Prepay price increase as subsidies removed

O2 and Everything Everywhere take action to retain profits in wake of MTR decision

O2 and Everything Everywhere have confirmed they are now actively removing subsidies from their prepay handsets as a result of lost revenues from mobile termination rates (MTRs) and the declining value of voice.

The move follows regulator Ofcom’s decision to cut MTRs in March, which is forcing all UK operators to slash the costs of connecting a call received from another network.

The cost will drop from 4p per minute to 0.69p per minute by 2015, a reduction of 80 per cent. MTRs are estimated to be worth in excess of 800 million a year
to the leading UK operators.

O2 CEO Ronan Dunne (pictured left) told Mobile News last week subsidies on prepay have become “untenable” and the operator has now removed around half of the subsidy from its prepay range of handsets, increasing the cost of purchase to the consumer.

Dunne said he has been forced to “rebalance” the books as a result of the changing market. Discussions to re-negotiate distribution contracts through its channels started six months ago in preparation. Some price increases on handsets are now reflected in O2 retail stores and online, he added.

Focus on retention

T-Mobile and Orange parent company Everything Everywhere confirmed it too will begin to remove subsidies from its prepay devices from late June or early July as a result of MTRs, and declining revenues from competitive tariffs and box breaking.

Everything Everywhere VP of commercial trading Neil Macgeorge (pictured right) described prepay as “fundamentally unsustainable” saying the market is now more focused on retention as opposed to acquisition.

It said subsidies have created opportunities for professional box-breakers, resulting in a financial loss to operators.

Prices in Orange and T-Mobile retail channels, as well as through channel partners, such as Argos  will be reflected at the same time.

Dunne said: “We have taken leadership on this and made changes in the market. It’s up to others if they follow or not, but we have to rebalance the profitability of our prepay business, as we are going to have significantly less termination revenues coming in. The obvious place to start is on handset subsidy.

“The reality is if mobile termination rates fall, then that has to be compensated for somewhere in the overall cost-base.”

Dunne added: “Those customers who were marginally profitable or at least broke even, will now be loss-making for us. In those
circumstances you can’t subsidise a handset because that’s a loss-making transaction.

“The amount of subsidy in the prepay market is simply no longer tenable. Partly because of competitors’ pricing, because minutes are falling down all the time, but also because of the reductions in mobile termination rates.

“We have been renegotiating our distribution contracts with various channels to better reflect the new termination regime. Those subsidies have either started to come out or been removed completely.”

Macgeorge said: “The combined effect of box-breaking and MTR reductions has meant the prepay market as it works now is fundamentally unsustainable.

“As we move further away from pure customer acquisition and focus more on rewarding and retaining valuable customers, we need to rebalance handset subsidies and acquisition costs in the prepay market. This needs to happen quickly across all our channels and brands.”

Vodafone declined to comment on its position.

Prepay sales have continued to decline in the past 12 months, with operators putting more focus on contract offers. O2 saw its prepay base fall year-on-year from 11.3 million at the end of Q1 2010 to 10.8 million in Q1 2011.

Everything Everywhere showed in its results earlier this month that prepay numbers had dropped from 7.4 million to 6.7 million during the same period. Both claim to
have seen significant migration from prepay to contract during this period.

Vodafone showed in its Q1 results last week its prepay base declined in the three months by 351,000 in 2010, and showed marginal improvement during the same period in 2011, falling 258,000.