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 [...]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 [...]February 11, 2002 Reports
The painful restructuring process at NTL is probably well underway. Holders of NTL bonds will have to accept a significant reduction in the nominal value of their holdings. To us, the crucial question is how much debt the slimmed-down UK businesses of NTL can afford to have on the balance sheet. If everything goes right, the number is something over £3 billion. But things will not go right, and the underlying debt capacity of NTL is probably considerably less than a billion pounds. As noted, TV viewing did indeed fall sharply in the first quarter. Viewership of the main analogue channel, ITV, fell faster. And this is not caused by multichannel competition. ITV's share has fallen fastest in analogue terrestrial-only homes. Sky has been a beneficiary, as have ITV2 and E4, the digital offspring of the main commercial channels.
The painful restructuring process at NTL is probably well underway. Holders of NTL bonds will have to accept a significant reductio [...]February 7, 2002 Reports
This brief note concerns further evidence of strong price sensitivity to broadband prices, as provided by Oftel's recent qualitative research. Since we expect an announcement from BT Group on February 26th regarding reduction of DSL wholesale prices to levels consistent with retail pricing of £30/month or slightly less, this is topical. In addition, we point to BTopenworld's very high market share (75% plus) in residential DSL installations so far.
This brief note concerns further evidence of strong price sensitivity to broadband prices, as provided by Oftel's recent qualitativ [...]January 22, 2002 Reports
The charges imposed by the mobile operators for handling incoming calls are a very important part of their revenue stream. The UK telecoms regulator is attempting to force the networks to reduce their prices significantly. The row has just been referred to the UK competition authorities. We look at the arguments used by Oftel to justify its harsh stance. We conclude that the evidence supports the regulator's view that incoming call charges are held artificially high. As a result, analysts should expect that the UK networks will fail to see the charge cap reversed. The impact on revenue will be about 7% in the next four-year period. This will flow straight to the profit line. Increases in fixed to mobile call volumes, as a result of the lower prices, will partly offset this. Wanadoo's aim of being the #2 broadband ISP in Europe (behind T-Online, way ahead) was adversely affected in Q1 2002 by the decision of the French Competition Commission to halt the marketing of the company's product through the network of France Telecom, so other ISPs can also have a chance to establish a foothold. Wanadoo has had to resort to other, more expensive, marketing platforms, and sales are running at about 70% of the pace before the decision. Wanadoo is also looking for a strong showing on broadband from Freeserve, just entering the market now: 70,000 broadband subscribers by year-end, and a quarter million by mid-2003. We are sceptical whether the brand can shake its reputation for cheap Internet service, which continues to attract a large PAYG base.
The charges imposed by the mobile operators for handling incoming calls are a very important part of their revenue stream. The UK t [...]January 16, 2002 Reports
This report is a companion to Broadband Europe (2002-02), issued concurrently, and looks more closely at cable's ability to compete with incumbents on marketing broadband. Key points include: The outlook for the industry is further enhanced by the impact of much lower paper costs, allied with cost measures on print usage, and reduction in expenditure on online ventures. The industry is increasingly benefiting from best practice although anomalies remain in margins that indicate further room for improvement. Editorial investment has not alas managed to halt continuing slow declines in circulation that are inevitable in our opinion.
This report is a companion to Broadband Europe (2002-02), issued concurrently, and looks more closely at cable's ability to compete [...]January 16, 2002 Reports
The potential for residential broadband connectivity in France, Germany and the UK depends on the availability of low-priced broadband products (hardware, installation and monthly subscriptions) and a narrow pricing gap with existing Internet access packages. Unless monthly subscriptions fall below 30 (from current comparable levels of 45 and up) and hassle-free self-installation is ubiquitous, consumers will not migrate from narrowband, even if they appreciate the faster surfing and download speeds of broadband. But regulators are guarding against any price declines from the incumbents, having put their faith in infrastructure-based competition through local loop unbundling (LLU) and upgrading of cable infrastructure. We believe that expectations of alternative supply of broadband through either of these routes in France and Germany are misplaced; in the UK, broadband cable will make more headway due to specific historical and regulatory factors, while there will be no effective alternative supply of residential DSL through LLU. In its projections supporting its £3.2 billion debt financing, H3G projects 172,000 subs in 2002, 1.2 million by end 2003 and 9 million by end 2010. Combined with projected ARPU of £40/month (or about current contract ARPU in the UK), H3G's revenue projections come to £2 billion in 2005 (note UK mobile market in total = £10 billion today).
