An island country, now home to diverse ethnic communities, the UK has always been in the forefront of adopting technological advancements. It was the industrial revolution and the UK’s participation in it that nudged the country to look beyond its shores and embark on colonial expansion across the globe. Today, with the legacy of an empire behind it, the UK continues to explore advances in technology and is amongst the top five communications markets in the world.
The UK is definitely amongst the most advanced telecom markets in Europe.With total telecom revenues at over ??46.16 billion as of March 2006 and a total subscriber base of over 103 million as of December 2006, it is a key player in the European subcontinent.
Ever since the government opened the sector to competition two decades back, subscribers have been moving away from state-owned British Telecommunication (BT) to other service providers. The Communication Act, 2003 brought about complete deregulation. The licence-based system was replaced by the “general conditions of entitlement”, under which operators were supposed to benefit the market as well as investors.
This resulted in consumers becoming more price-savvy and exacting in their demand for content. This in turn fuelled the rise of on-demand, interactive and multi-channel services. During 2004, new services and technologies such as 3G dominated the market. For the UK telecom sector, 2005 was the year of consolidation with multiple mergers and acquisitions taking place amongst the incumbents. There were 10 such transactions in the four months leading to December 2005.The growth of the telecom sector has been in tandem with the increase in revenues from cellular, short messaging, and internet and broadband services.Currently, cellular services account for the largest section of the total market.
While the revenue generated from basic fixed line telephony has declined, profits from mobile, internet and data traffic continue to increase. However, even the mobile sector is now showing signs of maturity, with the strongest growth restricted to niche areas such as new third-generation (3G) services.
In the coming years, cellular and data services, especially IP networks, are expected to grow at a much stronger rate than the rest of the telecom market. The key growth areas are likely to be broadband, video messaging and video telephony in the mobile sector and asymmetric digital subscriber lines (ADSL) and fixed line video telephony in the fixed line sector.
We bring you an overview of the UK telecom market.
Key players
The UK telecom sector is highly conolidated with only three or four major players dominating the market. While BT and Virgin Media together control over 90 per cent of the fixed line services market, wireless services are largely provided by the Vodafone Group, O2, T-Mobile and Orange.There is intense competition amongst the service providers, who struggle to differentiate their services on the basis of price, package offerings and other valueadded services.
British Telecommunications
The BT Group, with over 18 million subscribers worldwide, provides voice and data services in the UK as well as in over 170 countries in Europe, the Americas and the Asia-Pacific region.
A former state-owned monopoly with a significant amount of telecom infrastructure, BT dominates the UK fixed line market.
Despite this, the company is far from complacent. It especially poses stiff competition to its rivals on the price front. Since the relaxation of price controls by British telecom regulator Ofcom in 2006, BT has undertaken two rounds of price cuts.
The company is also strengthening its broadband division. It has recently acquired internet service provider Brightview for ??15.8 million, and aims to launch nextgeneration broadband services in the country by spring 2008.
This has translated into healthy financial results. During the period March 31, 2006 to March 31, 2007, BT’s revenue grew by approximately 2 per cent to ??17.24 billion. During the same period, the company’s profit (before tax and specific items) grew by 15 per cent to ??2.49 billion.
The company also recently raised ??1.5 billion in its first bond sale in six years.While part of the proceeds from the sale will help finance a ??2.5 billion share buyback programme, the rest will be used to repay the company’s existing debt.
Vodafone
The Vodafone Group is one of UK’s largest wireless service providers with 24 per cent market share as of December 2006 (according to Wikipedia). The largest wireless service provider in the world (in terms of revenues), the company operates in Europe, the US and the Asia-Pacific. It also has equity interests in 28 countries and partner networks in 14 countries.
As of March 31, 2007, the company had 17.4 million mobile customers in the UK, up from 16.3 million in the previous year.However, despite the growth in subscribers, the company is still registering losses.
Though Vodafone’s UK-based revenues improved by 1.5 per cent to ??5,124 million during the period March 2006 to March 2007, it registered a ??2.3 billion loss before tax (consolidated). This is largely due to intense pricing pressure and increasing saturation of the mobile market.
