United Kingdom Telecommunications Report Q2 2008

The UK has fallen to second place in BMI's Business Environment Rankings, overtaken by France for the first time. Its scores for Country Risk and Independence of Regulator remain unchanged, but a relatively small decrease in ARPU has had a negative effect on the country's Telecoms Market score and lowered the overall score, letting France take first place. The saturated mobile market is forecast to see little growth in comparison to the French mobile market and this has been enough to lower the Telecoms Market score, even as the Country Structure score rose to be one of the highest in the region. The UK also fell to second place in our regional rankings for fixed-line penetration, as we have added Greece to our Western Europe rankings, which took first place. The UK's broadband market has fallen to fourth place in the rankings as Belgium and France saw stronger growth rates in 2007.

While mobile subscriptions continue to grow at a slow pace, the UK 3G market saw strong increases in terms of subscriber numbers in 2007. Vodafone launched a campaign promoting its value-added services just before the launch of Apple's iPhone on the O2 network. Vodafone saw a sharp increase in the number of 3G subscribers on its network, impacting on Hutchison 3G's prior dominance of the market.

We believe Vodafone has a share of approximately 26.6% of the 3G market in the UK, with Hutchison 3G slightly ahead on 36.5%. This strong increase has encouraged BMI to upgrade our 3G forecasts; we are expecting the market to increase by 24% in 2008 and that 3G subscribers will reach 26.4% of the total UK mobile market by 2012.

The fourth quarter of 2007 saw the strongest increase in net subscriber additions in the mobile market, with 2.2% growth, slightly stronger than in Q406. However, the market did not quite reach our forecasts.

We have left ongoing forecasts virtually unchanged for the UK mobile market, and expect the largest changes to be in the prepaid/postpaid subscriber mix of the leading operators. The relatively high level of prepaid subscribers gives operators plenty of scope to migrate customers to more lucrative postpaid contracts, and we believe this will be an ongoing trend in the market as a means of reducing churn and increasing ARPUs.

Our forecasts for the broadband market were on target, with just over 16mn subscribers recorded at YE07. BT retains its number one position in the market but is facing increasing competition from alternative operators, many of which have been offering 'free' broadband as part of bundles of services.

The regulator has stated its intention to bring the UK market broadband speeds in line with European averages as the UK lags in terms of download speeds compared to other developed markets in the region.