July 29, 2002 Reports
This report provides an insight into the effect on consumers of the significant changes in retail pricing and promotion of broadband, as well as an update on the size and dynamics of the UK Internet population. The main points:
This report provides an insight into the effect on consumers of the significant changes in retail pricing and promotion of broadban [...]
July 17, 2002 Reports
Analysts are predicting substantial declines in mobile industry capital expenditure when expressed as a percentage of turnover. These improvements are supposed to be driven by (a) declining growth in call minutes; (b) decreasing prices of capital equipment; and (c) better 'capital efficiency' in the 3G era. The continuing success of the industry has derived partly from its position at the meeting point of several important social trends the decline in the reading of books, the gradual fall in the total circulation of newspapers, increased attention paid to celebrities and fashion and, most important, the increasing amount of disposable income available to the people under 35. Improvements in printing costs and distribution have allowed publishers to make money, even though the average sales per magazine have fallen substantially.
Analysts are predicting substantial declines in mobile industry capital expenditure when expressed as a percentage of turnover. The [...]
July 17, 2002 Reports
This report addresses four principal questions:
This report addresses four principal questions:Sector Digital Media.
June 27, 2002 Reports
In The Digital Bomb II (2002-21), we asserted that the worldwide switch to digital TV would take place more slowly than most commentators expect. We base this view on our assessment that there is no financial incentive for the operator to make the switch from analogue to digital TV. 1. The evidence of a rapid slowing of the growth in multichannel homes is increasingly clear. We predict that Sky will miss its target of 7 million subscribers by the end of 2003 by 300,000 homes, if current trends continue. 2. TV viewing levels appear to have returned to 2001 levels, after a fall in the first months of this year. The evidence for a secular decline in overall viewing is weak. But ITV1 continues to plummet.
In The Digital Bomb II (2002-21), we asserted that the worldwide switch to digital TV would take place more slowly than most commen [...]
June 11, 2002 Reports
Digital terrestrial television in the UK and elsewhere faces three enormous problems: (1) the paucity of attractive programming available for free distribution; (2) the uncertainty of the coverage and picture quality; and (3) the low channel capacity compared to satellite and cable. The four bids for the UK DTT licences try to address these problems, but with limited success. In the next two weeks the Independent Television Commission will try to choose the least worst proposal. The rationale behind the deal appears to be that management needed to demonstrate their continued commitment to building a successful US business, an ambition that all EMI managers have had for the last twenty years. Robbie Williams has never sold well in the US, and we regard EMI's public commitment to make him in a star in America as an extremely testing challenge. Robbie's brand of cheery mainstream pop is not as attractive to US record buyers as, say, Radiohead's gloomy rock. And the market for European music in the US has rarely been weaker.
Digital terrestrial television in the UK and elsewhere faces three enormous problems: (1) the paucity of attractive programming ava [...]Sector Digital Media.
June 11, 2002 Reports
Are resellers with stretchy brands' going to succeed where others have failed in dislodging BT from a dominant position in the fixed residential market for calls? Stretchy brands are widely touted as the next challengers because they have large and easily marketed customer bases, and their brand can be used to wean the fearful telecoms customer from BT.
Are resellers with stretchy brands' going to succeed where others have failed in dislodging BT from a dominant position in the fi [...]
June 10, 2002 Reports
This note looks at the likely extent of regulatory pressures on reducing termination charges for off-net calls to the 2G networks of mobile network operators (MNOs) in the UK, Italy and Germany. These charges are well above cost mainly because each MNO acts as a monopolist for termination of calls on its network - and are therefore important contributors to revenues as well as profits of MNOs. In the UK, off-net interconnection charges contribute one-quarter of revenues of the four MNOs.
This note looks at the likely extent of regulatory pressures on reducing termination charges for off-net calls to the 2G networks o [...]
June 5, 2002 Reports
In developed markets, the crucial determinant of the level of mobile handset sales is the speed of replacement, not the volume of new subscribers. But data on when customers expect to replace their existing phone, and what will prompt them to make the change, is extremely hard to find. In order to rectify this deficiency, we commissioned a telephone survey of customers in the UK. Wanadoo also looks set to achieve its target of 2 million new subscribers in 2002 once the acquisition of the Spanish ISP eresMas is finalised in October. Organic growth of the Internet subscriber base has been poor in France and at a virtual standstill at Freeserve in the UK in the context of slow-growing Internet markets.
