Changes Ahead for UK Operators in 2012

Predicting the Next 12 Months for the UK’s Mobile Network Operators

 

The past 12 months have been a challenging time for the UK’s mobile operators. Against a backdrop of economic uncertainty, the networks were challenged by regulatory cuts and declining use of voice services. Continued strong data usage has been the main bright spot, with smartphone penetration of around 35 percent to 40 percent among the highest in Europe. Here I take a look at the winners and losers in 2011 and outline my expectations for the year ahead.

Vodafone continued the good momentum it achieved at the end of 2010. It recorded solid growth in contract subscribers, a strong increase in data revenue and new customer wins in the enterprise segment. In 3Q11, it reported a 6.3 percent increase in service revenue excluding the impact of regulation. Under the leadership of CEO Guy Laurence, the operator successfully refocused on the indirect channel by tying partners into longer-term contracts. If Vodafone continues its progress, I forecast that it will surpass O2 in terms of service revenue in the second half of 2012.

Having taken an alternative approach to its bigger rivals, 3 finally made an impact in the contract market this year. Its sustained assault on the “value” segment through unlimited data plans helped it record an almost 20 percent rise in service revenue and surpass a 10 percent share of UK subscribers. So far, its competitors have been happy to let 3 take this space, fearing the impact on their own networks of following its data-centric strategy. It will be interesting to see how long 3 can continue its momentum as its network faces up to new challenges such as spectrum constraints and servicing more data-hungry customers.

O2 meanwhile failed to maintain the strong momentum it has achieved in recent years. A heavy fall in voice ARPU was the main reason for a disappointing performance that saw its share of service revenue dip below 30 percent. In 3Q11 alone, voice traffic fell 11 percent and its net contract additions of 91,000 were only around half those reported by Vodafone and Everything Everywhere. The operator will need to re-evaluate its voice tariff structure in 2012 and look to encourage more prepaid customers to take up contracts.

Everything Everywhere made gradual progress in 2011. One of its major challenges was to turnaround the performance of T-Mobile in the contract segment. It has largely succeeded in doing this: 3Q11 was the fourth consecutive quarter of contract subscriber growth for the brand, boosted by sales of 24-month subscriptions. The operator is also meeting its target to lead the market in terms of loyalty, with postpaid churn at 1.1% in 3Q11 — the lowest in the UK. All eyes next year will be on the outcome of its decision to use the Everything Everywhere name in the retail space and to focus on the Orange brand. I also expect parents France Telecom and Deutsche Telekom to ultimately exit the joint venture via an IPO.

Finally, Tesco Mobile didn’t quite make the impact this year I expected. It still recorded strong subscriber growth, at almost 20 percent, but 3’s success at the lower end of the market dampened its progress. I still expect Tesco to continue to invest hard in customer acquisition in 2012, with strong focus on cross-selling products and services using its successful loyalty scheme, Clubcard.

The UK remains one of the most competitive markets in Europe and falling service revenues mean operators will remain under pressure over the next year. They will need to expand carefully into selected new segments and offer innovative products to stave off declines in traditional areas.