Do 118 numbers add up?

The Number 118 118’s decision to launch a free directory enquiries (DQ) service last week has been interpreted by many as an admission that consumers are no longer willing to pay for phone numbers. At the very least, it seems, DQ operators must change their business models to survive in the long term.

Hundreds of companies have launched services since the 192 monopoly was scrapped four years ago but, despite The Number and its biggest rival BT spending millions of pounds on advertising, consumers have been abandoning DQ services since deregulation.

According to an Ofcom report published earlier this year, just 44% of people ever use a 118 service, compared to 74% who used 192 in November 2000. The Number UK recently saw profits plummet by 96%, although the company says that was “directly related” to the launch of two new 118 118 businesses in Italy and France last year.

From last week, The Number’s existing service is being supplemented with a new number – 0800 118 FREE or 0800 118 3733. Calls from a landline are free, although mobile users are charged by their network.

Internet challenge
Some observers think the launch of the free service is proof that consumers are fed up with paying up to £2 for a phone number that is widely available free of charge on the internet.

Keith Marsden, managing director of ICD Publishing, which owns and operates the online directory service 192.com, says: “If you are a voice DQ operator, then there definitely is a problem. People are moving online. The voice market has shrunk. Before deregulation, there were around 700 million directory enquiry calls a year. That figure has halved.”

That point is backed up by independent industry experts. Martin Ashfield, managing director of market analysis and consultancy firm 118 Tracker, says that none of the operators releases figures for the number of calls they handle, but the best estimate is that there are currently around 300 million to 330 million calls a year. 118 Tracker has details of around 130 different 118 services, but Ashfield says that most of them are either effectively defunct or handle such small numbers of calls that they are all but irrelevant. The company focuses on the 20 biggest players, including The Number, BT and Yell.

Targeting lapsed users
According to Ofcom, 42% of consumers say they use The Number, while 26% use BT’s 118 500 service and 5% Yell’s 118 247. But the regulator also says that the number of consumers who say that they never use a phone-based DQ service has more than doubled, from 26% in November 2000 to 55% in August 2005.

It is exactly those lapsed users that The Number is targeting with its free service, according to its communications director William Ostrom. “In the past three years the market has concentrated on regular users,” he adds. “Our research has identified a lot of people who have dropped out of the market. The only way to get them back is to offer them a genuinely free service.”

Research by 118 Tracker indicates that the calls will be much longer than ones to premium rate 118 operators – around two minutes compared to roughly 30 seconds – and consumers will have to listen to advertising messages while on hold. Furthermore, 118 FREE is a purely automated service, with no option to speak to an operator.

Earlier this year, 118 118 launched another advertiser-supported programme – this time involving contextual advertising for DQ services. With Ad//txt, consumers are sent ads for services deemed relevant to their enquiry by text message. For example, anyone who asked for the number of a DIY store would receive an ad from Homebase when they were sent the number.

Ostrom claims The Number was powerless to stop mobile users being charged for the free service: “It’s a very lucrative market for mobile operators and they are not going to give it up easily.”

Industry insiders say that at least two other major 118 operators are also believed to be planning free DQ services. In addition to 118 FREE, The Number also offers other information services via the phone, including train times, cinema listings and an “ask me anything” service, where people can receive answers to questions.

However, once again, observers point out that such services are available online and that increasing numbers of UK consumers are accessing them via the internet.

Falling profits
The Number, famous for using moustachioed runners in its advertising created by WCRS, appears to have been hit by the reduction in the numbers using DQ services. Its results showed a fall in operating profits from £12m for the year ending December 2005 to £444,000 for the next 12 months. Turnover for the year was up by 8% to £80m, while administrative costs were up by 85% to £43.5m. Ostrom says the fall in profits was due to start-up costs for the French and Italian operations and that the underlying business is very healthy.

Nevertheless, The Number’s US parent company InfonXX cancelled a planned $1.1bn (£600m) flotation earlier this year, although it did say that this was because it had managed to obtain private funding which made the flotation unnecessary.

If the DQ market is in trouble, 118 118 will not go down without a fight. It spent £10m on marketing last year, £12m this year and is likely to spend around £15m next year, according to Ostrom. It is continuing to sponsor the hit TV show Lost after its switch from Channel 4 to Sky, and is carrying on with its C4 Drama sponsorship. The 118 118 runners will also be hitting the streets of London this week as part of an experiential campaign.

There is no doubting the strength of the company’s brand but the same cannot necessarily be said of its product in a market that is being revolutionised by the internet. It looks likely that The Number and its rivals will have to continue to innovate and diversify their business models if the 1970s style joggers are to keep on running.