Shifting sectors andthe growth of SIMO

An online perspective of the UK mobile market

“Nature abhors a vacuum”, or so the saying goes.

Just as the smartphone market appeared to be settling down into a duopoly of devices from Apple and Samsung, a host of shifting scenarios and niche players have emerged to shake up the status quo.

The industrial design of smartphones has settled into a familiar, sleek glass screen, backed by metal or plastic.

This, however, does not mean that innovation is dead or that the market is moribund. The last 18 months has marked a significant increase in consumer choice across handsets and operators alike, many of whom are bringing something genuinely new and attractive to the table.

Just two years ago, the industry appeared to be settling into a pattern: Samsung and Apple launched one or two hero devices per year that competed for the vast majority of market share, leaving a group of other legacy manufacturers (Motorola, HTC, Sony) and ambitious Asian brands (Huawei, ZTE) vying for the rapidly dwindling remainder.

One look at today’s vibrant, more open mobile market in the UK illustrates that things have changed drastically in the interim. And it’s equally clear that consumers have benefited from the influx of arriviste, upstart brands and challenger networks competing for their smartphone spend.

Executive summary

True choice it seems, is making a return to the smartphone market.

No longer need to commit to a contract for two years

No longer need to pay £40 per month

No longer perceive Samsung or Apple as the onlyhigh-end smartphone experiences

No longer accept face-value deals on the high street as the best price

In 2017’s mobile market, this means that consumers:

2

The view of the customer

The view of the customer 4

One significant change in the past two years has been the explosion of SIM only (uSwitch reported on the growth of this market extensively throughout 2016), and in particular the role of the smaller ‘mobile virtual network operators’ (or MVNOs) within it.

SIM only deals have been gaining further momentum over the last year, particularly at the intersection of tariffs offering both a low relative cost and high value for the amount paid.

Our latest research shows that 15% of contract customers plan to change to a SIM only deal at the end of their current mobile contract, adding to the 30% of the market already signed up to SIM only.[1] SIM only is particularly popular amongst the segment of the adult population that does not have children living at home (either pre-kids, no kids or empty nesters).

SIM only is also in favour with the retired. Unsurprisingly, contracts subsidising a phone are popular with the 18-34 demographic that are either more focussed on owning the latest handset, or do not have the disposable income to purchase their handset of choice outright.

For the growing numbers of consumers attracted to SIM only plans, it seems that the perception of freedom is the big draw.

The SIM only market

uSwitch compares thousands of pay monthly and SIM only mobile deals as well as providing detailed handset reviews, guides and market insights for engaged and uninitiated consumers alike.

Our positioning and the fact we’re used by millions of consumers per month looking for the right phone deal provides us with a unique perspective on the market.

uSwitch also carries out extensive customer research, which provides both a quantitative and qualitative view on people’s attitudes to mobile. This gives us a unique insight into the marketplace: identifying both the handset functions that mean most to consumers and the kind of tariff bundles that generate most interest.

So what are customers looking for?

The view of the customer

The view of the customer 5

The overwhelming majority – three quarters – of customers continue to opt for 30-day SIMs over 12-month deals, despite having little inclination to leave their current provider.

Churn data from providers seems to substantiate the notion that the freedom to switch at any point – including the option to re-engage with the handset contract model – is front-of-mind when it comes to choosing a mobile deal.

Our consumer data also shows that there are significant data ‘sweet spots’ that networks need to deliver at certain prices to drive incremental volume. Rather than driving down the overall price of tariffs, this inflection point of value provides ample opportunity for bold providers to gain significant share by teaming a keen price point with the right amount of data. Perceived value can kick in strongly and suddenly when this ‘sweet spot’ is hit, with the shift often driven by even the slightest pricing-for-data adjustment.