In developed markets, the crucial determinant of the level of mobile handset sales is the speed of replacement, not the volume of n [...]
June 5, 2002 Reports
Despite the bad press it is receiving, the BARB TV viewing panel appears to us to be settling down and providing robust results. In this note, Toby Syfret shows that UK viewing trends now appear to be clear-cut and not artefacts of BARB panel design.
Despite the bad press it is receiving, the BARB TV viewing panel appears to us to be settling down and providing robust results. In [...]
May 16, 2002 Reports
This note contains our latest update on Wanadoo, France's leading ISP and broadband service provider, following on from the report we issued in April. Wanadoo's Q1 2002 results are on target with the company's objectives for the year, despite sharp declines in portal and e-commerce revenues. The reason is Freeserve: a better deal from its network provider has raised ARPU to 5.7/month from 3.7/month in Q4 2001, and its PAYG customer base has expanded under continued marketing efforts.
This note contains our latest update on Wanadoo, France's leading ISP and broadband service provider, following on from the report [...]SectorMay 15, 2002 Reports
In this note we look at the recent revenue growth performance of European mobile operators. We show that the current pessimism about future performance looks broadly justified. We comment on the increasing evidence, at least in the UK, that mobile penetration has stalled and that minutes of use are growing only slowly. We admit that our previous view that mobile usage would drift upwards even with stable call charges looks difficult to justify at the moment. Instead, many marginal users, such as older age groups and the less well-off, appear to be reducing their usage of mobile phones, possibly in reaction to perceived high prices.
In this note we look at the recent revenue growth performance of European mobile operators. We show that the current pessimism abou [...]May 13, 2002 Reports
This is the third in our series of notes on UK newspapers and concerns regional newspapers. Unlike other media sectors, 2002 has got off to a positive start (as we predicted) due to resilience in newspaper advertising, particularly recruitment. This can deliver 25% plus of revenues. We expect recruitment to remain resilient, primarily due to continued government recruitment. As a result, we forecast 2-3% growth in advertising to this media sector in 2002. But the overall conclusion of this report is that installing the infrastructure has, so far, changed very little. Old patterns of consumer behaviour largely remain. Three key points emerge. First, Internet behaviour is actually still very similar to Europe. Second, though wireless data use is rising, it is still a small fraction of voice usage. Popular data applications remain almost exclusively heavily focused on teenage ephemera, including ring tones, graphic messages and SMS/email. Third, the massive investment in digital TV capability, through satellite, terrestrial, cable and DSL is not being driven by consumer demand for High Definition TV. If South Korea is a good predictor of what is likely to happen in the rest of the world, the development of new content industries will continue to be slow and painful.
This is the third in our series of notes on UK newspapers and concerns regional newspapers. Unlike other media sectors, 2002 has go [...]Sector Print Media.May 1, 2002 Reports
This report explains why we are pessimistic about the short and medium term prospects of the global digital TV supply chain. While some recently published forecasts of digital TV penetration remain unremittingly optimistic, our own estimates suggest the number of digital homes may reach only 160 million by 2005. Not only are we bearish on demand but we find an industry that is concentrating on consolidation rather than unsustainable subscriber growth. Although some operators such as BSkyB are well on their way to profitability others face huge uncertainty over subscriber numbers and margins. But operator consolidation will not entirely solve the core issue facing the industry: that the current cost of an STB cannot be recouped by increased ARPU. To become profitable operators will require lower costs of content rights and STBs - and lower churn. These are all negative trends for the supply chain and will lead we believe to a 17% decline in global STB shipments during 2002 - a shortfall of 6m units over 2001. Furthermore due to declining average selling prices, we expect the STB market will not recover to 2001 value (approximately $7bn) until 2004. lack of a price advantage over GPRS or 3G tariffs a small base of prospective users
This report explains why we are pessimistic about the short and medium term prospects of the global digital TV supply chain. While [...]May 1, 2002 Reports
This note discusses the likely obstacles to a successful launch of H3G UK, the most aggressive 3G new entrant in Europe. Our main points: What does this mean for the media industry? Does the increasing power of media buyers mean further downward pressure on rate cards? We suspect that many of the effects have already been felt, particularly in the European and US TV businesses. In fact, we see a different issue emerging: the explosion in advertising inventory in the last few years, which has resulted in a worldwide glut. This has coincided with what we think may be a permanent reduction in the absolute number of advertisers. As a result, media buyers will continue to obtain better terms, whether in buying as part of a large group or not, but media price deflation may be a feature of the industry for many years to come.