Over financial year 2006-07, Vodafone has concentrated on cost-cutting while introducing new services for customers. So far, the company has achieved the core level of 3G and high speed downlink packet access (HSDPA) coverage across its European networks. It also offers fixed broadband services in five markets including the UK. On a constant lookout for opportunities in emerging markets, the company recently acquired foreign interests in Turkey and India.
O2 UK
O2 (formerly known as mmO2) is another key mobile services provider in the UK. The company, which also operates in Germany, Ireland, Slovakia, the Czech Republic and the Isle of Man, was previously part of the BT Group as BT Cellnet. However, in January 2006, it was acquired by Spain-based telecom service provider Telefonica.
During 2006, the company added 1.65 million subscribers to reach 17.63 million UK subscribers. Driven by strong growth in customer base and average revenue per user (ARPU), the company’s fourth quarter net service revenue increased by 13.7 per cent (year on year) to ??3.88 billion for the 11month period up to December 31, 2006.
O2 has also launched a slew of new services to acquire and retain customers. Such plans include offering free usage and value-added services. The company has also introduced a Bluebook facility, which enables customers to store contact information, text messages and video clips in a free web-accessible personal account.
O2 UK is attempting to strengthen its broadband unit Be. In February 2007, the company added 500 exchanges. It also launched Upload Plus, a service that allows enterprise broadband customers to send data at 2.5 Mbps.
T-Mobile
T-Mobile International, a wholly owned subsidiary of Deutsche Telekom, provides mobile communication services in Europe and the US.
As of the quarter ended March 31, 2007, the company’s subscriber base registered a 2 per cent year-on-year growth from 16.4 million to 16.7 million subscribers. For the same period, the company’s revenues registered a 10 per cent yearon-year growth to ??781 million.
Over financial year 2006-07, the company has focused on expanding its broadband mobile internet and Wi-Fi services.To this end, it has deployed HSDPA across its 3G network. It is currently in the process of rolling out networks capable of handling data speeds of up to 3 Mbps.
Wireless market
The UK mobile market was worth ??13.6 billion as of March 2006 (according to Research and Market’s Mobile Telecommunications Market Report, 2006) having increased in value by 7.7 per cent over the previous year. This trend looks set to continue despite the already high levels of penetration in the market at over 100 per cent. It was the third largest regional market after Germany and Italy, and accounted for 15.3 per cent of European revenues as of December 2005.
Data ?? notably text and picture messaging, ringtones, music and game downloads ?? rather than voice transfer is the fastest growing segment in the UK telecom market today. According to research by Informa Telecoms and Media, the UK mobile content market was worth ??661 million in 2006. In the first quarter of this year alone, UK customers spent a total of ??182 million on content with mobile gaming accounting for 46 per cent (??83 million) of the total amount.
The UK also has one of the most developed 3G markets. 3G licences were issued in 2000 and, by the end of 2004, all the operators had launched 3G services generating over ??22 billion for the government. Initially, 3G services were slow to take off and operators were saddled with debilitating debts and an uninterested user base. But with the increase in data usage, there was an increase in subscribers. While 3G mobile adoption represented less than 11 per cent of all mobile subscribers in 2006, it represented a 66 per cent increase over 2005.
The launch of 3G services in 2004 enabled operators to offer applications like TV-overmobile. During 2005 and 2006, many operators also explored the possibility of using other areas of spectrum and broadcast-based technologies to deliver TV to customers over multi-mode devices. For instance, O2 has conducted trials to deliver TV using the DVB-H platform and spectrum, with its trial customers using a dual-mode GSM/DVB-H handset. And Virgin Mobile launched a mobile handset in the country in 2006, which receives broadcast TV using Digital Audio Broadcasting spectrum.
Fixed-mobile convergence services were introduced in the UK in 2005. These services typically use a dual-platform handset combining a regular GSM mobile phone with another, shorter-range, wireless technology. Bluetooth is one option for the second wireless connection which is used by BT Fusion in the UK. Wi-Fi is another option, which is used by the Orange Unique service, launched in France and the UK in 2006.
