UK Telecom Market On Verge of Major Consolidation

After BT began moving towards an acquisition of either Telefonica SA’s O2 or EE, the wireless carrier co-owned by Orange SA and Deutsche Telekom AG, a Vodafone reaction was virtually certain.

Vodafone arguably cannot allow BT to amass that much revenue scale and bundling capability without the ability to match future BT offers and market share, as the U.K. telecommunications market would lurch towards a two-tier structure with BT possibly able to climb up to the top of the market share standings on the basis of new product bundles, while the other providers are left to compete with product offers less broad.

The example is the U.S. market, where most consumers buy a bundle of services including high speed access, voice and video entertainment, while some also add mobile service quadruple plays. The standard market offer, in that case, becomes the bundle itself, and less the discrete product components.

Bundling also deters customer churn, a key value in zero-sum markets where one service provider gains an account mostly at the expense of another provider.

The other important driver is a change from scale to scope in the consumer services business. In the past, networks tended to support a single lead app: broadcast TV, broadcast radio, voice, multi-channel TV, paging or mobile voice. These days, Internet protocol means any network potentially can deliver any media type.

But there are several other very good reasons service providers sell bundles of services. Very simply, in a competitive market no single service drives enough revenue to justify building and operating the network.

In a competitive market, where any single service sold by any single provider might only reach share of about 20 percent to 30 percent, an expensive access network can be justified, and remain financially viable, only when the network owner can sell multiple services.

In other words, selling a single customer three or four services at $30 a month, with household share between 25 percent to 33 percent, produces about the same amount of revenue as selling a single service to 95 percent of households.

There are other reasons for bundling. Service providers have found that bundling reduces customer churn. In some cases, a triple play or quadruple play customer exhibits churn as much as 2.6 times lower than single service customers.

Still, beyond any grand strategic considerations, such as gaining a facilities-based platform for competition in new markets, in-market consolidation is driven by a simple and growing problem.

It is becoming increasingly difficult for any service provider to make reasonable profits in its classic lines of business, virtually all of which face competition from new suppliers and new product substitutes. 

So integrating fixed and mobile services is less about synergies between the services and networks--though some synergies undeniably exist--and more about the sheer need to replace lost revenues with new replacement sources.