UK telecoms operators are facing tough trading conditions, according to O2’s UK CEO Ronan Dunne. The operator saw its lowest net customer additions in Q1 since securing the iPhone exclusive in 2007, but was still able to post a 5.3% year on year rise in revenue and a 13.7% rise in OIBDA.
Speaking to Mobile, Dunne says: ‘It is a tough market out there for a number of reasons. Overall the consumer market is smaller than last year and the general view is that consumer confidence is weak. There was a 20% plus drop in consumer confidence in January.
‘The other factor affecting consumers in Q1 was device fatigue. Since the quarter came to an end a number of manufacturers, such as Sony Ericsson and Samsung, have launched major new devices, but there were no significant devices launched in the first quarter. So, the combination of those two factors made it a tough market,’ he adds.
‘I sense in the market that some operators are chasing for physical numbers, rather than building sustainable long-term value for customers and therefore for shareholders,’ he continues. ‘You need to get the right balance between attracting customers in via a deal versus a consistent approach to value – so the whole of the price experience and loyalty has to be right.’
O2 may have miscalculated what the market could bear in Q1 as its range of more costly tariffs launched in the quarter saw consumers avoiding it like the plague. Mobile net additions fell from 254,000 in Q4 2010 to just 75,000 in Q1 2011 as a result. The operator has since moved to reverse the decline by introducing new tariffs at the end of March. Customer additions are now said to be picking up well.
Value not volume
However, Dunne attributes the drop in net customer additions to a decision not to chase volume but instead concentrate on value. ‘We took a clear view that existing customers should realise value from us. We focused on the execution of our data strategy by putting more smartphones into the base and introducing tariffs for data, which we strongly supported; four out of five sales or upgrades were smartphones on contracts,’ he says.
Contract net additions reached 151,000 in Q1 with smartphone penetration now making up 33% of the contract base at the end of March. ‘We see a sensible balance between volume of customers and value and we’ve kept churn at a record low,’ says Dunne.
The Q1 tariffs may have hit O2’s prepay additions but Dunne is adamant that O2 values its prepay customers. ‘We’ve seen strong swings from big negatives on prepay and positives on postpay across operators. But we made sure our Sim-only proposition provided the same value for both prepay and postpay customers. We do not force prepay customers onto postpay to get the better deal. As a result, additions on prepay were negative. Others may see more prepay customers migrating to postpay.’
Dunne argues that prepay customers are not necessarily less valuable than postpay ones. ‘If you look at the value equation of loyalty, spend and cost involved, prepay customers have no material cost in terms of handset subsidy - we moved to reduce this in response to the MTR cuts coming,’ he said. ‘But for higher value prepay customers, rather than push them to migrate onto postpay, we accept their loyalty by giving them good deals.’
All networks are continuing to face pressure on revenues and O2’s total ARPU declined 2.9% to reach E24.2, while voice ARPU dropped by 8.2%.
Dunne says there were several factors influencing the decline in ARPU. The first is customers managing their voice and data better and not incurring extra charges by staying inside their voice and data allowance.
‘That’s a good thing in the longer term,’ claims Dunne, ‘as it ensures customers are on the right tariff and that means they get a better experience and are more likely to stay with us. The new tiered tariffs we introduced at the end of March have helped this. You can get a large data tariff without needing to be on a large voice tariff as well.’
Another factor behind the decline in ARPU is that smartphones are penetrating further down the value band as cheaper smartphones become available at lower entry price points.
‘Those customers are coming in on an ARPU that is lower because the hardware is less expensive, but that doesn’t mean they are not spending on data,’ he says.
‘We have three main tariffs: top tier, mid and lower,’ he continues. ‘The vast majority of customers are going for top and mid tier deals. That has meant a good substitution effect between declining voice revenues and ARPU and an increasing data revenue and ARPU, which is helping to offset that decline. We have seen 10% year on year data growth, so that is compensating. The challenge for operators is to estimate how fast the data adoption rate will be.’
Dunne believes that data revenues will eventually offset the continuing decline in voice revenues. ‘There is a strong demand for data, so if we get the balance of the supply side cost right we are very confident we can compensate for the decline in voice revenue. Whether it balances out individual quarter on quarter is much harder to call.’
O2 is continuing to support the rise in smartphone adoption and the subsequent increase in demand for data through its O2 Guru initiative in its retail stores and online. It should have 250 Gurus by the beginning of June. Their job is to educate customers about how much more they can get out of their mobiles, which in turn should lead to further rises in data revenue.
O2 is continuing to expand its alternative revenue streams. In April, the network formally launched its b2b unified communications proposition, O2 Unify. ‘This has provided us with a real step change in our ability to compete with BT in fixed line, mobile and data,’ says Dunne.
‘We have already announced one or two names we have signed up and during Q1 we have progressed a number of other contracts, which we expect to announce in a month or so.’
O2’s acquisition of VoIP provider Jajah is also bearing fruit with its market share of the total international calling market (including fixed line) rising from 5% to about 7%. The company is targeting mobile and fixed line through its International Favourites offer, O2 calling card and O2 apps.
Dunne reports that its ‘new new’ businesses, such as financial services and O2 Media, have made good progress and that it has a number of developments ahead as NFC becomes more viable. ‘It’s no secret we are seeking e-money licences – the mobile wallet on the phone – and we hope to launch that in the second half of the year,’ he says.
The operator is also pursuing its O2 WiFi venture to install Wi-Fi into mobile hotspots around the UK. ‘We are in advanced discussions with various venue owners to roll out Wi-Fi in premium hotspots; it’s going into the O2 [Arena], for example.
‘You get free extra content as cellular networks can do a certain amount, but Wi-Fi capability can augment cellular. It gives venue owners the opportunity to manage the venue better and we can give them a lot of rich data about customers,’ says Dunne.
O2 is also being savvy about linking its various propositions together. Dunne says that it is not just about basic connectivity. ‘With O2 Unify and O2 WiFi we can go to venue owner and say we have an end-to