UK mobile operators are finding 2011 to be a pretty tough year. That’s not exactly a surprise given the deteriorating economic situation and the continuing downward pressure on core telephony revenues.
O2 UK CEO Ronan Dunne summed it up when he told Mobile recently: ‘Overall, the market continues to be tough and customers are being squeezed, so they are focusing on price and value. There is great value to be found out there at the moment, so customers are doing really well out of it. But we have to balance price with end-to-end value, so that we can invest in our network and in innovations, such as Priority Moments.’
Generating enough revenue to keep innovating is the crux of the challenge facing operators. But their room for manoeuvre is being hampered by the pressure on mobile service revenues.
Shaun Collins, MD of analyst CCS Insight, says: ‘Increasingly service revenue is being seen as the key indicator for showing where operators are. It is not so important how many customers they have now,’ he says.
All the operators suffered service revenue declines in Q2, a quarter that also saw some dramatic customer losses. The partial good news is that Q3 saw something of a recovery for O2, Vodafone and Everything Everywhere compared with Q2 2011 results.
Vodafone has posted the best growth over the last two quarters followed by Everything Everywhere.
O2, which for much of 2009 and 2010 defied the general run of the market by posting growth figures, is now struggling to match its peers (see figs. 1, 2 and 3). Dunne admits that the company is paying the price for some miscued tariffs from the earlier part of the year.
‘We under-traded at the back end of 2010 and early 2011,’ he says. ‘We were trying to find the balance between value and volume and didn’t get it quite right.’
O2 is tending to upgrade existing customers who are already on a high-end tariff.
‘We still have the benefit of those contract customers,’ Dunne says, ‘and our contract churn is still record for the industry. But the market is more price competitive now than two years ago, so they are renewing their contracts in a more price competitive environment.’
Collins says: ‘O2 has a vision that is different to the other operators, whether it is one that people want to buy into is another question. It has chosen to withdraw from the volume market and chase the value segment, but it is questionable as to whether this is working, as voice traffic is down 11% this year and ARPU is also down.’
Collins sees Everything Everywhere’s position as one of slow improvement. ‘It was a market leader that seemed to have forgotten how to lead, but it now seems to have regained some of the momentum it lost at the end of 2010 and early 2011. I think it is turning a corner, but it is not round it yet. The key change is the performance of T-Mobile in contract, which is now underpinning the good work Orange has been doing.’
Three (which only posts half-yearly results and so has none for Q3) has been attacking the value space in the market, which T-Mobile has to some extent traditionally occupied.
However, Collins thinks Three has impacted more on Tesco Mobile (which runs on O2’s network) in the value space than the other operators, in particular with its ‘all-you-can-eat data’ proposition, which it is communicating very well.
‘But none of the other operators has chosen to follow them back into that world (other than temporary offers),’ says Collins. ‘The price they feel they’d have to pay to manage unlimited data is too great for them so they are prepared to let Three take that space, but Tesco has paid the price.’
Collins thinks Vodafone is on a mission to catch up from what was a very challenging position. ‘There have been big changes under Guy Laurence’s leadership,’ he points out.
‘He recognised early on that changes were needed and he made a courageous decision to go back into third party channels and that is starting to pay dividends. Vodafone’s job for the next 12 months is to look at how they innovate and lead in the proposition space,’ says Collins.
Paul Lambert, an analyst at Informa, also thinks Vodafone is making the most progress at the moment. He observes: ‘All the operators are focused on improving profitability by moving customers onto higher price plans on contract. What is difficult in the UK is that each operator now offers the most desirable smartphones, so it is very hard for them to differentiate themselves on iPhone plans, for example. They are competing with very small increments on how much their users are paying.
‘Cuts in MTRs are causing problems and the reductions in roaming revenues imposed by the European Commission are also impacting revenues,’ he continues. ‘The question is: which operator can respond best to the competitive conditions? It will be the ones who can move more customers onto higher margin tariffs while keeping loyal, higher paying subscribers happy.’
The three big operators all saw net customer losses in Q2, but improved in Q3 (see figs. 4 and 5).
Both Vodafone and Everything Everywhere outperformed O2 in terms of new contract subscribers in Q3, as they signed up 182,000 and 185,000 respectively. However, their prepay losses were much higher than O2’s at 101,000 for Vodafone and 227,000 for Everything Everywhere. Vodafone ended up with net additions of 81,000, O2 with 71,000 while Everything Everywhere saw net losses of 42,000.
O2’s Dunne agrees that Vodafone and Everything Everywhere are working hard to migrate their prepay base onto higher margin postpay contracts, which boosts revenue and ARPU. But he says this is not O2’s policy.
‘We don’t proactively migrate customers from prepay to postpay,’ he explains, ‘as we like to give customers the choice. The other operators like to control prepay and they are seeing big prepay losses, although a lot of them are being migrated to postpay deals. This will help their ARPU progression. They may not make any more money out of them, but they are charging them more to cover hardware costs.’
But the other problem for operators, according to Informa’s Lambert, is that the UK is a mature and tech-savvy market. The operators are having to compete with offers from other neighbouring organisations such as Google Talk, Skype and now Apple coming in with messaging services and people-to-people video applications.
‘Core telephony services are coming under pressure not just from the low-end, but brands valued by consumers like Apple and Google,’ says Lambert. ‘Voice traffic is falling. One reason for this is that there is a degree of substitution from 2G and 3G to free IP-based offerings, so operators are having to mitigate the effect of this by trying to boost data spend.’
Both voice and data services are commodities now, says Lambert. ‘It is very hard to deal with a mature market where consumers are shopping around for the best deal. Operators have to balance the need for innovation, while still providing value for customers and retaining profitability by offering the right tariffs and devices. This is a work in progress and some are doing it better than others,’ he says.
But Lambert also thinks handset vendors are not supplying the right off-the-shelf devices to meet the operators’ subscribers segment requirements. ‘Operators need to target the right devices at the right customer segments and make sure that as many of them as possible are using data, as that is where the revenue and profit is,’ says Lambert.
Looking forward to 2012, Collins thinks the battle next year will centre around quality of service. ‘There will be additional pressure on the network infrastructure next year, because if the operators get the tariffs right we’ll see an explosion of smartphones on prepay. I think that if they can provide smartphones at around the £60-£70 mark and create a data tariff on prepay that gets a decent margin, then they will engage with an audience that is very willing to listen,’ he says.
Lambert sees O2 moving its value proposition away from telecoms towards O2 Media, where it is teaming up with retail brands. ‘The market is increasingly about offering incremental value over core telephony services,’ he says. ‘It is very hard to be nimble and come up with innovative offerings. Wi-Fi was once a differentiator, but they all do it on some price plans now.
The search for new services, such as the mobile wallet and broader NFC payments, is the holy grail now.’
In Lambert’s view, operators need to start working with other parts of the value chain in a joined up and coherent fashion – something they are not traditionally good at doing. For him, the operators that will succeed in the future are the ones that align most effectively with adjacent businesses and services.