The sea change in smartphone users’ priorities is also reflected in real consumer data coming from the uSwitch website, which found data to be the most popular criteria for search. On average, 17% of all uSwitch searches in H1 2017 utilised the data filter functionality, whereas an average of just 8% used the call bundle filter and 6% filtered by texts.[2]

Data allowance was found to be the single most important factor for consumers when considering a new mobile deal, outside of the overall monthly cost.

Data ranks higher in people’s considerations than the handset available with a contract, upfront cost and even network reliability.[1]

The proliferation of mobile apps offering movies, music and live streaming of video are obvious contributors to this shift. But at the same time even less engaged consumers are becoming aware of messaging applications that offer calling and text functionality. This has diminished interest in what were previously highly valued elements of deals, and has focused consumers’ attention on the amount of data in a package.

17% of all uSwitchsearches utilise

the data filter

Data is the driver

The view of the customer 6

For years it was driven by innovation: colour screens; dual screens; integrated cameras; touchscreen functionality; the first internet-enabled smartphone.

Since 2010, innovation has arguably focussed on incremental improvements interspersed with occasional leaps forward. All of which are then quickly absorbed into being standard requirements for all subsequent smartphones.

The pace of development has seen research and development costs spiral almost as quickly as skyrocketing marketing budgets.

From eye-tracking to squeezable sides and curved displays, the need for an easily expressed unique selling point has become essential at a time when the rectangular monolithic form factor has become the rule.

The relatively lukewarm reactions to recent handset launches for the sector’s hero brands Samsung and Apple demonstrate this growing sense of mobile malaise.

Nowhere was that more evident than in Wired magazine’s indifferent response to the iPhone 7 launch.

Reviewer David Pierce said: “Remember when the iPhone was exciting?

Although threatened by the growth in SIM only, traditional contract deals that pair a phone with a tariff are by no means dead.

More than 80% of consumers uSwitch surveyed are contract customers, though the number is steadily shifting downwards.[1]

For many people that have a mobile phone contract, switching operators is perceived to be too much hassle. Four out of five of those with a contract intend to renew it at the end of its lifetime.

The primary drivers of remaining in a contract are the desire to get either a new handset (75% of contract population) or to get more for less. Almost every customer we interviewed – regardless of their reason for upgrading – wanted a larger bundle for the same cost or to remain on the same bundle, albeit at a lower price.[1]

This, in effect, demonstrates the maturity of the mobile phone market in the UK.

The primary drivers of remaining in a contract are the

desire to get either a new handset or to

get more for less

Mobile contracts – the UK market sees a shift

The view of the customer 7

When every new design and app was an event in itself? When copy-paste was a feature to line up for? Those days are gone. Now, each year’s unprecedented combination of incredible technology feels ordinary, even expected.”[3]

Marginal gains in areas such as battery performance, screen quality and camera are fast becoming a similarly marginal interest to consumers too.

Increasing numbers are content to keep an older handset for longer. A poll conducted for Gallup in 2015 suggested that more than half of Americans will only replace their smartphone "when it stops working or becomes totally obsolete."[4]

Consumers surveyed by uSwitch were asked which elements of a contract were most important in making the decision to buy.

Across both SIM only and contract customers monthly cost was the primary factor, followed by the data allowance.

For contract customers the bundled handset came next, followed by the upfront cost of a deal.

Ranked last of seven criteria (including minutes and texts) is the network itself. Public perception seems to be that the mobile operator market is becoming increasingly commoditised and price-sensitive.[1]

No single network was singled out as being appreciated for a particular brand value and there is an expectation among customers that they are able to negotiate a better deal from their current supplier every time they are out of contract.

“Remember when the iPhone was exciting? When every new design and app was an event in itself? When copy-paste was a feature to line up for? Those days are gone. Now, each year’s unprecedented combination of incredible technology feels ordinary, even expected.” – David Pierce

The handset market

The handset market 9

While nearly two thirds believe handset price is the most important factor that influences their buying decision, one in four consumers cited security, suggesting awareness of a need for support at a time when privacy is an increasing requirement commensurate with the growth in mobile payments.

uSwitch research into consumer habits suggests that the following factors are the most important when purchasing a handset.[1]

Listed in order of most-to-least important, they are:

The handset market

The handset market 10

Market overview

While it is undoubtedly getting harder for handset manufacturers to compete with Apple and Samsung for sheer volume of devices sold, new opportunities are opening.