This note discusses the likely obstacles to a successful launch of H3G UK, the most aggressive 3G new entrant in Europe. Our main p [...]April 25, 2002 Reports
BT's direct access broadband product attracted a lot of attention last week. This note examines the likely scale of demand for the product over the next four years. We conclude that although the product does have a niche among sophisticated users, the number of prospective customers is very unlikely to exceed 1 million. BT forecasts several times this number. We use this report to show that, while camera phones have been important in Japan, they have actually added very little to ARPU. Their primary effect has been to attract high spending customers to J-Phone, Japan's innovator in this area. The rate of uptake in Japan has been encouraged by highly subsidised handsets (less than or around 150 or £100), and very low prices for sending and receiving pictures (12 cents or 8 pence each).
BT's direct access broadband product attracted a lot of attention last week. This note examines the likely scale of demand for the [...]April 9, 2002 Reports
We think that ITV Digital will eventually be forced to close. What will replace the service on the digital terrestrial spectrum? This note looks at the possible outcomes once the commercial television regulator decides to re-licence the spectrum. We identify the main external factors, such as the current strong video game cycle, mobile phone expenditure and piracy that will continue to reduce consumers' expenditure on music. Format maturity is the main industry factor in its decline and we see no grounds for optimism about digital delivery for up to 10 years. As a result, we believe that, excluding exchange rate effects, the global music market will continue the decline that began in 2001 (-9%), with further declines in 2002 (-9%), 2003 (-7%), and 2004 (-4%), with a prospect but no certainty of stabilisation in 2005. If economic conditions deteriorate further in the US, Europe and Japan, our forecasts may look optimistic. In contrast, recent industry studies forecast 3-5% growth from 2004 onwards.
We think that ITV Digital will eventually be forced to close. What will replace the service on the digital terrestrial spectrum? Th [...]Sector FTA TV.April 4, 2002 Reports
The BT self-install broadband product appears to be working well. Our own trial showed it was easy to install and functioned perfectly. Despite the cut of approximately 25% in retail pricing of broadband and BT's major advertising campaign, intentions to adopt broadband have only increased modestly from 24% to 28% of Internet users in the three-month period to May 2002. We identify one problem as the absence of concerted industry efforts to shift uneconomic heavy users to broadband by limiting consumption on unmetered products.
The BT self-install broadband product appears to be working well. Our own trial showed it was easy to install and functioned perfec [...]April 3, 2002 Reports
Wanadoo is a business combining extensive interests in European ISPs with a strongly cash-generative directory business. Wanadoo's position as the leading French ISP is secure. Its position as an ISP in other markets is much less happy; in particular, Freeserve in the UK is not performing well. In this report, we address the underlying reasons why the French ISP business is healthy while the low ARPUs and poor or negative access margins in other countries are draining the company's profitability. Section A of the report provides detailed projections of 2002 for Wanadoo ISP operations. We try to show why the unmetered access model for narrowband ISPs is dangerous. This note inquires into the difficult question of what really drives the capital expenditure of mobile operators. We try to show that since much capital investment is actually replacement of existing assets, the importance of the declining growth rate in call minutes in reducing capex is overstated. Our - very rough - estimate is that a mature European 2G operator will probably have to spend about 15% of sales on capital expenditure for years to come. This is in marked contrast to the more optimistic operators, who have publicly offered targets of below 10%. Similarly, we see little relief from 3G. While it is undoubtedly true that 3G provides more bits per buck, the costs of running a 3G network alongside a 2G infrastructure more than outweigh this advantage. Observers should also note that the capital efficiency benefits of 3G are largely illusory, since the savings in the network are wiped out by the higher handset costs.
