Price Rises No Silver Bullet for Operators

Last week, CCS Insight published Market Landscape and Forecast: Telecom Operators, UK, 2022-2026 — our half-yearly update on the UK telecom market. The report is comprised of two main sections: a wide-reaching forecast covering areas such as convergence, 5G, fixed wireless access, subscription trends and data usage; and an analysis of the latest market developments, this time including BT’s recent consumer branding decision, the prospect of market consolidation, price increases and the cost of living crisis, efforts to combat climate change and the return of roaming fees.

One part of the report has proved particularly interesting to our clients this year: our forecast for leading industry metrics such as average mobile spending and contract churn. These are never easy to project, but new forces such as annual price increases and the escalating cost of living crisis added further complexity.

Average revenue per user (ARPU) among contract customers in the UK fell from £25 per month in 2016 to just £18 in 2021, according to the report. It’s a worrying trend considering the surge in data usage — and it suggests operator strategies based on “more for more” haven’t been that successful.

Seeking to reverse this downward trend amid the hefty cost of deploying fibre and 5G networks, all four network operators brought in wide-reaching price rises in April 2022. Three hiked tariffs by 4.5%; O2, Vodafone and EE all used an inflation-linked calculation that saw some customers stung by a double-digit percentage rise. With inflation expected to remain high — it’s currently projected by the Bank of England to peak at above 11% in the autumn — a similar jump can be expected in April 2023.

It’s important to note that not all tariffs were affected. Operators offering split contracts only implemented prices rises to the service element of the payment plan, not the phone. Most 30-day SIM-only plans were also exempt.

Other trends raise hope for an ARPU turnaround: most providers are now charging for roaming again, the premium end of the smartphone market is proving impressively resilient and average data usage is expected to jump to just over 30GB a month in 2026.

But economic uncertainty made us temper our expectations. The cost of living crisis, leading to the sharpest decline in real household income in decades, is forcing people to scrutinize their spending; we believe many will delay buying a new device, or will downsize their mobile contract.

We expect total sales of new mobile phones in the UK to plumet 11% in 2022 to 14.5 million, the lowest figure this century. The second-hand device market is more resilient, but we expect a small decline there too. Hand in hand with device trends, SIM-only contracts will see further growth — these now represent over half of all contract subscriptions in the UK, and are expected to account for 61% in 2026. The knock-on effect is lower hardware sales, dragging down ARPU.

Continued strong competition — buoyed by a thriving market for virtual network operators and sub-brands — means customers are never far away from a good deal. It’s easy to find plenty of attractive SIM deals out there: 4GB for £6 at Smarty, 30GB for £10 at Voxi and 160GB for £20 at Vodafone are just three examples. With utility, transportation and food bills piling up, and with another jump in energy prices expected in October, low-cost offers will resonate with many people.

All factors considered, the most notable being April’s price increases, we see a tiny 0.4% rise in contract ARPU this year before small declines set in from 2023. This may sound disappointing to operators, but it would at least represent a stabilization of the long-term trend.

A more encouraging metric is contract churn, which is now at historically low levels. This is important for operators, as the cost of acquiring new customers is higher than that of retaining them. Our research shows that contract churn has fallen for four consecutive years, reaching just 1.01% in 2021.

This trend surprised us; we expected initiatives from Ofcom such as text-to-switch regulation and end-of-contract notifications to generate more movement between operators. The pandemic is one reason why this may not have happened, as store closures restricted ways to shop for a better deal. Another is that operators are doing a good job at preventing customers from thinking of leaving. In our User Survey: 5G Networks, UK and US, October 2020 for example, only 3% of UK mobile phone owners told us they were dissatisfied with their mobile provider.

Still, we think it’ll be difficult for operators to bring contract churn down much further. Our forecast shows a small increase this year, as the squeeze on household budgets prompts people to search for more-affordable deals. But strong loyalty to operators, combined with a general reluctance among customers to go through the hassle of changing, means that we expect it to quickly level off at about 1.1% in the long term.

Of course, market disruption is the bane of any forecast; no one knows what’s lurking around the corner. A major mobile merger (Three and Vodafone being the most likely), a significant e-SIM push or the arrival of a disruptive new player are just three possible scenarios that could challenge our numbers.

There’s never a dull moment in the UK telecom market; as always, we’ll be keeping a close watch on all the developments.

This article cites data from CCS Insight’s Market Landscape and Forecast: Telecom Operators, UK, 2022-2026. Clients can click the link to access the report. If you’re not currently a client and would be interested in receiving a copy, speaking to our analysts or having us present it to your team, please do get in touch.