Market Dynamics - UK Broadband, Q3 07

This is the first in a new series from Telco 2.0 looking at commercial developments in important Markets. We start with Fixed Broadband in the UK because it is consolidating fast and the players are starting to differentiate their bundles through Value Added Services.

In the future, we will be examing other interesting markets around the world: fixed, mobile, media, technology, mature and emerging.

Let's kick off with some key stats just in from UK players for Q3 2007:

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The main feature of UK Broadband in Q3 is the continued consolidation of the market: at the beginning of 2007 there were approx. 1.6m customers (11.5%) using smaller ISP's and now there is only 650k (4.1%). This consolidation has been driven both by ISP acquisition and the cost advantage of facilities based unbundlers. For example, Tiscali's market share gain has been driven by the acquisition of Pipex and Sky is the fastest growing ISP and offering prices that no reseller could match.

The UK market example creates a real dilemma for regulators across the world: prices are reducing as the market consolidates into an oligopoly creating huge barriers to entry through economies of scale for new entrants. The other feature is that approximately 30% of homes in the UK, which are outside of the economic area for unbundlers and cable TV, will be left with far lower choice and higher prices. The extreme example of this is seen in Hull, which is the UK's only municipal network and owned not by BT but by KCOM. In Hull broadband prices are higher than elsewhere in the UK and choice is limited to one supplier.

Although the UK market is clearly in the "land grab" stage of market evolution, we are seeing a couple of ISPs position themselves for the next phase of market evolution where a differentiated product set and targeting specific market segments will be vital. The clearest example here is BT which is differentiating itself with storage, security and video solutions whilst at the same time using its Plusnet subsidiary to launch services targeting the gaming niche. The biggest niche of all is the SME sector and here we see both Tiscali and Sky retaining different brands, Pipex and UKOnline, to offer different product and services for this sector.

Another market evolution is the emergence of third party wholesale services. The best example of this is that Sky use Google as their email provider paying them a fee for the service and sharing the advertising revenue generated. We at Telco 2.0 expect to see the emergence of much more of these types of "outsourced" services in the coming months.

The other clear story emerging so far is that fixed and mobile convergence is not proving to be a successful strategy in at least terms of market share, both Virgin Media and Orange market shares have gone backwards over the current year. Interestingly the two main mobile players, 3 and T-Mobile, who have championed a Fixed-to-Mobile broadband substitution policy with cheap datacards and dongles and reasonably priced access charges are the two mobile operators having the most success. We at Telco 2.0 believe that this "Fixed-Mobile" broadband substitution trend will continue, but accept that it will appeal to more than a small niche of the market.

In summary, we see the market continue to consolidate with choice of providers becoming more limited especially in rural areas. We also see the beginnings of the next stage of the market with more and more services targeting specific niches being offered over broadband and the emergence of a healthy wholesale market for some of these services.