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UK first battleground for European convergence

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In the UK, British Telecom is widely thought to have nowhere to go. It is a wireline operator that has no mobile infrastructure of its own, and is fighting shy of offering full IPTV, because of the strength of satellite TV supplier BSkyB and terrestrial digital TV in the UK. This means that when Orange attacks both wireline revenue by including mobile bundles, and offers a hybrid DVB-T/VoD-over-IP strategy, it will be able to steal customers.

Granted, neither Telecom Italia nor Deutsche Telekom has a footprint in UK broadband lines, but that could be easily acquired as there are at least seven independent unbundler operations, the biggest of which, Easynet, has already been acquired by Sky, and the next Bulldog, already acquired by Cable and Wireless, but thought to be up for sale again. And the German incumbent, of course, has T-Mobile UK to spearhead the branding of such an exercise.

Meanwhile, once Virgin Mobile has been acquired in the UK by NTL, it will form a digital cable based quadruple play, and it too can to mobile customers in the same way as Orange.

UK IPTV service HomeChoice is up for grabs, having placed itself on the market some months ago. This is an exceptional IPTV service, complete with internet access and VoIP, but not access to mobile bundling. So this might be another way into the UK for a BT rival.

Acquisition of BT?

But there's a better acquisition to be made. Deutsche Telekom could move to buy British Telecom itself. Many think that this is only a matter of time and price and that the price will only go down as BT spends aggressively on its switch to an entirely IP-based network, and as it loses market share to encroaching VoIP services.

The excellent Europe wide enterprise services that BT has could be floated off, and DT might end up with a cut-price acquisition, at the same time bypassing the effort of competing in the market against BT, and adding a full quad play to T-Mobile.

Other operators have their eyes on the UK as a testing ground for their converged bundles. In Spain the virulently strong Telefonica, bolstered by South American mobile and broadband revenues, is likely to yield little joy to anyone trying to enter its market in a quadruple play. It has IPTV growing at breakneck pace, huge broadband market share and it is the second largest mobile carrier in the world. Telefonica might be the next company to begin quadruple play bundling of its own in and outside its core territory, and a natural target would be the UK, because it owns local mobile operator O2.

The UK, then, highlights the two key challenges for large operators in Europe – for companies with just one network, how to achieve a quad play; and for wired/wireless majors, how to remain competitive in the converged world by taking on an increasingly internationalised set of rivals, while ensuring that bundling sustains profitability as well as market share.

Making profit from convergence

This may be harder than it looks. Bundling's positive impact on customer acquisition and retention is clear - one operator can control all of a user's activity in voice, video and broadband access, boosting its share of that user’s spend even if the customer is actually spending less than on discrete services. This lower total bill and the increased buy-in to a single provider also encourages loyalty (or customer apathy), and the convenience and predictability of a single bill is a significant lure.

The risk is far higher when it comes to margins. The triple play, when delivered over a single efficient IP network, can achieve significant opex economies that offer latitude for price cutting without too much pain for profits, but when the fourth arm of mobility is introduced, operators need to support (or partner with) at least two networks, and possibly more as some introduce broadband wireless to the equation too.

A recent report by Exane BNP Paribas and Arthur D Little warned that bundling and fixed/mobile convergence will have a "severe impact" on major operators' margins in the coming year, especially as users throw out fixed lines, and make heavier use of Wi-Fi at the expense of cellular.

The report is also sceptical that consumers will pay the premium rates for new services that would be required to compensate for the lower spending on basic functions like voice.

The report forecasts average revenue growth in the European telecom services market of just 3.1 per cent in mobile and 1.3 per cent in fixed, almost one percentage point slower than last year (with the main growth decline in mobile, which rose by 8 per cent a year in 2002-2005).

Copyright © 2006, Wireless Watch

Wireless Watch is published by Rethink Research, a London-based IT publishing and consulting firm. This weekly newsletter delivers in-depth analysis and market research of mobile and wireless for business. Subscription details are here.

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