November 28, 2017 / 11:00 AM / a year ago

Fitch: Fixed Broadband Driving Value in UK Telecoms; Content Largest Cost Rsk

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: What Investors Want to Know: UK Telecom Business Models here LONDON, November 28 (Fitch) Fitch Rating, London, says in a report published today that fixed broadband is the growth driver for the UK telecoms sector, that infrastructure-based service providers with high-quality networks and the ability to offer quad-play will benefit from a market that is adopting convergence. Data traffic across fixed network is exponentially higher than on mobile, while usage across both technologies is growing strongly. Pricing in fixed services has proven far more resilient than in mobile despite the investment made by the UK's mobile networks building out nationwide 4G coverage. Growth in mobile service revenue continues to prove elusive for the sector due to regulatory pressures and intense competition. Prices for fixed service bundles, on the other hand, have increased steadily, helped by a higher take-up of high-speed broadband. Average revenue per fixed broadband connection grew by almost 10% in 2016, delivering a compound average rate of growth or more than 4% over the past five years. Content is proving important in the communications bundle, with each of the main players in the market offering some form of quad-play service. Whether convergence at this stage means discounting the bundle or something more nuanced is not entirely clear. We believe that consumers are increasingly attracted by network quality on both a fixed and mobile basis along with access to premium content. In this regard each of BT Group plc (BT; BBB+/Stable), Sky plc (Sky; BBB-/RWP) and Virgin Media Inc. (VMED; BB-/Stable) are well positioned to meet these needs. Market participants with a mobile-only proposition, in our view, are likely to be more challenged to deliver top-line growth while EBITDA margins in UK mobile have been consistently pressured by the level of competition in the market. Service providers, whether network-based or virtual operators, have nonetheless been able to increase average revenue per user (ARPU) with the mass-market take-up of 4G services, but it is not clear that further increases in mobile data usage will lead to higher revenue growth. UK telecoms operators generally have shown a good propensity to drive efficiencies. However, we believe content inflation is a risk. These costs, in particular those associated with exclusive sports programming, have shown unhealthy inflationary pressures. In our view, the entrance in 2012 of BT into the TV market and its focus on exclusive sports rights, introduced a large and well-funded competitor to the market. This is likely to keep the competition for sports rights, especially for the English Premier League and the European Champions League at a high level. With Sky's core UK and Ireland businesses absorbing programming costs that exceed 50% of total opex - a ratio that is likely to continue to grow - the leading pay-TV player is most obviously exposed to this risk. BT and VMED on the other hand are for various reasons less exposed to such singular risks. In terms of product positioning, we believe that those operators with high-speed broadband-led commercial strategies allied to a high quality TV offer to be best positioned to grow, defend margins and benefit from economies of scale. Leverage aside, Fitch views the cable business model to be most resilient to the pressures described above, while BT's domestic business has also adapted well to the commercial challenges of a competitive market. 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