Vodafone struggling in UK mobile market, another tie-up with Liberty Global logical next step

Thursday 30 March 2017 | 09:45 CET | Background

Vodafone was the worst performer in the UK mobile market in the last quarter of 2016, new research from Telecompaper shows. 3 UK on the other hand showed the most growth, both in terms of customers and service revenues. The total number of Sims in the UK continued to grow but service revenues decreased. The latest results suggest more M&A may be on the cards, whether it be the long-rumoured tie-up of Vodafone and Virgin Media, a new partner for O2 UK or additional spectrum buys, as 3 UK has done with the takeover of UK Broadband. 

The UK mobile market grew in terms of Sims in the fourth quarter of 2016 but its service revenues declined. The total number of Sims reached 78.9 million in Q4 2016, an increase of 0.3 percent on a quarterly basis, as more postpaid Sims were added to the market than prepaid Sims were lost. The share of prepaid on the total market dropped further, to 35.1 percent from 38.6 percent at the end of 2015. 

All operators apart from 3 UK lost prepaid Sims compared to the previous quarter and a year ago. Vodafone was the only operator not to gain postpaid customers in Q4 2016, although it carried out a one-off customer base adjustment, reducing its base by a total 125,000 customers (both prepaid and postpaid). Vodafone said that without this adjustment it would have gained 99,000 postpaid customers, rather than the reported loss of 25,000 in postpaid. 

Mobile service revenues show a more mixed picture, with 3 UK and BT seeing quarterly growth of respectively 5 percent and 0.9 percent, but Vodafone and Telefonica O2 showing drops in the last quarter of 3.8 and 1.8 percent. Overall the market contracted slightly in the fourth quarter, by 0.7 percent to GBP 3.67 billion (1). 

Competitive pressure, roaming regulation and some players offering (more) content without (currently) charging for it negatively affected service revenues and ARPU. After small gains in the total blended ARPU to GBP 15.7 in Q3 2016, the figure dropped to GBP 15.5 in the fourth quarter. Despite a 2 percent quarterly fall in postpaid ARPU, Telefonica O2 still has the highest postpaid ARPU of the four operators, at GBP 23.5.  Vodafone now has the lowest, at GBP 18.5, after losing 2 percent during the fourth quarter. 

M&A rumours resurfacing in UK mobile market

Following the failed merger attempt by O2 and 3 UK in 2016, M&A rumours are resurfacing in the UK. Virgin Media, owner of a growing cable/FTTP network and major MVNO, is at the centre of the rumours, as a possible partner for either O2, which has had to delay its plans for an IPO, or Vodafone UK. Liberty Global, which owns Virgin Media, already formed a similar combination in the Netherlands with Vodafone, and has shown a growing interest in expanding its mobile activities.  Vodafone recently gave up on developing its own TV service, suggesting it may be more open to a partnership with a fixed or pay-TV operator. 

With Sky’s recent launch on the mobile market and BT’s continued focus on sports, video content is becoming increasingly important as a differentiator in the UK market. BT/EE, which recently extended its rights to the Champions League, is seeing the fruits of its ‘more-for-more’ strategy, offering its EE customers access to BT Sport in order to drive data usage and ARPU growth.   

3 UK meanwhile remains on the look-out for new growth opportunities. In addition to a growing focus on the wholesale market and IoT, the company announced in February the purchase of UK Broadband, which offers 4G-based services in London. This will give it additional mobile spectrum for the future launch of 5G services, and new opportunities in home broadband. 

3 UK has also been lobbying hard for new rules to cap spectrum holdings by the biggest operators, ahead of an expected auction of frequencies in the 2.3GHz and 3.4GHz bands later this year. With currently the smallest amount of spectrum, 3 UK needs to ensure it can remain competitive with 5G coming around the corner. The pending auction poses a challenge for all four operators, as while the extra spectrum is welcome, it may force the consolidation plans to be put on hold. Without further M&A though, the competitive pressure driving service revenues lower is set to continue. 

(1) The figures in the article are based on Telecompaper’s UK Mobile Operators database. This research is published in euros, in order to allow for comparison with our other mobile operator research. In this article we have chosen to discuss the UK market this quarter in pounds sterling, in order to reflect better the underlying market performance following the sharp fluctuations in the GBP – EUR exchange rate during 2016.

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