Publications

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UK TV Viewing Trends - Issue 3

This is the third of our regular reports on UK TV viewing. The report contains details to support the following assertions

The operators were hoping that the CC would soften Oftel's seemingly tough proposals (RPI-12% price cap); it seems most likely now that they will actually toughen them, incorporating a one-off cut in the new regime, which we estimate would negatively impact industry EBITDA by just over 10%. The process will, however, be far from over: we predict at least one legal challenge ahead, possibly several, delaying the implementation for many months into next year (EC legislation comes into force on the 24th July 2003 which may delay matters even further).

Media 14 October 2002
Robbie Williams

What prompted EMI to spend about £60 million to acquire Robbie’s next two records and to buy options on the next four? Even for an artist as successful as Robbie Williams, the numbers do not add up. Having sold less than 6 million units of his last album, EMI appears to be gambling that his next two records will sell more than 8 million units each, of which 2 million need to be in the US.

Media 6 October 2002
Nokia 3G Handset Launch

Last week Nokia launched its first 3G handset, the 6650. Or did it? Although the size, weight and price initially looked impressive, the handset has not really been launched (not until H1 2003), and technically it is not really 3G (the data rates are too slow). By the time the handset is actually widely available to consumers, GSM-only handsets will have a much better feature/price combination, with a 3G handset only appealing to laptop users who would probably prefer a data card anyway. This is good news for the operators - they can comfortably delay potentially expensive 3G roll-outs safe in the knowledge that competitors will not gain any advantage by being first to market with the current generation of handsets.

This note looks at what has happened to NTL in the past year, and the prospects for 2003-2004. It emerges from a period of introspection to face stronger competition than ever. Sky has won the battle for digital TV. Although NTL has been successful in broadband this year, BT has serious plans for this market.

 

 

  • Nokia
Telecoms, Mobile 1 October 2002
Mobile Handset Replacement

This note reports on our third bi-monthly survey of handset replacement intentions in the UK. Purchase intentions have weakened slightly in the last four months, suggesting a further lengthening in the average replacement cycle. Interest in replacing phones to acquire new handset features remains low. Awareness of camera phones is extremely high, but the most recent survey shows a decline in the level of interest in purchasing, probably as the prices of these devices has become more widely known. Nokia remains the overwhelmingly dominant choice for consumers’ next brand of phone. No other manufacturer has more than a tiny prospective share.

We think that TPS can probably just survive the prospective loss of football to Canal Satellite. Paradoxically, this may not be an ideal result for TF1, because it will not be able to argue that a merger of the two satellite platforms is justified on 'failing firm' grounds. Competition regulators will sometimes allow a merger on the grounds that the weaker company is bound to fail. This does not seem to be likely to be the case in French pay-TV, though TPS's subscriber numbers will be dented by the loss of the best football.

 

 

Telecoms, Mobile 29 September 2002
Wanadoo H1 2002 Results

Wanadoo's results for the first half of 2002, detailed in the attached note, show that the company is well on track to make its target of positive EBITDA as the loss margin has been cut by half on the Internet side of the business. The targeted revenue increase of 30% also looks plausible as Internet access revenues have done well in France due to migration of the subscriber base to higher priced broadband packages. Wanadoo hopes to have 1 million broadband subscribers by the end of the year, and is counting on the rollout of a new lower speed (128k) and lower-priced broadband package in mid-October. The French Competition Commission has also permitted the company to again market its broadband packs in FT's network of shops, cutting customer acquisition costs. Margins will improve in mid-October due to wholesale broadband price declines mandated by the regulator ART.

We think that the business is worth about €6bn, rather less than the €7-9bn that the investment banks are projecting. The difference arises because we think that they over-estimate the value of Universal’s music publishing business and expect a faster upturn in recorded music sales. But Universal is clearly strongest of the major music companies and we do expect the company’s margins to recover from the low levels seen this year.

  • France Telecom
Media 29 September 2002
UK Broadband Market

This note provides an update on the state of the UK broadband market at the end of the summer. The number of broadband users in the UK is rising fast, but much of this growth has arisen from the introduction of NTL's 128k product. 128k is not usually considered a data speed consistent with the term 'broadband'. However, ISPs should note the level of interest in this product and its highly competitive price point (£14.99). We continue to say that to be a product of appeal to the majority of Internet users, broadband has to be priced at no more than £20 per month. We also look briefly at options facing non-BT ISPs and suggest that the best strategy may be to launch a broadband product but only make it available to those that ask for it, rather than actively promoting it.

Those that defend E4 and ventures like it point to the importance of programmes like Big Brother, which was hugely successful on the satellite service. We try to demonstrate that even this undoubted success brought little financial benefit to E4. Big Brother, broadcast day and night on E4 over the summer, generated about half of E4’s total viewing for 2002. Nevertheless, it probably brought in no more than £8m advertising revenue, not enough to cover two months costs of running E4. The competition for the 18-34 audience on satellite is beginning to become acute. The best thing for Channel 4 to do would be to close E4, blaming government for allowing the BBC to sink £100m a year into programming a similar, but publicly funded service.

Telecoms 22 September 2002
Orange UK's New Tariff

On Wednesday Orange announced a simple new single tariff range for all its new contract users. Although there are some benefits to both consumers and Orange of tariff simplification, the main impact appears to be to increase the price of calls for off-peak users, which is a sensible strategy for Orange and consistent with other tariff increases we have seen recently. Orange may lose customers because of this, but it has helpfully given four weeks warning of the change to the other operators, who may react with changes of their own.

Weak economic growth is usually blamed, but we believe that other forms of communication are substituting for fixed voice calls. Substitution of fixed line calls by calls from mobile phones is increasingly less important. By contrast, our conclusion is that Internet-based communication (email and instant messaging) has recently become a far more important source of competition to fixed line voice calls.

  • Orange
Telecoms 15 September 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.

Media, Telecoms 14 September 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.

 

 

 

Telecoms, Mobile 13 September 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.

Media 9 September 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.

Telecoms 29 August 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.

 

 

 

Telecoms, Mobile 11 August 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.

Media 5 August 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:

Media, Telecoms 29 July 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.

 

 

Telecoms, Mobile 17 July 2002
European Online Advertising

This report addresses four principal questions:

Media 17 July 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.

Media, Telecoms 27 June 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.

Media 11 June 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.

Telecoms 11 June 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.

 

 

 

Telecoms, Mobile 10 June 2002

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