2017 has seen more niche devices being launched, as evidenced by a raft of product announcements at Mobile World Congress 2017. These were later followed by flagship handset launches such as the OnePlus 5 and the Galaxy Note 8.

Despite market leaders Apple and Samsung launching a limited number of flagship phones annually, the other market mainstays and new entrants continue to offer a wider range of devices: Sony launched four, ZTE unveiled three and LG, Huawei and Lenovo all announced a duo of sequels.

Nokia (resurrected in brand form by Finnish tech firm HMD Global) announced the return of its iconic 3310. Although this was probably as much about publicity as it is sales (the company’s long-term ambitions lie in affordable Android-powered smartphones), it had the desired effect of propelling the former market leader back into public consciousness, further demonstrating diversity in the market.

Competition is extending beyond the flagship device. While this is not surprising – different market dynamics drive volume in different territories – it is bound to impact on manufacturers’ ability to manage inventory.

Beyond the traditional handset brands, a combination of low cost digital marketing and the ability to quickly and effectively source new handset designs from Asia is enabling market entrants to build awareness quickly and easily.

According to analyst company IDC, the global market share for handsets at the end of 2016 saw Apple and Samsung neck and neck with around 18% each. Ambitious Chinese giant Huawei was in third place with a 10% market share.[5] Around 40% of the global market is made up of smaller manufacturers with relatively low market share.

Of the mobile device install base in the UK, 48% of people own Apple devices while 34% own Samsung devices. Sony, HTC, Nokia, LG, Motorola and Huawei collectively represent 12% of the market.[6]

The handset market 11

Shenzen-based OnePlus is a good example, while UK-based brands, such as STK and WileyFox, are meeting lofty ambitions for the domestic handset market and beyond, with the lattermost tracking to meet two million device shipments as of August 2017.[7]

The growth of the SIM only market offers a new opportunity to these entrants. Historically, these companies would need to invest significant marketing sums to nurture global network operator relationships.

Now they can build traction through low cost social media marketing, leveraging channels such as Amazon to retail devices directly.

An increasing number of consumers are weighing up the cost of acquiring a handset via upfront purchase or through use of credit combined with a SIM only tariff against the cost of a traditional contract where the tariff subsidises the handset purchase over 24 months. For the savvy consumer, challenger brands can offer a lower cost alternative to flagship devices, as long as they have the cash (or can obtain credit) to fund the purchase of a handset outright.

Source: Ofcom, 2017

The mobile device install base in the UK

The handset market 12

There is a growing propensity among manufacturers to offer finance options – even at 0% – to offset the initial outlay.

The increasing number of consumers that are looking beyond the high street for a non-Samsung/Apple device offers these challenger brands a significant market for the first time.

As well as new challenger brands gaining momentum, there is also a significant trend towards niche products in the market.

The elderly market, for example, is being catered for by the likes of Swedish manufacturer Doro, which claims to have a presence in more than 1,000 UK stores and harbours ambitions to become the largest brand in the shrinking feature phone market.

Perhaps the most surprising winner is Alcatel. Earlier this year, the manufacturer announced it was the third largest supplier of smartphones and leading brand in the UK’s feature phone sector. GFK figures quoted by the company’s Country Director for UK & Eire suggested a market share of greater than 10% – impressive figures for a brand rarely considered a heavyweight in the space.

The operator market

The operator market 14

With an increasing number of consumers looking outside traditional retailers for a phone or SIM only contract, how do mobile operators react?

To date, operator differentiation strategies have largely relied on perks or additional extras to entice customers and tie them in.

