The power of the brand

The major mobile phone operators are looking to gain greater control in the industry with the introduction of own-brand products and advances into the high street and other retail sectors. This will result in fiercer competition in an already closely-fought sector. Robert Lester reports

O2’s increased focus on own-branded products (MW last week) is indicative of a wider strategic shift taking place in the mobile phone industry. With the UK now one of the most mature and competitive mobile markets in the world, operators want greater control of the brand in an effort to cut costs and improve margins.

Telefonica-owned O2 is setting up a dedicated team to develop marketing for a new range of own-branded mobile phones and other next-generation devices. The news follows rival Vodafone’s move into own-branded handsets last year with the launch of its 710 model, which is manufactured by China’s Huawei Technologies and rebadged with the Vodafone name.

As well flexing their muscles on the manufacturing side, the operators are also looking to become more prominent in the retail channel. O2 bought 293 The Link stores from DSG International in June last year to increase its high street presence to more than 400 outlets, while 3 has gone from a handful of shops and 130 Superdrug concessions to 140 standalone stores with plans to open another 110 by the end of this year.

Taking control of the brand
The concept of exerting greater control over the brand process dates back to the late 1800s, when John D Rockefeller founded Standard Oil. He played a pivotal role in the establishment of the oil industry and built his empire by controlling the railroads, and therefore the distribution of oil. Similarly, many attribute Coca-Cola’s success to the way it secretly guards its famous syrup recipe, which is then sold to the various bottlers throughout the world that hold a Coca-Cola franchise. More recently, supermarkets have started to take control of the end-to-end process by launching their own-brand ranges.

O2 is already one of the most advanced operators in terms of own-branded products with its Ice and Jet handsets and its Xda range. It is looking for a head of own-brand marketing to oversee the new team, which will be tasked with “identifying untapped device opportunities”.

The company’s marketing director, Sally Cowdry, says: “Our own-brand devices form a vital part of our development strategy. They are key to delivering better customer experiences and are a fundamental element of our overall brand experience.”

Vodafone, meanwhile, is likely to launch more phones to sit alongside the 710, while Orange has its SPV (Sound Pictures Video) range and T-Mobile offers some high-end smartphones mainly for the business market. 3 is the only operator not to offer any own-branded products but says its X-Series package, which experts believe will kick-start interest in the mobile internet, is a sign of its intentions.

However, the handset giants that dominate the manufacturing space do not appear overly concerned by the operators’ new focus on own-branded products. The big five – Nokia, Motorola, Samsung, Sony Ericsson and LG – currently hold about 91% of the market between them and, of the remaining 9%, the operators own-brand phones account for just 2%.

LG Mobile UK head of marketing John Bernard says: “People trust the established manufacturers. They are on their thirdor fourth-generation Nokia or their second-generation LG. We’re looking over our shoulders but I don’t think we’re too worried yet.”

Pre-pay mobile phones make up 60% of the market in the UK and the top three stores for pre-pay are Argos, Woolworths and Tesco. Bernard adds: “Where the operators have an issue is getting their own-brand phones into those stores because they only look at established manufacturers. It’s easy for them to sell their phones in their own shops but the real battle is the indirect channel. If one is successful in that area they could start to make an impression as a manufacturer.”

Bernard also believes there is an opportunity for the operators to take market share from some of the smaller players that are retreating from Western markets because of the fierce competition. But he says they will need to dedicate a greater proportion of their marketing budgets to their own-brand handsets, which are mainly marketed in store at present.

High street competition
It is no less competitive on the high street, with Carphone Warehouse boasting more than 700 stores in the UK and Phones4U 408. Last year, Vodafone took the unprecedented step of signing an exclusive deal with Phones4U to sell its contracts. O2 has just done the reverse by ditching Phones4U for its contract deals in favour of Carphone, as the operators try to squeeze better deals out of third-party retailers to cut costs.

3 and T-Mobile both extended their high street presence by about 120 stores last year. A T-Mobile spokesman admits the company was “light” in terms of retail stores but describes it as a “rebalancing” rather than a conscious assault on the third-party retailers. He adds: “We believe there’s always a place for the indirect channel but customer service is absolutely paramount to us and you have more control over that if you’re the retailer as well.”

A 3 spokesman says the company is “seeing the need to take more responsibility for the customer relationship”. It is thought that the Hutchison Whampoa-owned network wants 50% of its sales to go through its own stores by next year. O2, which has the most outlets in the UK with 417, is thought to generate about two-thirds of its sales through its stores and online. Three years ago, about two-thirds of its sales came from the third-party retailers.

Vodafone is spending £15m on upgrading its stores, rather than increasing the number it has. Director of commercial operations Ian Shepherd says: “Some of our rivals are in a race for growth and are talking about how many stores they’ve got, but I think some of them are starting to wonder if they’ve gone too far.”

One of the main reasons Vodafone signed the exclusive deal with Phones4U was to tap into the youth market, where the retailer is particularly strong. Ovum analyst John Arber believes this could be a sign of things to come, with the operators using third-party retailers to target specific areas of the market, while concentrating on their conventional packages in their own stores. Arber points out that the networks are happy to sell their pre-pay phones in as many channels as possible and adds: “By getting more involved in the retail side they have far more control over their higher value products. As players like Vodafone move towards triple play it becomes more important to be able to demonstrate services in store.”

Carphone anticipated the threat to its core business last year when it pioneered “free” broadband and has effectively become a telecoms company in its own right. Sources claim Phones4U is about to start selling broadband as a third-party retailer.

The move by the operators towards trying to own the master brand is already making waves in the telecoms industry. It would be dangerous to underestimate the might of the big five networks as they move into the retail and manufacturing sectors but it is clear that the competition will be formidable on all fronts.

Operator Number of stores in the UK Own-brand products
     
3 140 (plus 130 Superdrug concessions and three in Selfridges). Plans to increase number of standalone stores to 250 by the end of 2007 None
O2 417 Jet and Ice handsets, plus Xda range
Orange 336 SPV (Sound Pictures Video) range
T-Mobile 250 A range of HTC-produced high-end smartphones
Vodafone 348 Vodafone 710, as well as a range of business devices
     
    Source: The operators

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