Virgin Mobile Christmas Risk.
This Christmas Virgin Mobile is back heavily subsidising Pre-pay handsets. This is the exact opposite position to all the major networks. Vodafone came out with last week stating that a SAC for pre-pay of £20 is sustainable. O2 came out with that they wanted to push the SIM free model. This means that the majors are looking to pay indirect channels very little commission for pre-pay sales.
The Christmas Pre-pay Sales are legendary for giving the network executives sleepless nights. I expect the Virgin Mobile team will be desperate on Boxing Day to find out how many new handsets put into the market are actually being activated and used.
The problem is sixfold:
1. Boxbreaking. This is now a highly sophisticated business operated by gangs who sell the phones abroad and can work on margins as little as £2/handset.
2. Upgrades. Customers buy the handset, discard the Virgin SIM and use their existing one. Yesterday, I went into the local Carphone Warehouse and asked the price for Cathy Kitson exclusive on prepaid. The Sales Attendant said the best price was on Virgin and I mentioned my wife might prefer to keep her Vodafone number. “No problem, just swap the SIMs - the phones are unblocked” came the reply.
3. eBay Resale. There is a big danger that discounted prepay handsets find their way onto eBay for resale by individuals looking to make a few quid for Christmas. This is greater for exclusives and collectibles - a search for Cath Kidston mobile phones show a brisk trade is already occurring.
4. Dealers buy the prepay, because it is cheaper than they can buy wholesale or because it an exclusive and then sell it on contract where they attract big commissions.
5. The usage is so low that the subsidy is never recovered from air-time margins.
6. Own base churn. The subsidy is effectively given to an existing Virgin customer who would have remained on the network and are just upgrading their handset cheaply. Although Virgin keep the customers, margins can be lost for a substantial period.
Virgin has placed most of the subsidy in a scheme called “drip feed” whereby for instance £35 airtime credit is released to users in £5 lots over 7 months as long as the SIM and mobile phone match. In other words people can’t place the SIM in another phone and get the credit. This scheme seems to me to offer a lot of protection against the typical box-breaker who typically rings a premium rate number that they own to collect part of the credit from the airtime credits.
I think ntl are more or less committed to producing quarterly revenues and profit (of a sort, operation income before depreciation, amortisation and other charges or “OCF”) figures for Virgin Mobile. Already, they are predicting OCF to drop to £6m in Q4 from £16m in Q3 because of acquisition costs. It will be extremely interesting to see the progression of the Virgin Mobile figures over the next 12 months to see whether this Christmas Risk actually translates into higher revenues and profits.
The Christmas Pre-pay Sales are legendary for giving the network executives sleepless nights. I expect the Virgin Mobile team will be desperate on Boxing Day to find out how many new handsets put into the market are actually being activated and used.
The problem is sixfold:
1. Boxbreaking. This is now a highly sophisticated business operated by gangs who sell the phones abroad and can work on margins as little as £2/handset.
2. Upgrades. Customers buy the handset, discard the Virgin SIM and use their existing one. Yesterday, I went into the local Carphone Warehouse and asked the price for Cathy Kitson exclusive on prepaid. The Sales Attendant said the best price was on Virgin and I mentioned my wife might prefer to keep her Vodafone number. “No problem, just swap the SIMs - the phones are unblocked” came the reply.
3. eBay Resale. There is a big danger that discounted prepay handsets find their way onto eBay for resale by individuals looking to make a few quid for Christmas. This is greater for exclusives and collectibles - a search for Cath Kidston mobile phones show a brisk trade is already occurring.
4. Dealers buy the prepay, because it is cheaper than they can buy wholesale or because it an exclusive and then sell it on contract where they attract big commissions.
5. The usage is so low that the subsidy is never recovered from air-time margins.
6. Own base churn. The subsidy is effectively given to an existing Virgin customer who would have remained on the network and are just upgrading their handset cheaply. Although Virgin keep the customers, margins can be lost for a substantial period.
Virgin has placed most of the subsidy in a scheme called “drip feed” whereby for instance £35 airtime credit is released to users in £5 lots over 7 months as long as the SIM and mobile phone match. In other words people can’t place the SIM in another phone and get the credit. This scheme seems to me to offer a lot of protection against the typical box-breaker who typically rings a premium rate number that they own to collect part of the credit from the airtime credits.
I think ntl are more or less committed to producing quarterly revenues and profit (of a sort, operation income before depreciation, amortisation and other charges or “OCF”) figures for Virgin Mobile. Already, they are predicting OCF to drop to £6m in Q4 from £16m in Q3 because of acquisition costs. It will be extremely interesting to see the progression of the Virgin Mobile figures over the next 12 months to see whether this Christmas Risk actually translates into higher revenues and profits.
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