For instance, O2 offers early access to tickets for major concerts. Vodafone and EE lead with entertainment-led bundles that include free Spotify to Sky Sports subscriptions, while Three provides travellers a respite from bill shock with international roaming to popular destinations outside of Europe at no extra cost.

That being said, there is relatively scant evidence that these are of primary concern to the consumer, as evidenced by uSwitch research that found additional perks do not rank as a major consideration when taking out a contract.[8]

The operator market

This suggests that mobile operators will need to look beyond these value-add strategies to maintain loyalty. Bundling home phone with broadband (and increasingly television) is an obvious opportunity for operators to generate increased loyalty and cross sell services.

However, networks’ willingness to sell extra services does not yet appear to be matched by consumer demand.

Although this trend of bundling is likely to continue, it sits in contrast to the perceived value and freedom that’s driving increased uptake of 30-day SIMs. This suggests that the real winners will be the operators that successfully marry rewards for customer loyalty with high value or the perception of flexibility and freedom.

One area of contention for operators is their strategy around MVNOs. There are now more than 100 of these in the UK market and their total share is close to 15%.

Market snapshot:data pricing 30 day SIM only

The operator market 15

Some of the established mobile network operators (MNOs) have ventured into the space undeterred, however. Three has managed to combine a rich set of core value propositions with new premium perks, and we’re seeing other key players following suit. Big names are now attempting to offer greater value data at similar monthly costs teamed with their suite of benefits, but many are still struggling to crack the lucrative sub-£15-per-month segment.

These dynamic new players are undoubtedly breathing life into the SIM only space and causing significant disruption. In so doing, they’ve branched o u t b e y o n d b e i n g s o l e l y v a l u e propositions that appeal to cost-conscious consumers and now challenge the more established operators in the data-heavy segments of the market.

For example, a customer seeking a 30-day contract could choose to go with O2 or their wholly owned subsidiary giffgaff. But if they chose the latter, they could secure a similar tariff for a significantly lower monthly cost.

Arguably, the perks and overall customer experience are markedly different (or outright absent in the case of many MVNOs). However because giffgaff and O2 share the same infrastructure, consumers’ core usage experience should be indistinguishable. If price and data are the primary mot ivat ions for consumers , the emergence of a low cost and high value MVNO market potentially threatens operator revenues. In a market where a race to the bottom is a risk in itself, operators need to find new ways to meaningfully compete.

Market snapshot:data pricing 12 month SIM only

What happens next?

What happens next? 17

The 5G arms race continues unabated. And with a massive auction of the airwaves in the offing, stealing a march on the future of connectivity will be key to all providers.

Even more important than the advent of faster, full-fibre home broadband, 5G heralds the advent of true connectivity, clearing the way for everything from the connected smarthome to the driverless car and 4K video on the move.

Huge investment and acquisition is a strategy already employed by the likes of Three, and tensions around the distribution of 5G spectrum will be a conversation that’s unlikely to be fully resolved.

From a consumer perspective, an exciting inflection point may arrive where the propositions of mobile providers begin to challenge those offered by broadband providers, or at least complement them in such a way that reflects the massive shift in tastes and usage of UK consumers.

5G and beyond

There are more than 2,500 mobile retail stores in the UK, but this number will undoubtedly fall.

With the increased use of e-commerce portals to lower overheads, develop a deeper relationship with consumers and facilitate improved deals, the number of retail stores is unsustainable and will contract. Even flagship ‘experiential’ stores from the likes of Sony and Samsung (essentially, anyone other than Apple) find it challenging to remain open for any period of time, as ‘showrooming’, advice from friends and family and online research has superseded salesmen's patter in convincing consumers of their next smartphone purchase.

Historically, not being available at one of the high-street retail outlets was the death of a mobile device. But presence in bricks-and-mortar outlets will become less important to the second-tier handset

Retail no longer the key to success

What happens next?

