UK mobile competition gears up after failed consolidation, weak Q2

Friday 16 September 2016 | 15:16 CET | Background

After the turbulence in the British mobile market of the past year, the operators have settled down to refining their commercial strategies. The failed merger partners 3 UK and O2 UK have been updating their product ranges and prices, while BT/EE and Vodafone are gearing up for competition on the quad-play market. The strategy refresh is needed as the mobile market faces pressure on revenues.

The British mobile market showed signs of a recovery in 2015, with solid growth in service revenues, but the latest figures from Telecompaper show a quarterly decline of 1.3 percent in the second quarter of 2016. Total service revenues amounted to EUR 4.5 billion in Q2 2016. BT was the only operator to show a small increase in its service revenues in Q2 2016. All the operators except BT saw a drop in postpaid revenues, and all the operators except 3 UK showed a decrease in prepaid revenues.

Mobile operators refining strategies

Since the merger of 3 and O2 was blocked by the EC in May, 3 has announced a major overhaul of its postpaid pricing in an attempt to halt the decline. O2 meanwhile has been experimenting with more family and shared data plans, something which could be enhanced by its recent launch of smart home services. The latter is based on a deal signed earlier this year to use AT&T’s ‘Digital Life’ platform.

Telefonica is still interested in monetizing O2, as the main reason for wanting to sell O2 to 3 UK was to reduce its debt. The company confirmed recently an IPO is among the options under consideration, but this is unlikely to change the mobile market landscape much, as Telefonica aims to retain a majority stake, and hence control over O2’s strategy. Nevertheless, a sale to a party like Liberty Global or a private equity firm cannot be ruled out.

Telefonica has said that it believes that there is still room in the UK for a pure mobile player. While “it is inevitable that the UK's convergence take-up will increase”, the operator sees the fixed-mobile market still in its infancy, and “some customers will always look for value versus discount quad-play services”. (Souce:Telefonica Q2 16 analyst call transcript). BT/EE and Vodafone appear to see convergence moving more quickly. BT completed the takeover of EE in January and since then EE has started offering its customers access to BT sports channels, and BT has started to sell handsets. We expect BT to focus more in the near term on cross-selling services between the EE and BT brands, and in future to launch full quad-play offers.

Vodafone clearly sees a threat in BT’s plans and is lobbying hard for improved access to Openreach in order to support growth in its fixed services and offset the mobile decline. The latest reports also have Vodafone looking into building its own broadband network and preparing to launch a TV service. This shows that Vodafone too believes that it needs access to mobile and fixed networks to succeed in the UK.

Vodafone UK worst performer in Q2 2016

Vodafone had the worst performance of all four operators in Q2 2016, with its postpaid service revenues down 4 percent compared to the previous quarter, according to Telecompaper’s database. Vodafone blamed this mostly on the continued problems with its billing system migration, as well as lower out-of-bundle revenues and the effects of roaming regulation and MTR cuts. Telefonica saw its postpaid revenues drop by 0.6 percent in the second quarter and also pointed to roaming and MTR effects, and 3 UK also lost postpaid revenues (-1.2%). BT was the only one to gain, with postpaid revenues up 1.2 percent in the second quarter. As all operators showed an increase in postpaid customers, this means all (except BT) saw a decline in postpaid ARPU too, with Vodafone losing the most at a drop of EUR 1.4.


Note: the service revenues are not comparable on a yearly basis as BT uses a different definition to EE, excluding MVNOs and M2M. This results in a large drop in Q1 2016 revenues compared to Q4 2015.

This pressure on postpaid ARPU is likely to continue, both from roaming regulation and changes in customer behaviour, such as the ongoing switch to OTT messaging services. Alongside these effects and changes brought on by the emergence of converged services, the market may also be impacted by the next spectrum auction (no date set yet). This could lead to BT owning the majority of the total spectrum. It currently owns about 42 percent, after pooling its own and EE’s frequencies. Any further acquisitions could give BT/EE a majority of the airwaves, making it more difficult for Vodafone to match the company in quality and even harder for smaller players 3 UK and O2 to grow and remain competitive in the market.

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