Flagging demand for landline telephones and mounting competition from streaming services such as Netflix have left telecoms groups scrambling to keep their subscribers. Increasing numbers are opting to bundle several services together and attract customers with discounts, additional features and the convenience of a single monthly bill. But as more and more companies adopt that approach, it’s bound to become less effective. Investors should back those that can successfully innovate and adapt their offering to reflect evolving consumer demands.
Telcos are racing to assemble and sell 'quad-play' packages of television, broadband and both mobile and landline telephony. One reason is that the number of quad-play subscribers in the UK is forecast to to triple between 2015 and 2020 (see chart), according to Strategy Analytics, which also expects quad-play packages to account for more than 21 per cent of bundled subscriptions in the UK in 2020. Bundling boosts average revenue per user (Arpu), a key metric for telecoms companies, and can push up margins. Moreover, the hassle of switching over multiple services can discourage customers from decamping to competitors, allowing providers to push through price increases with limited fallout. And the strategy diversifies the supplier’s revenue streams, insulating it from weakness in any individual product line.
"In established telecoms markets like the UK, subscriber growth comes at the expense of another operator’s subscribers rather than a great deal of total market expansion," says Jason Blackwell, director of service provider strategies at Strategy Analytics. "As a result, customer retention and churn are key strategic issues, especially given high subscriber acquisition costs in many instances."
Quad-play has its perks, but as more and more companies bundle services, poaching rivals' customers becomes harder, potentially negating those benefits. Other risks of bundling include cannibalisation, as customers who would have bought a company's services separately end up paying less for a combined package, and making it easier for customers to swap their landlines for mobile phones. Bundling also clashes with consumers' growing preference for more flexible services such as Netflix, which don't tie them to annual contracts or punish them with break fees. Just as US consumers have rebelled against the cable-TV model of bundling thousands of channels together, UK consumers could grow resentful of being forced to buy unwanted landline services to access the best deals.
Crossed wires
The UK quad-play market is becoming more crowded. Virgin Media, TalkTalk (TALK) and BT (BT.A) - following its takeover of EE - all offer packages. Sky (SKY) and Vodafone (VOD) are set to complete their quartet of offerings by launching mobile and TV services respectively in the coming months. And O2-owner Telefónica could well broaden the mobile operator's offering after European antitrust authorities vetoed its proposed merger with rival Three.
Vodafone has been particularly keen to build bundles, primarily through deals and partnerships. After acquiring Ono in Spain and Kabel Deutschland in Germany, it launched service packages in both countries. In August, regulators approved its deal with US cable giant Liberty Global - owner of Virgin Media - to merge their Dutch operations and sell bundles of mobile, TV and broadband. And this summer it agreed to merge its and Sky's New Zealand operations in order to offer quad-play packages. It may be looking for a UK partner to bolster its domestic offering.
Mounting competition threatens to push down prices and drive up marketing, customer service and development costs as telcos battle for market share. Moreover, the trumpeted benefits of bundling haven’t always lived up to their billing. Around 40 per cent of Sky’s customers use its TV, broadband and landline services, yet Arpu has crept up from £45 a month in the year to June 2012 to £47 last financial year. Its UK and Ireland customers have also revolted against price hikes: 'churn', or the percentage of customers who cancelled their services, grew by 1.4 percentage points to 11.2 per cent in FY2016. And management declined to reveal figures for churn or the number of new broadband customers in the first quarter of this financial year.
Sky's rivals have seen clearer benefits. Arpu in BT's consumer division was £37.80 in the first quarter to 30 June, up 14 per cent from the same period in 2014. However, that partly reflects the launch of its BT Sport channel in 2013 and cross-selling to EE customers. Arpu among TalkTalk's core customers grew 5.8 per cent in the year to 31 March 2016 as it sold more products and raised prices, and churn fell to 1.36 per cent in the first quarter of this financial year. But management didn't report an Arpu figure for the period, perhaps because discounts and giveaways following the cyber attack in October have discouraged churn but weighed on Arpu.
Mixed opinions
A recent survey of 5,700 UK consumers by brokerage Jefferies challenges the conventional wisdom of quad-play bundles. The majority of respondents didn't perceive changing their provider as difficult, and 21 per cent didn't want broadband, mobile and pay-TV services in a single package. The survey also revealed consumers' feelings about different suppliers. Less than 6 per cent were interested in taking four services from TalkTalk, compared with about 14 per cent for BT, 26 per cent for Sky and 27 per cent for Virgin Media. Interestingly, 60 per cent of existing Sky users were interested in taking quad-play from the company, even though it hasn't launched a mobile service yet, highlighting trust in its brand and satisfaction with its existing services. That compares with 43 per cent of BT and EE subscribers.
IC VIEW:
Existing and aspiring quad-play providers face a fiercely competitive market, while the touted benefits of quad-play bundles don't always materialise. Investors should favour telcos that adjust and update their bundles to reflect consumer demand, for instance by swapping out landline services for mobile voice and mobile broadband, or adding premium entertainment or connected-home technology to the deal. Companies that innovate and bolster the value to packages, rather than roping customers in with discounts only to provide the bare minimum, should also perform better in the long term.