Wanadoo is a business combining extensive interests in European ISPs with a strongly cash-generative directory business. Wanadoo's [...]SectorMarch 22, 2002 Reports
UK national newspapers are in poor shape. The inherent problem of the industry too many papers chasing too few readers has been exacerbated by a sharp decline in advertising revenue since September. As a result of these challenges coupled with the implications of forthcoming media legislation, we expect to see significant changes in newspaper ownership over the next two years. The likely development of overall advertising in Europe in 2002 and 2003; The development of overall online advertising in the same period;
UK national newspapers are in poor shape. The inherent problem of the industry too many papers chasing too few readers has be [...]March 8, 2002 Reports
Telewest has drawn away from its key competitor in terms of UK performance. However, we still believe Telewest's bonds are worth less than 50% of their face value. This note explains why. In this note, we provide some evidence for this unpopular view. We look at BSkyB in the UK in the period from prior to the start of its digital service to today. We show four main points: (1) Digital TV has not resulted in digital viewers buying more channels or spending significant sums on pay-per-view. In fact the key 'pay-to-basic' ratio has fallen; (2) Sky's increased TV ARPU has resulted entirely from price increases in the various Sky packages, rather than increased purchasing; (3) The move to digital has caused a significant, and possibly permanent, deterioration in the costs of operating the Sky service. All the main categories of Sky's costs have risen as a percentage of turnover; (4) The ability to run more sophisticated interactive services on a digital platform has had little positive effect on Sky's economics. Though Sky disguises the costs attached to interactive services, it almost certainly loses money on this part of its activities.
Telewest has drawn away from its key competitor in terms of UK performance. However, we still believe Telewest's bonds are worth le [...]March 7, 2002 Reports
This report is the first of a quarterly series by Toby Syfret, one of Europe's best known commentators on viewing trends. We believe it will opt for the BBC offering. This note shows why.
This report is the first of a quarterly series by Toby Syfret, one of Europe's best known commentators on viewing trends. We belie [...]February 27, 2002 Reports
The UK Internet population continued to grow very slowly in the fall of 2001, reaching 14.7 million home users (30% adult penetration rate). Although this slow pace of customer growth may give dot.com investors pause for concern, we found some good news on e-tailing to report, such as higher numbers of purchasers - to almost 9 million - and positive experiences online that will lead to repeat shopping. Books, clothes, DVDs and computer games were especially popular items. Bricks-and-clicks e-tailers like WHSmith, Argos and John Lewis are well positioned to take advantage of offline/online marketing synergies, but Amazon (around 3 million unique visitors) is impressive in execution. Tesco has retained its very wide lead over other online supermarkets, almost doubling reach to 9% of home Internet users in 2001, and Argos is also doing well. This note looks in detail at the reseller business model, and in particular for BT service providers taking over BT lines, where Oftel has just mandated a wholesale line rental' product. We think the small international call segment is unappealing for entry as competition is already fierce. The new entrant will also find it difficult to establish a foothold on the local and national calls segments where substitution of mobile telephony is draining any dynamism from the market. Even more ominous is the advantage the BT Together packages have given BT over resellers in the customer segment most likely to be aggressively marketed by stretchy brands: families making off-peak and weekend calls to family and friends.
The UK Internet population continued to grow very slowly in the fall of 2001, reaching 14.7 million home users (30% adult penetrati [...]February 22, 2002 Reports
Sky's continued excellent performance has attracted favourable comment in the weeks since its half yearly results. But much of the commentary missed some critical points. The analysts did not question Sky's assertions that it was successfully targeting high value customers. Actually, the last half-year saw a fall in the numbers taking the top-priced package. Similarly, few commentators noticed that despite the favourable comments in the results announcement, interactive revenues actually fell last quarter. The steepest rate of decline was seen in betting, which a year ago was going to be application that formed the core of Sky's interactive ARPU. Similarly nobody seemed to have noticed that Sky's overall share of TV viewing declined in the quarter, despite the addition of two hundred thousand new subscribers. According to the Financial Times (27/03/2002), the European Commission is planning to clamp down on the cost of calling mobiles' and issue tough new rules', which would make it easier for national telecoms regulators to force mobile phone companies to reduce excessive call termination charges'. According to our research, this is an exaggerated assessment: the likeliest outcome would be a Commission recommendation on best practice' guidelines, rather than new rules. Our research also shows that the pressures from NRAs on MNOs to lower mobile termination charges are highly uneven in the top three markets: they are most acute in the UK (predictably, given the pro-consumer orientation of Oftel), less significant but nevertheless present in Italy, and non-existent in Germany. Thus, if the UK Competition Commission endorses Oftel's proposed charge cap in its forthcoming ruling, we can expect the four leading UK MNOs to lose about £880 million in revenues for the 2002-2006 period, with the annual reduction in 2002-2003 estimated at about £265 million.
Sky's continued excellent performance has attracted favourable comment in the weeks since its half yearly results. But much of the [...]Sector Pay TV.February 15, 2002 Reports
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 mobile operators in the UK and elsewhere probably make a higher margin on SMS than on any other product. We think that about 30 [...]