O2 and 3 ahead in UK Q1 net additions, others lose ground

New data from Wireless Intelligence reveals that UK market-leader Telefónica O2 increased its lead over its three largest UK competitors in 1Q09, while fifth-placed player 3 UK took the highest share of net new additions. In this usually weak period, all five UK mobile operators saw a decline in net additions compared to the previous quarter, though only O2 UK and 3 UK grew their connections base (3 data is estimated). Vodafone, T-Mobile and Orange all lost customers.  

O2 UK added 142,000 net new mobile additions, two and a half times what it achieved in this quarter last year. It was narrowly surpassed by 3, which increased its connections base by 177,000 according to our estimates. Vodafone saw the largest decline of the remaining three operators, its connections base declining by 450,000.
 
The UK market as a whole declined by around half a percentage point from the previous quarter, a decline of 387,000 in terms of net additions.  

O2 cited record low levels of churn as a key reason it was able to outperform the market during the quarter. This was achieved via the operator's success in migrating its customer base onto contract (postpaid) plans, a segment less susceptible to churn than prepaid. O2 added 286,267 contract customers in the quarter – a rise of 18% year-on-year – and contract customers now account for 42.6% of its total base, a higher proportion than all its competitors with the exception of 3.
 
Churn in its contract customer base in the quarter was 1.2% compared to overall churn of 2.8%, highlighting that the success O2 has had in retaining its higher-value contract customers.

The increase in contract customers was due in part to the success of the operator's simplicity price plans, which offers a postpaid service that can be cancelled at 30 days notice and does not require the customer to enter into a lengthy contract. O2 said that the tariffs had been a key factor in migrating customers to contract plans and reducing churn. Meanwhile, the operator's high-end segment was boosted by premium devices such as Apple’s iPhone 3G, which O2 continues to offer on an exclusive basis in the UK.

However, the operator's strong growth over the year was contrasted by a decline in ARPU. In 1Q09, ARPU fell to €24.2, a decline of 3.6% in local currency terms, though data ARPU rose 1.5% (in local currency) to €8.8. The proportion of non-SMS data revenue rose to 24% from 18% a year earlier, driven by an increase in mobile broadband connections and the popularity of its "bolt-on" mobile data tariffs.

Revenues at the unit rose 7% in local currency terms to €1.75 billion, the largest increase across Telefonica Europe's various markets (which excludes Spain). This meant that the UK unit was comfortably the group's largest source of revenue, generating almost twice the revenue as O2 Germany, its second-largest market, which reported revenues of €855 million for the quarter.
 
O2 UK's operating income was also the largest in the group at €423 million, a 6.9% increase over the year-earlier period. Its operating income margin was flat over the year at 24.1%.  
 
In mature markets with intense competitive pressures and a difficult economic environment, mobile operators are focusing on customer retention strategies and value share. Migrating the prepaid installed base onto contract is a key objective for most operators, and many are launching innovative new tariffs to achieve it.
 
SIM-only offers are now widespread in Europe and help operators to lock more customers into contracts without a handset and therefore fewer subsidies. Such mass market offers also help operators to focus on high-end consumer segments where subsidies will be substantially higher and consumer spend more important.
 
Orange UK has recently launched a similar offer to O2's simplicity called Orange 5 which provides customers with 50 minutes, 50 texts and a free Nokia 2630 (to be replaced after 18 months), all for £4.89 a month, over 36 months.
 
While such offers can attract new customers, it is a dangerous play in a market where operators have to monitor carefully price elasticity across all consumer segments. Similarly, it is interesting to note that most operators still report registered subscribers that include inactive SIM cards, which distorts 'real' growth and market share and 'real' market penetration."

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