What happens next? 18

manufacturers as new routes to market become cheaper and easier to access.

By taking a chance and ranging fledging phone brands, Carphone Warehouse already offers more SIM-free devices for sale online than contract phones. At the same time, marketing efforts spanning social media and influencer campaigns, editorially-driven awareness activity and paid search can drive a previously unknown brand into the hearts and minds of undecided shoppers with unerring accuracy.

The unbundling of device and tariff is an increasingly important aspect of the UK mobile market and goes some way to explaining the renewed enthusiasm for unsettling the establishment.

The ability of new brands, such as OnePlus, to build an online following for a fraction of the marketing costs required to partner with networks, combined with the availability of high value tariffs, opens the door to new opportunities and demographics way beyond the technology-minded early adopter.

The US market is already offering shared data plans to increase customer loyalty and is marketing these propositions fiercely.

In Finland, mobile contracts are not sold based on the amount of data they offer, as they are all unlimited. Instead tariffs from networks like Elisa Telecom are tiered by speed, enabling consumers to easily opt for superfast internet on their mobile. This approach has seen a commensurate drop in the rate of fixed line broadband usage, due to great 4G coverage, fast speeds and compelling pricing.

In the Far East, users can donate unused portions of bundles to others simply and effectively – a parent with 1GB of data remaining can pass it on to a child via an app.

This – and other – novel models are likely to gain traction among networks eagerly seeking differentiation as competition continues to grow.

Bespoke tariffs

What happens next? 19

In a world where almost every handset looks and feels broadly the same, manufacturers may look to new USPs to drive interest. In our survey of consumers, 25% considered security as a factor when choosing a handset.[1]

Handset security could provide differentiation

Historically the UK mobile market consisted of 30% prepay, also known as pay as you go or PAYG, and 70% contract. However, prepay is rapidly being replaced by 30-day SIM only deals.

The high value bundles offered by several MVNOs are likely to increase their market share, particularly with older and more price-sensitive demographics. Tech-savvy and data-hungry youngsters will be a valuable new market for the online MVNOs and will be a key segment to target in future.

MVNOs grow value through SIMO

The new handset brands will face a new headache – dealing with customer service issues. Because they principally sell their phones SIM-free, responsibility for service failure will no longer be that of the network, bringing phone-makers into the frontline.

Handset brands will need to work hard and invest heavily to ensure they provide a level of service and support that customers have grown to expect from established manufacturers well versed in the value of keeping people satisfied, as well as the potential of high-profile misfires with the wrong approach.

The well documented Galaxy Note 7 battery issues in the second half of 2016 demonstrated how a brand as strong as Samsung could be negatively impacted by a product failure. Newer brands that are less trusted would be unable to survive a similar issue.

Customer service and support issues will make orbreak tier two handset brands

What happens next? 20

This is one area where some manufacturers may be able to take the lead over their rivals and set themselves apart in a crowded market. Fingerprint recognition – a feature that did not exist two years ago – is now almost ubiquitous on new phones and consumer take-up is strong.

Blackphone from Silent Circle boasts that it is built from the ground up with privacy in mind. With the growth in concern over privacy and personal data, combined with increasing use of handsets as mobile wallets, this may provide a differentiation point in the future.

Conclusion

Conclusion 22

Challenges are faced by all the key stakeholders in the UK smartphone market, for a variety of reasons. For operators, the challenge is moving from the land grab strategy of boosting subscriber numbers to a market where they are known for differentiators. Already operators are commenting privately that operating margin and customer satisfaction are the two key criteria for future prosperity.

The challenge will be to offer differentiation in a market traditionally so dependent on pricing promotions to attract new customers. In today’s market, not only do networks need to compete with other operators. They now face an increasing challenge from over-the-top messaging and voice apps that sit on the networks, but do not contribute to network revenues. With roaming revenues disappearing in the European Union and the imperative to invest significantly in next generation 5G networks, operators will need to carefully consider future strategy.

