Switches EE for Vodafone in new MVNO deal
Yesterday, UK operator Virgin Media confirmed a five-year mobile virtual network operator (MVNO) partnership with Vodafone that will replace its existing deal with BT-owned EE, when it expires in late 2021. The announcement also confirmed an extensive wholesale agreement struck between both companies, for the supply of network services by Virgin Media Business to Vodafone.
The MVNO switch is a big win for Vodafone that validates its strong network investment of more than £4.5 billion in the past few years. It’s undoubtedly a shot in the arm for its efforts to turn around performance in its emotive home market, which are gathering pace after an extended period in the doldrums.
We believe several reasons contributed to Virgin Media’s choice to switch from the EE mobile network. Although Vodafone continues to make good progress in its network, particularly in London, EE is still widely regarded as having the best coverage in the UK. As such, better commercial terms are likely to have played a major part in the decision.
Greater flexibility to offer 5G was probably another reason. Virgin Media’s mobile phone customers will receive unrestricted 5G from Vodafone “in the near future” and before Virgin Mobile services transition to the Vodafone network in 2021. Offering a combination of 5G mobile services and the UK’s fastest broadband speeds would be a potent combination for Virgin Media.
Virgin Mobile was late to the party in 4G. Lengthy negotiations meant that it didn’t get access to EE’s network until late in 2016, some four years after its partner went live. And even then, EE refused to offer its fastest 4G speeds, achieved through carrier aggregation.
We believe that Virgin Mobile wants to avoid a repeat in 5G, particularly as rival Sky Mobile is set to launch 5G later this month, with O2 as its network partner. Sky Mobile is enjoying good growth, having passed 1 million customers in June 2019, less than two and a half years after launch. By contrast, Virgin Mobile customers have been flat at just over 3 million for several years.
In addition to gaining access to a 5G network, Virgin Mobile has the option to wholesale the structure of Vodafone’s speed-tiered unlimited data plans launched in July 2019 (see Instant Insight: Vodafone Launches 5G Network in the UK with Unlimited Data). This could help the MVNO build on its existing unlimited data offer, introduced at the start of 2018 but restricted to existing broadband and TV customers. Virgin Mobile is also expected to make announcements about voice-over-LTE and voice-over-Wi-Fi soon, also drawing on the Vodafone agreement.
Virgin Media’s decision to switch could also be a response to a greater competitive threat from BT, which is deepening its relationship with EE and stepping up investment in fibre-to-the-home connectivity (see Instant Insight: BT Unveils New Brand Identity, Makes High-Street Push). The news is undoubtedly a blow to the UK market leader, whose partnership with Virgin Media dates back about 20 years, when the latter launched the world’s first MVNO on the T-Mobile network (T-Mobile merged with Orange to form EE in 2010). It’s been widely reported that BT’s deal with Virgin Media is worth £200 million a year, so this will be a big dent in BT’s numbers.
For Vodafone, the agreement not only supports its renaissance in the UK, but also appears to mark a change in the operator’s tack toward wholesale partners. Under the leadership of previous group CEO Vittorio Colao, Vodafone deprioritized such agreements, fearful of undermining its heavy investment in mobile networks. In the UK, Vodafone pulled out of deals with TalkTalk, Sainsbury’s and Carphone Warehouse a few years ago.
But with current CEO Nick Read at the helm, a pillar of Vodafone’s strategy is to better use existing network assets. This culminated in the creation of a new tower company in July 2019, that Vodafone will look to float within 18 months (see Instant Insight: Vodafone Results, Fiscal 1Q19/20). The operator has also confirmed some high-profile 5G network-sharing agreements, including with O2 in the UK.
A final angle to the announcement is that the deal could be the prelude to a much closer long-term partnership between Vodafone UK and Virgin Media’s parent, Liberty Global. In July 2019, Vodafone formally completed the acquisition of Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania, for a total cost of €18.4 billion. This followed a merger between Vodafone and Liberty Global in the Netherlands in 2016.
Vodafone and Liberty Global have formally discussed a UK joint venture in the past but were unable to reach an agreement. Now, however, the rationale for such a deal appears stronger as both companies push harder into the market for bundled telecom services in a bid to challenge BT. Yesterday’s news could be just the start.
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