Research Notes

UK operators haven’t learnt the lessons of nature

When we look at mobile operators’ distribution strategies across Europe, one country in particular stands out – the UK. Historically, the UK’s operators have been generous when it comes to subsidising terminals, and retailer commissions have also been among the highest in Europe. Some would call the UK an unhealthy market in this respect. But it’s worth asking if it is unhealthy because of the retailers or in spite of them.
When you make a living out of analysing mobile markets, as we do at Strand Consult, it soon becomes clear that those in charge of distribution for UK operators live in their own universe. They have what you might say is a naïve view of the market. In particular, they seem to have missed out on one important lesson from nature – that bees are attracted to the most beautiful and best-smelling flowers.
A good place to start is by comparing operators’ own shops with those of the independent retailers. It’s clear where you get the better experience, not to mention the best deals. The independent retailers’ stores, you could say, smell a lot more beautiful than the operators’ shops.  
Our 14 years of experience covering this industry, and with more than 140 mobile operators on our client list worldwide, we have learned one thing. UK operators have a naïve and arrogant belief that they have little to learn from the rest of the world’s operators – even as Vodafone, Orange, O2, T-Mobile and 3 continue to experience big problems outside the UK because of their weaker distribution strategies.
Consider how no-frills MVNO’s such as Telmore and CBB forced Orange Denmark to quit the Danish market; or how Tele 2 forced Vodafone in Sweden to write off a 500-million-pound investment before selling it on to Telenor; or how O2 had to sell its Dutch operations for 25 million euros, while 3 years later the buyer sold the same entity on for 1.25 billion euros. Meanwhile, T-Mobile has had a rough time of it in Germany, whereas rival E-Plus has had considerable success with its alternative strategy. And in Denmark and Sweden, 3 has experienced so many problems that if they are now finally seeing light at the end of the tunnel it can only be from the train hurtling towards them.
In the UK, the operators are struggling with huge costs. But why do they have such high costs and so many employees? Is it the naïve belief that they are better off running their own retail businesses instead of leaving it to the country’s many independent retailers? The UK operators have used high acquisition costs as an excuse to set up their own shops selling fewer products and terminals – but it means customers have a much worse experience in their shops than at independent retailers, which offer a much bigger range of products.
The other excuse – that operator shops avoid the problem of disloyal dealers – is further proof that they have not understood the lessons of nature. If you wife is unfaithful, locking her up won’t solve the problem. Loyalty isn’t something you can buy. It’s earned. New ideas and thinking is needed to solve the problems that UK operators face, and here they can learn a lot from foreign operators.
In Germany, E-Plus has over the past 2 years improved its turnover and profit, and at the same time reduced its distribution costs, at the expense of Vodafone, T-Mobile and O2, all of which have seen turnover and profit in Germany fall. This has forced those operators to undergo a paradigm shift, something that UK operators too will be compelled to do.
In the period Q1 2005 to Q1 2007, E-Plus has reduced its blended average SAC from 189 euros to 84 euros, increased its MoU from 71 min to 126 min and its EBITDA margin from 21% to 36%. Vodafone, O2 and T-Mobile in Germany all have experienced the opposite effect. E-Plus has an aggressive MVNO strategy, combined with large cost reductions and a focus on distribution channels that create value. This strategy has generated remarkable shareholder value, reflected in parent company’s KPN’s share price
We believe distribution costs in the UK are too high. But they could easily be reduced, and the market’s operators will soon feel the necessity for a paradigm shift. Their problems will not be solved by opening up new shops and benchmarking their distribution costs against the high costs of going through independent distribution channels.
The serious operator will start by looking at its own costs and then benchmarking itself against organisations such as E-Plus, Tele2 in Sweden, Base in Belgium and Telfort in the Netherlands. After organisational reductions of 50% to 60%, it would adopt a new distribution strategy – a combination of an effective MVNO strategy and new dealer strategy, where independent dealers are rewarded for the quality and type of customers, not the overall number, they bring. After doing this, operators will quickly realise that their own shops represent the most expensive means to acquire customers.
To start with, they need to fully understand nature’s lesson that bees are attracted to the sweetest smelling flowers. E-Plus has shown the best way to attract the bees, while in Germany every day Vodafone, O2 and T-Mobile are experiencing what it feels like to be passed by for a finer scent.
Mega trends in the mobile industry – a question of life and death

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