A growing share of the UK mobile market is now in foreign hands. Orange, tMobile, O2 and 3, owned by France Telecom, Deutsche Telecom, Telefonica and Hutchison Whampoa respectively account for approximately 73 per cent of mobile retail revenues. At the end of March 2007, the combined customer base of the five UK network operators (Orange, Vodafone, tMobile, O2 and 3) was 71.1 million compared with 67.63 million the previous year.
The market is highly competitive with the “virtual operator” Virgin continuing to expand its consumer base and contributing to the rise in prepaid customers. As a result, though the four main operators (excluding 3) each have a relatively equal share of the subscriber base, at the prepaid level, tMobile is the largest as it incorporates the Virgin subscriber base since Virgin rides on T-Mobile’s network. Prepaid mobile services remain the most popular with almost 70 per cent of customers opting for it.
According to research firm Mako Analysis, the UK is likely to witness an increase in the number of mobile virtual network operators (MVNOs), which accounted for 13 per cent of subscribers in 2005. This will be primarily due to an increasing number of firms looking to extend their service portfolio into the mobile space and a relaxing of incumbent mobile operator selection criteria for potential wholesale partners.
The key growth areas in the 20072011 time-frame are likely to be mobile broadband services with the rise of HSDPA-enabled 3G networks, mobile TV and video services, and mobile content. This will lead to more partnerships and mergers between content providers and telecom operators.
Fixed line services
Unlike the wireless telecom services industry, the UK’s fixed line services segment is on the decline. The number of fixed line subscribers decreased by 1.4 per cent from 32.1 million in December 2005 to 31.6 million in December 2006.
This is a long-standing trend. According to an industry study by Datamonitor, during the period 2002-06, the number of fixed line subscriptions registered a -1.8 per cent compounded annual rate of change (CARC).
The decline in volumes has translated into a reduction in market value. According to Datamonitor, the fixed line market’s total revenue has declined by 3.1 per cent from ??10.1 billion in December 2005 to ??9.8 billion in December 2006. Over 2002-06, the sector’s total revenues witnessed a -6.1 per cent CARC.
The slow decay of the British fixed line segment can be attributed largely to the increased availability of alternative means of communication. While mobile phones have severely challenged the flexibility and convenience of wireline phones, internet applications such as voice over internet protocol offer cheaper means of communicating over longer distances. Cable companies have also started offering viable and affordable telecom alternatives, further obviating the need for fixed lines. Of late, however, in a bid to sustain revenues, wireline operators have started offering some of these substitutes themselves.
The key players in the UK fixed line telecom segment are BT and Virgin Media with 78.4 per cent and 13 per cent market share respectively. While BT is an assetbased carrier which owns and operates its own physical network, Virgin and several other fixed line service providers such as Sirocom and Vanco are virtual network operators (VNOs). The latter offer telecom services by purchasing access to an asset-based carrier’s hardware.
Some VNOs offer only call packages.Subsequently, consumers can opt for these packages while paying BT for line rentals.
With the different options available for new entrants, industry analysts expect that there is a moderate likelihood of new players entering the market. However, with steadily falling penetration rates and dwindling revenues, new entrants will further intensify competition and rivalry in an already matured market.
Moreover, the Economist Intelligence Unit (EIU) has forecasted that the number of fixed line connections will further drop to 29 million by end-2007 and to 27.1 million by end-2008.
Broadband
The UK has one of the more competitive markets in Europe for broadband, largely as a result of government encouragement and regulatory pressure. Competition exists at both the infrastructure level between cable internet providers and xDSL, and among numerous service providers competing with the incumbent, BT, to provide retail xDSL services to customers. The country reported the highest broadband growth in Europe in 2005 and had 10 million broadband connections by 2005, growing at a rate of 27 per cent between 2001 and 2005. With over 13.95 million broadband connections, the UK is the seventh largest broadband market in the world today.
A number of companies are competing in the broadband retail market to provide the interface between the customer and network, from large internationally owned companies such as Freeserve and AOL, to much smaller ventures. However, there is far less choice in the degree of product differentiation as the ISPs are constrained in what they can offer by the limited wholesale market.
