The UK mobile market outlook is better as the COVID impact eases overall thanks to reduced roaming impact, but the November lockdown (including store closures) will drag. Having become more cautious last quarter, many of the European operators, including BT and Vodafone, have edged their EBITDA outlook up very slightly.

• Service revenue declines stabilised at -7% this quarter with a myriad of factors at play: roaming worsening, the end of lockdown taking some pressure off, B2B a mixed bag, and the annualisation of cuts to intra-EU calls
• Ofcom’s second 5G auction will be a focus in January. We expect selective bidding, proceeds of up to £2.7bn, and some wrangling over spectrum trading
• The outlook is better from here as the drag from roaming eases, in contract price rises step up from the spring, Carphone Warehouse diminishes as a factor in the market, and the prospect of consolidation is still on the table

Contents

Executive summary: Brighter outlook

Market and competitive trends

UK mobile market: roaming worsens while other COVID impacts ease

Competitive performances: H3G bucking the trend, iPhone delay hurts O2

Assessing performance: neither service nor total revenue growth are perfect measures

Significant COVID-19 impacts but likely to lessen overall next quarter

Net adds: B2B boost for some; H3G uses indirect distribution to good effect

Churn bounced back

Diverging ARPU trends

Pricing: H3G extends its relative discount

Unlimited pricing: H3G discounting again; Vodafone deals for Christmas

Financial performance: O2 and Vodafone post EBITDA declines

Some operators edging up their EBITDA outlook

Another blow to Dixons Carphone as O2 and now EE end the relationship

In-contract price rise outlook greatly improved

Consolidation prospects mounting, but hurdles to overcome

5G spectrum auction: all change on the capacity front

5G spectrum auction: who wants what?

5G spectrum auction: will contiguity issues be resolved?

Huawei now banned from 2027 at great cost to the sector

5G rollout much less aggressive than 4G

Mobile network performance resilient in the face of COVID-19

COVID-19 creates longer-term challenges…and opportunities

O2/Virgin Media: a merger of convenience

End-of-contract legislation resumed since end of June

Automatic discounts hit first, but only for some

Timing of out-of-contract initiatives will vary

Shared Rural Network agreement finalised

Headwinds annualising out

Nearing the end of the headwinds

Out-of-bundle pressure now steady

Higher ALFs drag on EBITDA disappeared for all but H3G

Cut to intra-EU call pricing now fully annualised for the first time

Appendix

IFRS 15 reporting note

IFRS 15 and means of distribution as a driver of revenue trends

Zero-rating

Previous contract price increases for existing customers

Spectrum ownership

List of charts/tables

Reported mobile service revenue growth

UK mobile market net adds (000s)

Reported mobile service revenue growth by operator

Reported total mobile revenue growth by operator

BT/EE total revenue and service revenue growth (IFRS 15)

Vodafone total revenue and service revenue growth (IFRS 15)

O2 total revenue and service revenue growth (IFRS 15)

H3G total revenue and service revenue growth (IFRS 15)

Change in COVID-19 impact from Q2 to Q3 and outlook for Q4 and 2021

Contract net additions (000s)

Annualised contract churn

Contract ARPU growth

SIM-only share of contract subscriptions

‘Sweet spot’ bundle with iPhone 6s/7/8/XR/11

SIM-only pricing by data allowance (GB) (£/month)

SIM-only unlimited data bundle pricing (£/month)

EBITDA margin, last 12 months

Capex, last 6 months (£m)

Cashflow (EBITDA-capex) margin, last 12 months (£m)

COVID-19 related financial guidance changes

MNO price increases in 2020

Inflation-linked price increases, 2018-2021

ROCE using spectrum at current value and market shares

Operator shares of capacity

Spectrum holding by operator (MHz)

Spectrum allocation in the 3.4-3.8 GHz band

Huawei’s market shares

5G launch dates and plans

4G (dotted line) versus 5G (solid line) rollout by operator

Europe average mobile network speeds (Mbps)

Peak complaints per 15 minutes by mobile operator

UK underlying service revenue vs GDP growth

Residential market shares (including pay TV)

Total market shares (including pay TV)

Potential drag from loss of ‘sleepers’

Discounts offered by each operator to with-handset customers out of contract for more than three months

Timing and impact of out-of-contract notifications and discounts

UK mobile coverage (% of landmass)

Outlook for change in mobile trends in 2019 by operator

Operators’ restrictions on out-of-bundle spending before new regulation

Annual licence fees (£m per MHz per annum)

EBITDA drag from ALF change (excluding H3G 5G spectrum)

Bolt-on offers for international calls from mobiles

IFRS 15 effect of indirect and direct mobile contract distribution

UK zero-rated data offers

Select previous MNO price increases

Mobile network operator spectrum ownership (both up and down MHz)