The potential for residential broadband connectivity in France, Germany and the UK depends on the availability of low-priced broadb [...]December 21, 2001 Reports
15 million UK adults regularly (at least once a month) accessed the Internet from home in Q3 2001, the same as in Q2 2001. This stagnation is due to mainly seasonal factors and we expect growth of the home Internet population to be renewed in the autumn and winter. Our lower forecasts are derived from an analysis of the numbers of households and small businesses that are apparently prepared to buy ADSL at current price levels, but also driven by concerns about this particular product. Users will have to acquire new email addresses and pay for a new email service. We do not think the product will work in networked multi-PC homes or offer ISDN users a real alternative. We see tremendous confusion in the marketplace from two competing BT Broadband offerings from BT Retail and BTopenworld.
15 million UK adults regularly (at least once a month) accessed the Internet from home in Q3 2001, the same as in Q2 2001. This sta [...]December 20, 2001 Reports
This report contains our analysis of the French TV market. France, like the UK, is a difficult market for pay-TV and, recently, for some analogue terrestrial channels as well. We look at the analogies and differences between the two countries. In both places, excess competition and declining advertising revenues are beginning to create cracks in the noble edifices of the major TV groups. As in the UK, we conclude that analogue commercial TV may be less affected by digitalisation and pay-TV than most analysts expect. We conclude that the economics of both free and premium digital terrestrial television are so unattractive that no rational bidder would enter the race for the licence. Likely advertising revenue on free channels will barely cover the transmission costs, while pay services will be crippled by astronomical subscriber management costs and low, or negative, margins on channels provided by BSkyB.
This report contains our analysis of the French TV market. France, like the UK, is a difficult market for pay-TV and, recently, for [...]December 19, 2001 Reports
In this note we summarise the available evidence on trends in ARPU among European mobile operators. We demonstrate the increasing trend towards stable or increasing revenue per subscriber in key markets. The end to the long downward trend in voice ARPU is clearly in sight. This new stability is derived from increasingly firm call charges and slow growth in minutes of use. Local competitive conditions may disrupt this pattern in individual countries and we demonstrate the countervailing trend in Finland but, overall, the pattern is clear and will probably become more so in the next few months. More important, perhaps, the current economics look acceptable both for BT's Wholesale and Openworld divisions - this note includes some detailed financial analysis. But even at the lower price levels, we remain unconvinced whether subscriber numbers will grow as rapidly as BT predicts. (BT is now saying that ADSL subscribers will be more numerous in 2005 than unmetered customers are today!)
In this note we summarise the available evidence on trends in ARPU among European mobile operators. We demonstrate the increasing t [...]December 18, 2001 Reports
The regional newspaper business in the UK is a mature industry with improved operating management and a small number of powerful players. The bulk of the report examines in detail the structural forces determining the growth of ISPs in Wanadoo's main territories - France and the UK. It looks at the scope for raising revenues through broadband growth, increased advertising or e-commerce revenues. We look at market shares, and the factors that drive growth and decline.
The regional newspaper business in the UK is a mature industry with improved operating management and a small number of powerful pl [...]Sector Print Media.December 14, 2001 Reports
Microsoft XP has wider significance than most analysts appreciate. While the operating system is, in itself, not a huge advance on existing products - particularly Windows 2000 - its true significance lies in its value as a Trojan Horse for Microsoft .NET. As we indicated in the spring of this year, we think .NET moves Microsoft into direct competition with businesses as diverse as ISPs, mobile network operators and home electronics companies. Widespread adoption of XP makes the eventual success of .NET more secure
Microsoft XP has wider significance than most analysts appreciate. While the operating system is, in itself, not a huge advance on [...]December 10, 2001 Reports
Nokia's recent guidance suggested a modest recovery in handset sales in 2002, followed by a strong resurgence thereafter. We think the position will be different and look for unit sales of about 450m next year, with only 3-7% growth in the years 2003-2005.
Nokia's recent guidance suggested a modest recovery in handset sales in 2002, followed by a strong resurgence thereafter. We think [...]November 29, 2001 Reports
In this short note, we look at trends in mobile design and features. We show that the steady decline in size and weight is now over, and manufacturers are focusing on adding new functions, such as digital cameras, and even, in one case, a thermometer.
In this short note, we look at trends in mobile design and features. We show that the steady decline in size and weight is now over [...]November 21, 2001 Reports
This report provides an update on the major trends in the UK digital TV market. We use a variety of consumer market research data, which all offer a consistent picture of trends in the business. Sky is doing well. But the evidence of the last quarter's results suggests that it is not out of the wood yet.
This report provides an update on the major trends in the UK digital TV market. We use a variety of consumer market research data, [...]