The mass broadband market is currently confined to ADSL via BT’s telephony infrastructure and to cable, with cable accounting for 27 per cent of the connections as of March 2006. While BT is obliged to provide access to its network, the main cable operators, NTL and Telewest, are able to act independently of the market. BT allows access to its network through the sale of two wholesale packages ?? IPStream and DataStream. IPStream is BT’s end-to-end product. DataStream, by contrast, allows operators with their own networks the ability to transfer broadband traffic from BT’s network onto their own, thereby offering the potential for greater price competition and product differentiation. Alternative players in the UK broadband market have aimed to cut loose from BT Wholesale for several years now by offering broadband via their own equipment ?? a process known as local loop unbundling (LLU). However, compared to France and Germany, the UK had by far the lowest LLU/total DSL lines ratio till recently. For instance, by June 2006, 30.2 per cent of all DSL lines in France were local loop unbundled vis-? -vis only 6.6 per cent in the UK.
This has now changed with LLU growth accelerating. According to research by Point Topic, LLU lines grew by over 100 per cent, from 580,000 in June 2006 to 2.25 million in May 2007.
Wide regional variation prevails in the status of LLU. At the top end, 95 per cent of all BT exchanges in London are LLU enabled. At the bottom end, Wales and Scotland have seen only 3 to 5.5 per cent of their exchanges being LLU enabled.
By June 2006, the UK broadband market accommodated 12 major LLU operators, and a number of smaller ISPs.By June 2006, Bulldog, Cable & Wireless’s broadband arm, was not only the largest LLU operator in terms of exchanges but also the largest provider of LLU lines in service and accounted for an overall market share of 21.4 per cent. But others are catching up fast, notably AOL with about 100,000 LLU lines in service, followed by Tiscali and Orange.
Consolidation
The year 2005 witnessed the much-awaited consolidation in the UK telecom marketplace. In just the last six months of 2005, Cable & Wireless bought Energis, NTL and Telewest finally agreed to merge, and BSkyB bought Easynet to gain a foothold in the broadband market. While these were the prominent mergers and acquisitions, there have been other, smaller acquisitions in 2005 as well, including Kingston’s purchase of Eclipse ISP, and Omnetica’s and Pipex’s purchase of Nildram and Freedom to Surf ISPs.
While Cable & Wireless’s acquisition of Energis removed one significant competitor from the equation, which relieved market pressure and strengthened Cable & Wireless in the UK with Energis’s customer base and leadership, the NTlTelewest union was a natural progression towards establishing a single cable entity with greater market clout.
Concerns
The UK telecom industry still faces several lingering uncertainties. For starters, telecom companies have invested unrealistic amounts in 3G spectrum, which to date has not been fully utilised. With the 3G industry failing to take off in a big way, several companies still haven’t fully recovered their investment.
Moreover, with over 100 per cent telecom penetration rates, the UK telecom market has reached a point of saturation.Growth in the traditional business of voice and text has been exhausted. This has, of late, led to deteriorating profitability.
Consequently, operators will have to explore new avenues in the form of lucrative opportunities in emerging markets.For instance, Vodafone has recently gained a foothold in India, the world’s fastest growing telecom market, by acquiring a controlling stake in mobile operator Hutchison Essar. Similarly, BT has started servicing the long distance requirements of the enterprise space in India.
With the consumers’ high expectations, it will clearly be a challenge for telecom operators to come up with innovative products, designs and services to inspire additional expenditure on communication needs. And service providers will have to do this in the midst of stiff competition from fellow operators.
The road ahead
The UK telecom sector is likely to witness some excitement in the future as the wireless, internet and broadband segments are expected to grow further. While demand for mobile services will be fuelled by 3G growth and development, internet and broadband expansion will take off with further increases in data speeds.
The EIU estimates that the mobile subscriber base will increase from 71.4 million subscribers in 2006 to 74.88 million in 2008. Mobile penetration rates are expected to rise to over 123 per cent.Broadband service subscribers are also expected to increase from 13.26 million to 18.59 million during the same period.
All in all, the UK telecom landscape is still likely to transform, albeit not as significantly as the emerging markets.Though mature, the market has plenty of life in it yet.
