UK Comms Spending Finally Rises, But There's Trouble in Paradise

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After years of recession-era realities hamstringing household budgets, spending on communications services has bounced back in the UK, rising for the first time in more than five years. The spending areas of choice? Broadband and pay TV. But a look at the numbers breakdown indicates a major cancer growing at the heart of the comms industry in that country.

First, the good news. The UK’s industry regulator Ofcom said that the average British household spent a total of £117.71 ($183.75) per month last year on broadband, phone, mobile, television, radio and postal services, the first jump since 2009.

Pay-TV adoption in particular significantly increased, thanks to competitive packages from BT and TalkTalk that undersell both satellite giant Sky and Virgin Media, the country’s lone cable offering. In fact, Ofcom said that hundreds of thousands of new households have become new subscribers in the past 12 months thanks to “skinny” packages in particular.

Ofcom also told the Telegraph that it expects pay-TV prices to increase, in large part to the record £5.1 billion (a little less than $8 billion) that broadcasters are paying for Premier League soccer rights. And that in turn will boost household spending on communications further.

In tandem with the rise in pay-TV spending, over-the-top (OTT) video services from Netflix, Amazon and Sky’s Now TV have also taken off. Ofcom said Netflix now has 4.4 million UK subscribers, and that total online streamlining television subscriptions skyrocketed 53 percent to total £317 million ($494 million) in new spending.

Image via Shutterstock

Broadband was the other main source of household spending growth, with average bills up 14 percent to £14.74 ($23) per month, not including line rental. Ofcom said that most of the increase came from consumers upgrading their broadband speeds—perhaps to support all of those new OTT packages.

But—and it’s a major “but”—all of this positivity is offset by a dull, dismal, absolutely horrific voice outlook. Traditional voice calls were down 12.6 percent by volume last year, but average landline bills were down just 34p (53 cents) per month, to £22.18 ($34.62). Why is that? Because the fee doesn’t reflect the usage drop-off. Operators simply raised line rental rates to compensate—a strategy that will eventually have a chilling effect on high-margin broadband uptake.

It’s unsustainable over time, so operators will have to find a way to transition its voice business from a per-minute model to something more innovative and stable. They could also wrap in new value-added services that would boost margins for voice.

On the mobile front, Ofcom said that the average household spend on mobile fell a sharp £1.61 ($2.51) to £44.37 ($69.26) per month, meaning that wireless spending has fallen by more than £6 ($9.37) per month in five years. Not a good state of affairs when one has 4G networks to roll out and pay for. 4G coverage is notoriously terrible in the UK—a state of affairs that squeezed margins can only prolong.

In response, the mobile segment is in the process of consolidating, with BT planning to acquire EE and a merger planned for Three and O2 by Hutchison Whampoa. Meanwhile, Sky is planning to enter the mobile market next year. But all of that will mean yet lower prices and lower spending, according to analysts.

“We expect a doubling of the market share from the super MVNOs [Sky and TalkTalk] in the UK over the next five years, and fear a headwind from pricing,” said Guy Peddy of Macquarie, in a note to clients.

Given the voice and mobile issues, the overall amount spent per household last year was up a modest 19p (30 cents) per month compared to the year before. But the real issue is that 2014’s rise to £117.71 per month, while a year-over-year increase, still falls short of spending in 2009, when the average inflation-adjusted spend was £122.07 ($190.55).

So what’s the takeaway? Consumers are willing to spend on entertainment choices and broadband. But, voice and even mobile are major drags on that promise—to the point of forcing a long-term trend of falling revenue. Innovation in this space could go a long way to shoring up operators’ long-term viability.




Edited by Dominick Sorrentino

TechZone360 Contributor

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