Is O2 suffocating in a saturated market?

The UK mobile phone market is overcrowded, and many in the industry predict that O2 will struggle to keep pace with the richer brands that have a stronger global presence, says Robert Lester

There are now more mobile phones in the UK than there are people. There is also a preponderance of networks, and industry insiders are predicting that this fierce competition may claim a high-profile casualty.

As well as the five network operators – Orange, O2, 3, T-Mobile and Vodafone – there are a host of mobile virtual network operators (MVNOs), including Virgin Mobile and the recently launched easyMobile, targeting low-usage customers.

The total number of mobile subscribers in the UK is 61.9 million, taking individual user penetration to 81 per cent and subscriber penetration to 104 per cent, as there are more people that own two or more phones than there are who do not own any.

Operator 3 is often considered to be the runt of the litter with the greatest potential to falter. But takeover talk has centred on O2. However, O2 chief executive Peter Erskine strongly rebutted such speculation last week, saying: “Our view is that by the end of next year the strong will be getting stronger and the weak weaker. We are one of the strong.”

But O2, the former BT Cellnet business, is the only network operator that doesn’t have serious financial backing. Orange and T-Mobile are owned by France Telecom and Deutsche Telecom respectively, 3 is the mobile subsidiary of Hutchison Whampoa and Vodafone has become a global behemoth in its own right.

O2 has recently announced plans to hire 2,000 new staff to work in its shops and call centres in a bid to increase customer loyalty. But to help fund the recruitment drive it is laying off 500 managers and administrative staff. A spokesman confirms that the marketing department could be affected by the job losses.

Strategy Analytics senior analyst Sara Harris warns that O2 is potentially the most exposed of the operators because it derives almost 70 per cent of its revenue from the UK, compared with 31 per cent for Orange and 15 per cent for Vodafone. She says: “If there is to be a casualty, I think it’s very likely that it would be O2. Even hiring 2,000 new customer service staff and recognising the need for retention and superlative service in a super-saturated market is not going to

be enough to save it if the market decides it doesn’t need a fifth player. It might well be too little too late.”

However, she does not believe industry consolidation is imminent, pointing out that the Netherlands, which has a smaller population than the UK, has five major network operators and several MVNOs.

After a rocky start beset by problems with coverage and handset quality, 3 now claims to be the fastest-growing network in the UK. Last year its subscriber numbers jumped from 250,000 in January to 2.5 million in December. This was largely due to the company slashing its prices to offer huge call and text bundles.

However, 3 denies claims that its pricing is a promotional gimmick, insisting it has laid the foundations for a new pricing model for the industry.

Some observers do not think 3 can continue with its price model in the long term. One industry source says: “It’s unsustainable from an economic point of view. I don’t know how it’s going to keep it going.”

But 3 chief operating officer Gareth Jones, who was part of the team that launched Orange along with 3 chief executive Bob Fuller, claims that prices were at an unacceptably high level before 3 launched its third-generation (3G) service in 2003.

He says: “We’re not in the business of committing suicide. We have a robust business model and we believe that the prices we’re charging are right for the way the market is.”

3 has about four per cent of the subscriber market, according to figures published at the end of 2004 by Strategy Analytics, and is due to announce its latest subscriber numbers tomorrow (Thursday). Vodafone is the market leader with 25 per cent of the UK market, closely followed by Orange and O2 with 23 per cent each and T-Mobile with 17 per cent. Virgin Mobile, which uses T-Mobile’s network, has about eight per cent of the market.

Harris thinks 3’s prices will start to rise in the next year because the UK business is being touted as the second part of Hutchison Whampoa’s mobile empire to be floated, with the first planned to be Italy by the end of this year.

She says: “Hutchison doesn’t care about making money at this stage, it just needs to get a decent foothold in the market and to get people using its services. At the moment it could disappear from the market without a ripple. It has to get to the stage where its disappearance would have an impact.”

But the market for simple mobile phone use is saturated, and service providers need customers to adopt new uses for their phones. The launch of 3G has opened up a new market for operators but the “big four” have only just begun rolling out their 3G services and the technology has yet to catch on.

O2 and T-Mobile have delayed their 3G launches. O2 has instead opted to focus on customer retention. The company is launching an &£8m campaign this week, created by Vallance Carruthers Coleman Priest and below-the-line agency Archibald Ingall Stretton. Its strapline – “A world that revolves around you” – is aimed at increasing loyalty among O2 customers.

O2 head of brand and marketing communications Susie Moore says: “The market has been focusing on acquisition for too long and it’s about time someone took stock and concentrated on thanking its customers and keeping hold of them. It is the first time we have properly spoken to our customers in a campaign.”

It may be premature to predict the demise of a major player at this stage, but eyebrows are being raised over T-Mobile’s move into the wholesale market by teaming up with MVNOs. Observers say that Orange’s once renowned marketing communications are not what they were, and Vodafone’s problems in recruiting subscribers in Japan show no sign of abating.

However, all of the operators have strong brands and large customer bases. The question is whether any of them has the confidence and deep enough pockets to make a play for a rival, or whether an outsider will instead mount a takeover to gain a foothold in the UK market.

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