Sales at O2 fell during 2011 as it spent big to keep customers on long-term smartphone contracts.
In parent company Telefónica's full year results, it said the UK market remained 'intensely competitive amidst a challenging economy'.
O2 said it had 175,000 new contract additions in the fourth quarter, up 93% on Q3, which it said was because of new smartphone devices and tariffs. Contract customers were up 4% during 2011 and accounts for 49% of O2's 22.1 million total base. Total customers were broadly flat year on year. The operator said it focused on retention of its 'high-value' customer base as they came out of contracts. It said: 'This lead to an increased commercial spend but Telefónica UK benefits from maintaining these valuable customers on long-term contracts.'
Smartphone penetration was 38% by the end of 2011 compared to 29% in 2010 and 36% by the end of the third quarter. It said more than 95% of new handset sales to contract customers during the fourth quarter were smartphones.
Mobile service revenues were down 3.7% to €6.20bn, down 3.7% on 2010. However, it had a weak fourth quarter with mobile revenues down 8.7%, which it blamed on slower growth of its customer base. If mobile termination rate (MTR) changes are stripped out, mobile service revenues declined 0.4% year on year and by 4.8% in the fourth quarter.
Operating income before depreciation and amortisation was €1.84bn, down 2.3% in organic terms. However, stripping out a 2010 restructuring expense of €72m, OIBDA grew by 1.5%.
ARPU (average revenue per user) was down 6.6% year on year to €22.90 and slumped 9.5% during the fourth quarter. Stripping out MTR changes, it would have been down 3.5% in 2011 and 5.6% during Q4. Voice ARPU was hit the most, down 14.6% during 2011 and 17.7% in the fourth quarter. Excluding regulation, it declined 9.2% on 2010. O2 blamed this decline on tariff price reductions amid 'adverse conditions' and better use of bundles.
Prepay took the heaviest hit in ARPU, down 15.8% to €10.10 although contract ARPU was down 9.7% to €36.20.
Data ARPU had steadier growth of 5.1% to €10.70 during 2011 and was up 2.2% during Q4. Data growth was lead by non-SMS data revenues, up 33.1% because of the popularity of both smartphones tiered data packages. Total data revenue was up 7.9% on 2010 and up 3.1% during the fourth quarter. It now accounts for 45% of mobile service revenues, up almost 10% on the previous year.
Churn increased 0.4 percentage points to 3.1%.
Telefónica UK CEO Ronan Dunne said: 'Against a backdrop of difficult economic conditions we remain firmly committed to our strategy which quite simply is about building a business for the future that goes way beyond our core mobile services. This is coupled with placing huge focus on looking after our existing customers with genuine, long-term value and experiences they won’t find elsewhere.'