mmO2: Competition Commission squeezes profits

There may be troubles ahead

mmO2, the former mobile arm of BT Group, is on track to meet H1 financial targets after adding more than half a million new customers, and reporting an increase in the amount they are spending on mobile services. However, regulatory moves could hamper H2 growth in the highly competitive UK marketplace.

mmO2 operates in three main European markets, namely the UK, Germany, and Ireland and it has reportedly gained an additional 500,000 customers in Q2. In the first half of the year, O2 UK is expected to report revenue growth in the mid-teen region, driven by strong growth of its customer base and higher average revenue per user (ARPU). The EBITDA margin in the first half is also expected to demonstrate steady progress to its full-year target of 30 per cent.

However, it also warned that revenue growth will "slow significantly" in the second half of the year, after the UK government imposed cuts to mobile phone charges. The Competition Commission ruled that termination charges (the prices mobile phone operators charge other operators for access to their networks) must be lowered by 15 per cent each year for three years.

mmO2's loss-making German arm showed a strong performance. It expects to report strong customer and ARPU growth, which is expected to continue into the second half of the year. It now has more than five million customers, giving it an eight per cent market share. The remaining marketplace, Ireland, is expected to report further steady growth of service revenue and EBITDA during the first half.

In May this year, mmO2 reported record losses of £10.2 billion for the year to March 31. The majority of this loss was due to a write-down in assets after massively overpaying for third-generation licenses at the height of the telecoms boom.

Whilst H1 has proved to be positive overall, mmO2 is confronting a number of challenges going forward. Like all other UK mobile operators, it will have to reduce termination charges, but it is facing increasing competition from the 3G mobile operator "3", owned by Hutchison Whampoa.

While it seems to have held its own for the time being, the effects from "3"'s highly aggressive price cuts and summer promotional campaign have yet to be seen. Additionally, the decision by BT Group to offer a virtual mobile service, possibly using the T-Mobile network, will increase the pressure on the operator.

Source: Computerwire/Datamonitor

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