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Friday, January 05, 2007

UK Mobile Networks 2007

Whilst the results are not in for 2006, it is more or less certain that O2 was the star market share performer with y-o-y revenues growth of around 15%. T-Mobile also did extremely well with revenue y-o-y growth which also should come in around 15% from a lower base. T-Mobile had the star product launch which was Flext which attracted over 1 million 18 month contract subscribers – zero technology and all pricing innovation. Vodafone and Orange had miserable years with revenue static and cost cutting featuring heavily. The only bright spot for Vodafone was the relaunch into the consumer sector in the 2nd Half – early signs of improvements are eagerly awaited in the 3Q KPIs. 3UK’s data is extremely limited and although revenue grew by 16% in the first half, £700m is not enough to sustain a nationwide operator. It also looks as if 3UK has completely reinvented its market (again) with the launch of the X-Series. Full year results are eagerly awaited, but we’ll have to wait until March. Under new ownership, Virgin Mobile again punched above its MVNO weight and put its toe into the contract market – results are unknown but parent company ntl is forecasting a big drop in profitability in the final quarter. Overall, Orange estimate the UK mobile market grew by 8% with 15% price deflation.

In 2007, I think the market will develop as follows:

3UK will successfully reinvent itself as the innovators network: the X-Series will be a big success, perhaps even matching the 2006 success of Flext. The transition will be tough as its current price conscious base move to find a cheaper home. 3UK will also finally launch into the business market and get little traction in Year 1. 3UK will continue to be a drain on Hutchison Whampoa finances and the parent company will face a difficult decision at year end whether to cut its losses and run.

T-Mobile will continue to be successful with the consumer Flext tariff and will cut prices if necessary to keep it the price leader. We also might see them trying to do something with the Sidekick or a similar device to try and make T-Mobile a little trendier (aka T-Mobile USA) strategy. T-Mobile will continue to gain market revenue share.

Vodafone will re-emerge in the consumer segment – the family tariff will be a really big success in the most boring, but most profitable end of the market. The business segment will be more difficult to maintain margins as price cutting bites. Vodafone will probably maintain overall market share.

O2 will struggle to repeat its success from last year. T-Mobile, 3UK, Virgin and O2 are all fighting for that large youth market, although I don’t believe it will be a disaster especially given the supa-strength of the O2 brand. I believe O2 will maintain market share.

Orange will be the struggler. I believe they will focus their efforts on fixed-mobile products like Unik and cross selling broadband into the mobile base which will be a big flop. I also believe the organisation must still be under strain after the redundancies from last year. In fact, Orange is showing signs that they are being run like an incumbent with a large fixed line base to protect. More akin to France Telecom in France than a challenger in the UK. If things begin to look bad in the second half, Orange might be one to trigger yet another price war.

Virgin Mobile is the wildcard – I can see their profits being completely wiped out by the push into contracts, however I can’t see ntl changing strategy in 2007. Perhaps, they might withdraw from paying third party dealer commissions. Overall, I’m neutral on market share.

In terms of technology, I see the dual mode WiFi/GSM phones being a big flop. I can see them being a niche product for local authorities and at a stretch SMEs, but this is BT’s MVNO playground and not traditional networks. I see a lot more potential in Femtocells and believe that O2 and perhaps Vodafone will launch products in 2007.

With data access, I see 3G completely nailing WiFi as prices of data access tumble. Vodafone will remain king in the corporate arena, but one of the operators will break ranks offer a deeply discounted 3G data card tariff for PCs. This will ruin many a Wimax business plan. Download Speed and coverage will increase, but people will start complaining about upload speeds.

Blackberry style messaging products will move into the mainstream in the SME sector and for high end consumers. Blackberry and the operators will miss out on this and instead the biggest beneficiaries will be Data Specialist resellers who will provide all sorts of interesting hosted solutions.

will start to reinvent the consumer messaging world as early adopters start to abandon SMS for MSN style Instant Messaging. This will cause a major rethink towards the end of the year.

Content will be the biggest disappointment for the operators as most music and graphics will be sourced from kids PCs and Bluetooth. 3UK will only operator who really makes an interesting environment for user generated content. MobileTV will be the exception and the media hype machine will go into overdrive with the “L” band auctions.

In terms of distribution, the first half of the year will be extremely tough as operators offer specials to drive traffic to their own stores and justify the big expense in their store opening programmes. Towards, the second half an operator will break ranks, probably Orange, and the power will shift back to a humbler Charles Dunstone. I expect to see the shift to online rather retail buying continue - real tensions will emerge as networks offer the best prices online exclusively on their websites.

The interesting aspect of distribution will be in the SME reseller sector and several companies will build decent business on the back of new data markets. Some new multi-multi-mobile-millionaires will emerge in a few years when the network operators notice they are being outmanoeuvred yet again and buy a few out.

In terms of regulation, I believe the operators will get a “draw” in the fight with Brussels - retail roaming prices will not be regulated. OFCOM will at their most gentlest for many a year focussing instead on shenanigans in the broadband market.

A word of caution in all of the above, I’ve been wrong in the past and the only certainty is that I’ll be wrong in the future, but periodicallyI get a couple of things right.

Keep smiling and Good luck to all the operators in 2007 – may it be a clean fight.