The growth of UK quad-play propositions is inevitable

With 65% of Virgin customers taking triple-play (TV, broadband, telephone) propositions, there is a big opportunity for Sky, BT and Talk Talk to increase their numbers of triple play customers. Today about a third of Sky’s customers take all three services whilst BT and Talk Talk numbers are significantly less given their fast growing but relatively small number of pay TV customers compared to Sky and Virgin.

Over time the dynamics of the UK’s telecom, broadband, tv and mobile markets makes the growth in quad-play (TV, broadband, telephone, mobile) propositions inevitable. So why the growth in triple-play and ultimately quad-play propositions?

Customer profitability – Churn benefits

Virgin’s 2010 annual report noted that “triple-play customers are more profitable than double-play or single-play customers”.  Acquisition costs are higher but revenue and lower churn is positive. Churn of Virgin Media’s quad-play customers is below 8% per annum.

It’s a good deal for recession hit customers

Customers buy triple-play or quad-play propositions largely because they perceive they are getting a better deal taking broadband, telephone, mobile and tv services together. In the UK, Sky, Virgin Media, Talk Talk and BT spend millions every month, marketing and selling their competing triple play deals to recession hit customers looking for the best deal. Companies in countries who have successfully launched quad-play, for example “Free” in France, are using similar headline grabbing price points to win “customers” rather than sell individual products.

The leading triple play companies in the UK are Virgin and Sky each with over 3 million triple-play customers. At the end of 2012, 65% of Virgin Media’s customers took a triple-play bundle, versus about one third of Sky’s customers. Back in 2010, 63% of Virgin’s customers took triple-play whilst Sky had only about a fifth of its customers taking triple-play, highlighting the rapid transformation from Sky as a payTV operator into the UK’s second largest broadband company behind BT.

Smoother transfer of services 

A few years ago it was often a fraught experience changing telephone, mobile and broadband suppliers but today the experience is a lot smoother and in many cases seamless. As people share their experience, confidence to switch will grow. With only a third of Sky’s customers taking triple -play versus two thirds of Virgin’s, it’s no wonder Sky introduced a dedicated team of customer service advisors named the “switch squad” to make it easy to switch to Sky Broadband.

Quad-play is “mainstream” in some markets

In Spain, France, Portugal, Netherlands and Belgium quad-play has become a “mainstream offer” according to Bernstein Research. In France they estimate that over 40% broadband customers have a bundle of mobile and fixed services.  Iliad, spearheaded by the Free Mobile brand, offer discounts of up to 25% on mobile services if customers have their fixed telcom and broadband service.  Iliad won 50% of France’s broadband net adds during 2012. Their TV option provides access to 457 channels with 200 included in the basic package.

In the US, Dish Networks have made a $25Bn bid for Sprint Nextel. Their plan is to sell quad-play services to the new combined customer base. Dish has 14m pay TV customers, Sprint Nextel has 48m mobile customers.  Dish Networks CEO, Charlie Ergen, told the FT “Everybody I know in the US wants to have in the house a voice product, a broadband product and a video product….and they want the exact same product outside the house . . . in an integrated manner and they want that in one bill they understand and they want to tie all their devices together.”

In Germany the on – off discussions between Vodafone Germany and Kabel Deutschland appear to be on again. Like in the UK, quad-play customers in Germany are few and far between but Vodafone senses an opportunity… albeit it an expensive one with Kabel Deutschland trading on 20 times earnings. Vodafone missed opportunities to acquire cable assets in the UK and Portugal so all eyes are on Germany.

Seeking competitive differentiation

The main UK companies are always looking for new competitive services that are differentiated and will appeal to markets big enough to justify the cost of launching, promoting and operationally servicing. Virgin has had a quad-play proposition for years but has relied more on its superfast broadband proposition and its TIVO set top box to win customers versus BT and Sky, neither of whom has a mobile proposition. The proportion of Virgin’s customers that take quad-play grew from 11.8% to 15.8% between 2010 and 2012, suggesting that there is further scope to convert more of their triple play customers to take mobile.

Like Virgin, Talk Talk has a mobile proposition but only 175,000 customers currently. Speaking to Talk Talk sales agents, mobile is not of prime importance to secure the sale. They are focused on proving the savings versus Virgin and Sky’s triple play offers. In Talk Talk’s recent results presentation, mobile was identified for further growth although I believe they will continue to put primary focus on promoting their triple-play proposition. With 230,000 TV customers they will focus on encouraging a broader uptake of their TV service.

At BT’s recent results presentation, CEO Ian Livingston, said it was “highly possible” that a BT-branded mobile service could be up and running as soon as next year. This service will be launched on the back of the 4G spectrum BT have acquired and a mobile network agreement they will negotiate with one of the UK’s mobile operators. I anticipate that a good number of BT’s existing broadband and telecom customers would be tempted by the addition of a BT mobile service. A successful launch of BT Sport will also further positively improve the markets perceptions of BT enabling it to easier promote a quad-play proposition to new customers.  Although this would be a differentiator to Sky, I anticipate BT’s focus in the short and medium term will be on BT Sports, BT Vision and Fibre.

With their three main triple-play competitors gearing up for quad-play it will be interesting to see what Sky do. They didn’t acquire a 4G licence and are currently focusing on The Cloud wi-fi propositions. In the US Cablevision is betting its long term mobile future on wi-fi. At the J.P Morgan Global Technology, Media and Telecom Conference, CFO Gregg Siebert was quoted as saying that he wasn’t “a big believer in the quad-play”,  and that the cable company’s “wireless future was entirely concentrated on Wi-Fi”. This contrasts with other US cable operators, e.g. Comcast and Time Warner who have negotiated  deals with Verizon Wireless that allow them to market quad-play propositions of video, high-speed data and landline and mobile phone service to customers. (Cablevision bullish about Wi-Fi but not smartphones – Fierce Wireless – May 15, 2013). I don’t believe a wi-fi only proposition will be compelling enough for some Sky customers if Sky’s competitors start launching “always-on” 4G services bundled as quad-play, with associated tablet, mobile devices and video content deals.

Of all the leading mobile operators in the UK, only EE offer fixed broadband and telco services. Tesco do offer mobile, broadband, telephone and an OTT TV service Blinkbox but they exist as different brands with no quad-play deals like in France or Spain. O2 and Vodafone have both sold off their broadband businesses. The mobile operators are spending billions building out their 4G networks but will can they evolve into something more than big pipes for video content. In the UK they’ve launched Weve as a common advertising platform but it remains to be seen if they can generate sufficient revenue from their customers in the face of declining traditional voice and messaging revenue and relentless innovation from Apple, Google, Facebook etc.  A deal with Sky could be interesting. In addition to their network assets they have established mobile device relationships and a large retail presence.

Conclusion

The triple-play battle has begun. The growth in quad-play propositions is inevitable in the UK, however it will take a strong lead from one of Sky, Virgin, Talk Talk and BT to catalyse and move the market like Sky have done with Broadband. The most likely company to do it would be VirginMobile given they have had a differentiated quad-play proposition for many years but I suspect that BT or Sky may make some interesting moves.

I look forward to your comments.

Angus Mitchell - Athenic interim and consulting