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    September 14, 2002

    Korean Broadband, Wireless and TV

    This report looks at whether the extraordinary investment in Korean digital infrastructure has changed consumer behaviour. A combination of the Korean government and the large conglomerates have provided almost universal broadband access, the world's most advanced 2.5G networks and are just beginning the process of providing ubiquitous digital TV. Alongside the growth in infrastructure, a small number of businesses have begun to develop substantial revenue streams from content. Of particular interest is the growth of multiplayer online games, in which Korea has a world lead. Music publishing revenues are composed of multiple streams arising from almost all uses of music – radio, TV, live performance, sale of physical formats, use in film/TV soundtracks, sale of printed music etc. Of these, only the publishing revenues derived from the sale of physical formats are in decline. Otherwise, the industry is buoyant as music becomes yet more ubiquitous in everyday life. The latest version of Grand Auto Theft has 80 music tracks on it from major stars, an example of the spread of music into every corner of life.

  • September 13, 2002

    European Mobile Operators – Mobile Valuation

    In this report, we look at the components of a theoretical DCF valuation of European mobile operators, focusing on Vodafone as the most salient example, and compare our views with those of the ‘analyst consensus'. Perhaps unsurprisingly, we are more conservative on revenue and margin forecasts than most forecasters, but an area in which we are uncharacteristically optimistic is cost of capital; the one benefit of the mobile industry's transformation to low but stable growth is that WACCs should fall through both reduced betas and the ability to take on more debt. Our resulting value per share for Vodafone is lower than the analyst consensus forecasts would give, but is still a healthy 115p. We should stress that this is not a price target or a recommendation, as many other factors affect stock prices apart from theoretical projections. The Vodafone share price is currently trading below the valuation implicit in our low growth assumptions, perhaps because of cynicism about the company's excessive past promises, the possibility of further expensive acquisitions or many other potential concerns.

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    September 9, 2002

    Consolidation in Media Buying

    The last three years have seen huge concentration in the marketing services industry. One source suggests that 56% of the world's advertising billings now pass through just seven buying groups, up from 32% in 1999. Though the advertising recession in major economies shows little sign of abating, the major groups continue to grow by acquisition, often financed by debt. At the same time, media planning and media buying have moved to the centre of these groups after a century of being little more than a clerical activity at the periphery of their business.

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  • August 29, 2002

    Wi-Fi: Wireless Data in Public ‘Hotspots’

    The last few weeks have seen several enthusiastic announcements from telecom operators eager to start public Wi-Fi services. In this note we look at the prospects for public Wi-Fi. Our analysis suggests that Wi-Fi is likely to suffer from three major problems. Our central projection – that about 50% of households will have access to multi-channel TV in 2006 – is far lower than other forecasters. Indeed, if we are wrong, it will probably be because we are too pessimistic. However, more sanguine observers should note that Zenith, probably the most quoted industry analyst, has quietly reduced its digital TV penetration forecasts by 5 million homes (over 20% of UK households) in the past year.

  • August 11, 2002

    Camera Phones

    Camera phones represent the best hope of the mobile operators. Proven demand in Japan gives European operators reason for optimism that cameras will increase ARPU. Handset manufacturers believe it will ignite replacement demand.

  • August 5, 2002

    Where Did the Music Go?

    This report provides our analysis of the main factors in the evolution of the global music market in the period 2002-2006.

  • July 29, 2002

    UK Broadband/Internet Trends H1 2002

    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:

  • July 17, 2002

    European Mobile Operators – Capital Expenditure Trends

    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.

  • July 17, 2002

    European Online Advertising

    This report addresses four principal questions:

  • June 27, 2002

    The High Cost of Going Digital – The experience of BSkyB

    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.

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    June 11, 2002

    The Digital Terrestrial Licence Applications

    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.

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    June 11, 2002

    Resellers of Calls

    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.

  • June 10, 2002

    Mobile Termination Charges

    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.

  • June 5, 2002

    Handset Sales and the Replacement Cycle

    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.

  • June 5, 2002

    UK TV Viewing Trends – Issue 2

    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.

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  • May 16, 2002

    Wanadoo Q1 2002 Results

    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.

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  • May 15, 2002

    European Mobile Operators – Revenue Growth

    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.

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    May 13, 2002

    UK Regional Newspapers

    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.

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  • May 1, 2002

    The Digital Bomb II – The Digital TV World Market

    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

  • H3G
    H3G
    May 1, 2002

    Hutchison 3G – The Last of the White Elephants?

    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.

  • April 25, 2002

    BT Broadband

    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).

  • April 9, 2002

    Digital Terrestrial Television

    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.

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  • April 4, 2002

    UK Broadband

    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.

  • April 3, 2002

    Wanadoo

    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.

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