive EBIT from the H3G group for the full 2010 year, but this will require either further creative accounting or very strictly controlled spending on subscriber acquisition, at the expense of future revenue growth
H3G UK’s revenue fell 9% in the half, although profitability improved with very weak contract net adds probably caused by a restricted SAC budget. With demand for smartphones surging H3G UK is in a potentially strong position, but without a substantial marketing and SAC budget it cannot take advantage

CPW saw growing revenue but falling volume in its core European handset retail business, as contract handset growth outperformed prepay

We believe that this is in line with a slightly subdued market, with consumer confidence quite weak across a number of European countries

CPW’s US business did much better, growing at 30%, and it is this strength that leaves us confident in the group’s ability to have a strong full year

The Apple ‘antennagate scandal’ has received massive press attention, reflecting perhaps more the extent of Apple’s smartphone incumbency than the extent of the reception issues with the iPhone 4

The problem may be greater than Apple publicly admits to, but it is less than it first appeared to be. The resulting consumer confusion will not help unit sales, but we still expect them to grow, supported by a number of feature set advances in the iPhone 4

Android handset sales are growing very rapidly, and are in a sense ‘catching up’ with the iPhone; while Android may end up dominating the mid-range, the iPhone can still enjoy an (enlarged) position at the top end, provided it can maintain a premium price justification

Vodafone Europe’s revenue growth again notched up, increasing by 0.7ppts as reported or 0.3ppts in underlying terms, with minutes volume growth accelerating by 1.8ppts

This is a little disappointing in the context of the rate of reported GDP recovery, but consumer confidence, particularly in Southern Europe, has re-dipped in the last few months, making raw GDP figures less relevant than they once were

Data revenue is forging ahead, but voice pricing is steadily weakening, and with many offers linking voice, text and data into an inseparable bundle the former may be causing the later, implying that data’s contribution to overall revenue is easy to overestimate

UK reported mobile subscriber growth has returned to stronger growth over the past few quarters as the UK economy slowly recovers

O2 is still the leading operator in terms of both its own customer loyalty and share of other operators’ customers who intend to switch, though its lead has narrowed considerably on last year

UK handset sales are likely to continue to rise, with intention to replace in the next 12 months rising from 32% in 2009 to 35% in 2010, which is albeit still some way short of the 40% pre-recession figure

Data usage overall is up –the proportion of consumers regularly browsing news and information increased to 22% from 16% last year. However, this increase was not uniform; 5ppts of this was the direct result of there being more iPhones and BlackBerrys in use, and only 1ppt was due to increased usage on any other handset

Overall reported revenue growth in the top 5 European markets increased by 1.6ppts, to growth of -1.7%. With little change in regulation during the quarter, underlying growth also saw a sharp uplift, rising 1.7ppts and building on the 0.4ppts increase seen in the last quarter. The European mobile market is now firmly in recovery following a very difficult 2009

At the current CSFB tech conference in Barcelona Ericsson stated that the expected handset market for 2001 will now be at lower end of its previously stated range of 430-480m; both it & Nokia said the reason was cuts to handset subsidies in Europe. Whilst we are relieved that our early emphasis on the impact of changes in operator strategies on the handset market in Europe has been proved right, we are in the process of revising upwards our own forecast of 300-350 million units based on growth in China (this forecast and spreadsheet will shortly be available).

For the future, we expect data traffic to slow given strong signs of a plateau in demand among businesses and changing residential payment models. However, we forecast a gradual evolution towards profitable ISP business models based on unsubsidised pricing for all forms of access. Indeed, we expect overall pure Internet access revenues to continue to grow until the latter part of the decade. This is plainly contrary to all those who predicted access would be free for all and a loss-leader for other forms of revenue, such as online advertising, e-commerce commissions and eCRM (direct marketing).