BT turns attention to shaking up UK mobile market

©Johnnie Pakington/BT

BT is to mount a fresh challenge to mobile operators with cut-price bundled offers using its broadband network and the 4G spectrum it unexpectedly acquired last year.

Having shaken the pay-TV market with free Premier League football, BT is turning attention to reviving its lacklustre mobile business. The telecoms group has not been a major provider of mobile services since the sale of O2 more than a decade ago. 

BT will offer households a TV, broadband, and fixed and mobile telecoms on combined tariffs – the so-called “quad play” bundle that is increasingly popular in the US and Europe. 

It will launch offers for businesses towards the end of the year, according to people familiar with the situation, before focusing on the consumer market.

Those people say the central proposition is around data – taking the group’s fixed-line superfast data connections into the mobile market. BT is in early talks with handset makers about supplying devices, according to people familiar with the negotiations.

Analysts see the strategy as partly defensive. BT wants to reduce the loss of its lines in homes, which have been in decline for many years with people increasingly forsaking fixed-line calls for mobile. 

Offering an additional service has been proved as a way to strengthen customer loyalty, if only because people are less inclined to move a large number of services at one time to different suppliers.

But there is an offensive element to the mobile strategy, at least as far as the traditional mobile operators are concerned. They see the prospect of BT’s strong telecoms brand swinging in with disruptively low prices to entice customers to its premium broadband packages.

Quad play potential

The British market for quad play services is relatively small, with less than one in 10 households with fixed-line broadband also taking a mobile service and most of those signed up by Virgin Media.

But the option of offering such bundles is becoming important in European markets, even to the extent of influencing M&A activity. Telecoms groups such as Vodafone have aggressively pursued fixed-line businesses while media companies such as Liberty Global are adding mobile.

Large incumbent operators such as Holland’s KPN already offer quad play, which chief executive Eelco Blok says has boosted firepower in winning and retaining customers.

Analysts at Espirito said BT was “well placed to do similarly” and convert its 9.7m residential customers to additional mobile services. Espirito estimates that BT could win “several million mobile customers over the next few years”, offering about 5 per cent of revenue market share and adding 1-2 per cent to BT’s growth.

Disruptive deals

As on the continent, BT can innovate in both technology and tariffs to win mobile customers. Over time the company is expected to upgrade existing WiFi “home hubs” linked to its broadband network with so-called “femtocell” technology – in effect creating a small mast (or “small cell” in industry parlance) in the home that uses the 4G spectrum acquired for £200m in the government auction last year.

“How disruptive can BT be?” said analysts at Berenberg. “BT has form in using non-core products like BT Sport to defend its core products like broadband. We believe that it could take the same approach with mobile.”

Berenberg points out that fixed voice minutes on BT’s network have halved in the past six years, and estimates that two-thirds more would be lost by 2020. This is equivalent to £600m of high-margin revenue. “In our view, BT’s mobile opportunity is a disruptive offer aimed at defending its eroding fixed-voice revenue stream.”

BT’s long mobile history
BT has been a competitor in the mobile market since launching one of the UK’s first networks in 1986. However, the 2002 spin-off of O2, which was then called Cellnet, put the mobile business on the back burner, writes Daniel Thomas.
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And that – with the potential to cross-subsidise bundled offers on services – means lower prices for customers and a headache for mobile operators. Although there are scores of cheap branded offers using their networks on a wholesale basis – from virtual operators such as Tesco and Asda – none has the brand or network that BT can leverage.

For example BT could offer an unlimited voice/SMS Sim for as little as £3 per month, with £4 per month charged per gigabyte of data, according to Berenberg analysts. “If BT can defend 30 per cent of the high-margin £600m voice revenues that we expect it to lose by 2020, it could be worth as much as £2bn in value.”

It is not just cheap Sim-only deals, however. A range of pricing options is expected from BT, including longer-term contracts that come with expensive smartphones, and mobile data bundles covering the home.

BT has not yet detailed its plans, only saying that services would build on a “strong WiFi presence”, while otherwise using EE’s network. Further details are likely to be confirmed after its full-year results on May 8.

Rival response

Mobile executives say it is difficult to gauge the impact of BT on their businesses until its packages are revealed. Indeed, analysts still question how disruptive they will be for the mobile industry. 

How disruptive can BT be? BT has form in using non-core products like BT Sport to defend its core products like broadband. We believe that it could take the same approach with mobile
- Berenberg analysts

UK mobile prices are some of the lowest in Europe, and the concept of quad play has not yet taken root, with only Virgin Media backing the strategy. Meanwhile, even if BT managed to sell mobile to half its broadband customers, that would account for only a single-digit share of the overall market.

But given existing pressures on revenues in the sector, mobile executives admit that the additional competition from a fifth mobile player with its own network is unwelcome and could put further pressure on prices.

BSkyB may also need to respond by adding mobile to create its own quad play offers. The recent talks about commercial deals between Sky and Vodafone have been seen by analysts as partly a response to the threat to both groups from a BT that spans the telephony, internet and TV markets.

It remains to be seen whether the average British household wants all these services bundled into one tariff – but this is a question that the former British telecoms incumbent is not afraid to explore.