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Business Watch: O2’s chasing pack closes in

Mobile News
July 6, 2010

O2 remains the number one network in UK mobile in terms of growth but the gap between it and the other four networks is narrowing as the market continues to recover

By Dominic White

Industry experts Enders Analysis reckons that O2’s high-profile network glitches in London and the loss of its exclusive deal to sell the iPhone may have put it at a disadvantage to competitors who are pushing hard to make up lost ground.

The in-depth study covers the quarter to March 2010, so does not take into account the recent wobble in the economic recovery and any impact the new government’s austerity budget – with its socking great rise in the VAT rate – may have on the mobile market.

Nevertheless, Enders has uncovered some revealing trends.

The good news for everyone, first off, is UK mobile operators as a whole continued to recover during the first quarter of the calendar year in terms of both reported and underlying revenue growth.

Reported revenues are still falling but the trend improved by two percentage points from -3.8 per cent to -1.8 per cent, whilst underlying revenues rose by 2.3 percentage points from 0.1 per cent to 2.4 per cent.

Enders’ Will Harris, James Barford and Tim Hatt believe the improvements were probably driven more by price effects than volume increases because market volume growth was steady over the last two quarters of fiscal 2010.

Because consumers were feeling more confident over that period than they were a year ago, during the global financial crisis, operators have been under less pressure to offer huge discounts. The networks have shifted more contracts with high-priced handsets attached as opposed to the cheaper SIM-only deals that were so attractive to punters during the depths of the crisis.

It’s important not to underestimate the iPhone effect on the market too. The life-changing, industry-shaping gadget has not only been a best-seller in its own right but has spawned a slew of copycat handsets by rivals and raised expectations about what mobiles should be able to do.

If your mate’s got an iPhone which costs them a fair bit to use but which they bore you about constantly, you’ll quite possibly get iPhone envy yourself eventually – if only to shut them up.

Either that or you’ll upgrade your dusty old candybar to a natty smartphone made by another just to be contrary – or in order to save a bit of much-needed cash that you’d otherwise be dropping into Steve Jobs’ well-lined pockets.

O2 knows this all to well, having ridden on its exclusive deal to sell the iPhone for two years. According to Enders, O2 remains the only network operator that has maintained positive revenue growth in the 12 months to March 2010.

But in the three months after Christmas all four other operators reported that revenue was slowing at a lower rate than before – the first time that has happened in over a year. It’s pretty obvious the opening up of the iPhone market was a factor in that improvement.

“In revenue growth terms, the gap between O2 and the rest has narrowed over the last few quarters,” said Enders. For now at least O2 still retains a 4.7 percentage point lead over the nearest competitor in terms of revenue growth figures, which was Orange in the three months after Christmas.

Meanwhile, Enders said prepay revenue growth continued to fall at nearly 15 per cent while the contract segment moved back into positive territory.

In  terms of subscribers, however, prepay growth began to improve over the six months to March, having fallen throughout most of 2009, while on the contract side growth improved slightly.

Revenue vs subs

Vodafone chief executive Vittorio Colao (pictured) will doubtless be delighted that in the first quarter of the year Vodafone led the way in terms of contract net additions while O2 has dropped to a distant third having been far and away the market leader six months ago.

At least O2 chief executive Ronan Dunne can content himself that his business continued to outperform in profitability terms, holding its underlying margins at 26 per cent while the other operators remain between three and six percentage points below that.

Those margins are calculated before you subtract capital expenditure. And, when it comes to capex , Vodafone and O2 both heavily increased their budgets over the prior year, with Vodafone outlaying £353 million and O2 £304 million in the first three months of 2010.

In contrast Orange and T-Mobile reduced their outlay on capital – such as network equipment – to £174 million and £124 million respectively which, combined is less than O2. In case you hadn’t noticed Orange and T-Mobile are busy merging their UK operations and one of the big reasons for doing so is to squeeze out cost savings.

It’s one of the most important tasks now facing former Virgin Mobile boss Tom Alexander who has the tricky job of running the combined group.

Vodafone share price

Finally, Colao may have afforded himself a smile late last week when Collins Stewart, which has consistently told investors to sell or steer clear of Vodafone shares, changed its tune and told its clients to snap up the stock.

Collins Stewart notes the company has had a run of good news, which has driven a bit of a recovery in the share price in recent weeks. That includes news that Three’s pricing plans for the new iPhone have confirmed the days of unlimited data plans are over, which is good news for all of the networks, Vodafone included.

Collins Stewart warns big risks remain, including to the economic recovery and the fact that, as a largely mobile-only player, Vodafone remains exposed to shifts in the telecoms market that combined landline-and-mobile players are not.

But with investors piling out of BP and eyeing new homes for their cash, Vodafone, with its decent dividend payment, has enjoyed a good run in its share price.

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