This report provides our model for global handset sales in 2001 to 2005. We continue to forecast 375 million units shipped in 2001. The forecast for 2002 is 470 million units. Key constraints on the level of shipments in Europe: At current pricing levels, we see pay-TV penetration struggling to exceed 60% by 2010. And the rapid continued price inflation in the pay-TV offerings of Sky, the cable companies and ITV Digital will make even this target difficult to achieve. As our recent note on household expenditure (Time and Money) indicated, the poorest 40% of the population have very little surplus cash. Increasing prices means that pay-TV is moving even further beyond the reach of this group.

Our view is that mobile operator marketing strategy was the key determinant of the rate of apparent growth in mobile penetration across Europe in 2000. We use this report to show that operator 'push' was responsible for the increase in apparent subscribers. We examine the evidence on actual rates of ownership and usage in the three of the largest markets and show that underlying mobile penetration is probably around 60% of adults in these markets. Will the reduction in estimated levels of penetration, which the operators also acknowledge, mean continuing high growth rates in future? We think it unlikely. First of all, of course, operator 'push' is reducing. Second, ownership in key demographics, such as 15-24 year olds is already close to saturation. Third, those that do not own a mobile, particularly in the older age groups, appear relatively uninterested in the product. Our pessimism derives from our view, firstly, that subscriber growth in NTL's UK cable franchises has all but ceased and, secondly, that further price rises will inevitably cause loss of subscribers as NTL's telephony and television offerings have already become uncompetitive. Broadband is important but will not generate significant amounts of extra revenue.

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).