Broadband and mobile operators are all expected to come out fighting with “innovative pricing moves” in the coming weeks and months, analysts have predicted, after pressure from the regulator to improve customer fairness.
BT Group PLC (LON:BT.A) and Virgin Media are both likely to experience “headwinds” in the near term from such a price war, analysts at Barclays forecast, while Talktalk Telecom Group PLC (LON:TALK) should be “broadly neutral” and Vodafone PLC (LON:VOD) is seen as having “significant tailwinds”.
The networks need to get creative with their consumer prices in order to avoid a slapped wrist and a harsher response from regulator Ofcom, which could take action to force them to cut prices on existing customers, known in the industry as their ‘backbook’.
This follows a pivot of Ofcom’s focus towards “customer fairness” via the instigation of initiatives such as to ease “customer switching” in mobile and to remove the “loyalty penalty” in fixed-line and mobile.
As part of the loyalty penalty phenomenon, Ofcom has estimated that around 40% of UK broadband customers are out of contract and pay roughly 30-35% more than new customers, with mobile customers also affected.
From February, customers will be notified when their contract is coming to an end and what the “best price” is, with around £1bn of annual UK consumer revenues estimated to be effected.
Barclays said this represents around 10% of the total UK sector’s underlying profits (EBITDA) from retail business.
Battle for market share
“To avoid likely material downwards backbook repricing, we believe the next few quarters will likely see all market participants attempt innovative pricing moves, which should prove deflationary and disruptive,” the Barclays analysts said in a note to clients on Tuesday.
For BT, the analysts believe consumer EBITDA will fall by 4.5% in the year to March 2021, with fixed service revenues falling 4.1% driven by a 2.3% decline in fixed average revenue per user and 1.6% in mobile service revenues.
“A May 2020 ‘expectations reset’ looks likely, in our view.”
For TalkTalk, expectations and backbook exposure are “low”, the analysts said, while Vodafone is expect to continue pushing towards gaining market share in the UK broadband market and as it has a relatively low number of backbook customers, “we do not expect the ‘loyalty penalty’ to keep Vodafone back from continuing its momentum”.
Virgin Media is expected to promote mobile “more aggressively” and has “only” a 20% penetration of the broadband base, why Sky is predicted to push mobile connections in an effort to drive their customers onto bundled contracts.
Barclays also noted that Sky was “a potential kingmaker” for fibre broadband wholesale providers, noting reports that it was in talks with Virgin Media about a new full-fibre network and that the set-up of a separate wholesale entity for Virgin Media “would be contingent on reaching an exclusive wholesale deal with Sky”.
After BT's news that the government's cap on Huawei equipment in the 5G network will lead to an extra £500mln of investment, analysts at Credit Suisse also trimmed its share price target for BT to 270p from 280p.
They are still optimistic, seeing Ofcom’s fibre update from January as adding “incremental support” to BT’s ambition to roll out superfast broadband to 15mln premises, “improving build economics”.
While the analysts were disappointed by a recently delayed fibre build expansion announcement, they still believe BT is “highly likely” to commit to a 15mln roll-out, which should drive “strong project returns over the next 10+ years”.