They may need to look at a recent innovation from Sky TV, which rewards loyalty based on the length of time they’ve been a customer. Or they may need to look at how best to build in more freedom to their packages. Even if consumers don’t plan to leave, the perceived flexibility and freedom of entering and exiting a service has really resonated with consumers, as demonstrated by the success of 30-day SIMs and the explosive uptake of disruptor services such as Netflix that offer ‘click to cancel’. Alternatively they may wish to offer customers enhanced data speeds in exchange for higher costs, although this option has its own challenges. How does it stack up with network neutrality, for instance?

For the established handset manufacturers, the challenge will be delivering innovation that users really want. For ten years the default design of a smartphone has been broadly the same, suggesting that the form factor has been perfected. Is it due a significant period of disruption or further incremental improvements? Certainly any manufacturer that can deliver a step change improvement on battery life may benefit from a first-mover advantage.

Conclusion

Conclusion 23

A further test will be defending premium pricing against low cost challengers. Perhaps only Apple is in the position to maintain its premium position in the longer term. However IDC estimated that at the end of 2016 the Android platform accounted for 80% of global smartphone shipments. Apple could ultimately have a niche role in the global smartphone market – much as it does in the personal computer market.

The traditional handset brands such as Sony, Motorola and LG are facing competition that delivers an equally powerful handset at a lower cost. Xiaomi only started making smartphones in 2011 but by 2014 was the third largest manufacturer in the world according to IDC. Will we see other brands emerge as truly global players?

For the mobile user, this all means more choice than ever before. They can still choose a two-year tariff with a subsidised handset, but can also opt to buy a smartphone outright or on credit and to switch networks every 30 days. With an array of choices across smartphones, service providers, payment schedule and even a growing second-hand device market, consumers need more help and advice than ever. Navigating through the mobile minefield and finding the right choice no longer means a trip round the local high street.

1. uSwitch Consumer Survey, 3Gem, 4359 respondents surveyed March – May 2016

2. uSwitch Google analytics filter usage calendar year 2017 H1

3. https://www.wired.com/2016/09/review-apple-iphone-7-7-plus/

4. http://www.gallup.com/poll/184043/americans-split-often-upgrade-smartphones.aspx

5. IDC http://www.idc.com/promo/smartphone-market-share/vendor

6. Ofcom Jan 3 – Feb 29 2-17, 2041 respondents 16 years and over (https://

www.statista.com/statistics/387227/market-share-of-smartphone-manufacturers-in-the-uk/)

7. http://www.mobilenewscwp.co.uk/2017/08/03/wileyfox-track-hit-two-million-device-

shipments/

8. uSwitch research July 2017

Appendix

Ernest has turned an unabashed interest in gadgets into a desire to help consumers get the

best deal – whatever the device – for 10 years.

In his role as Senior Commercial Manager for uSwitch Mobiles, Broadband and TV, he

leverages unrivalled data insight to help networks, retailers and manufacturers deliver

market-leading offers to customers.

@ernestdoku 0203 872 5634 uSwitch Limited, The Cooperage, 5 Copper Row, London, SE1 2LH

About the author

uSwitch is an online and telephone price comparison and switching service, helping

consumers get a better deal on gas, electricity, home phone, broadband, digital television,

mobile phones and personal finance products including mortgages, credit cards, current

accounts and insurance.

uSwitch customers have the option to create an account which will prompt them when their

current broadband, credit card, energy, insurance and mobile deals are coming to an end.

For energy customers, the account can also automatically monitor the market and notify

them when they can move to a cheaper tariff - making future comparisons even simpler and

faster. In 2016, uSwitch saved UK consumers over £320m on their energy bills alone.

uSwitch is owned by ZPG Plc (LSE:ZPG), owner of some of the UK’s most trusted home-

related digital platforms including Hometrack, PrimeLocation, Property Software Group and

Zoopla.

About uSwitch