Business Watch: Mobile market shrugs of recession

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Welcome summer holiday reading for the industry: the UK’s mobile phone sector recession is officially over

According to market research group GfK, the handset market has posted three consecutive months of annual growth for the first time in nearly two years.

Some 7.1 million handset sold over April, May and June: 366,000 more devices than were shifted in the same period last year, an increase of 5.15 per cent.

And June was particularly strong in comparison to the same month in 2009, with sales up 6.8 per cent.

“This turnaround has been fuelled mostly by the ongoing success of the contract market, which has been in decline [on a monthly basis] only twice in the last year due to the continued demand for smartphones,” said GfK.

It’s an impressive turnaround after a tough 2009 during which the market fell. That fall was caused by the contraction in the pre-pay market as the contract market actually grew last year.

“Throughout the last two years, prepay phones have seen a constant decline in sales as the demand for high-end prepay phones slows down,” said Ben Mansell, analyst at GfK.

“This is due to a variety of reasons, not least the recession – customers are less keen to replace their handsets as frequently as in the past.

“However, contract phones have seen near constant growth – new 24 month contracts offer better value for money and the demand for high-end smartphones sees no sign of slowing down.”

Now, GfK says that the pre-pay market – which until April had only seen a single period of growth during the previous 12 months – is back too.

In the second quarter of 2010, helped by key handset promotions, the prepay market finally saw growth, and with it the total market also grew for the first time in two years.

But before anyone gets complacent, the good times are not necessarily here to stay.

GfK cautioned that without continued promotional activity the prepay market may slip back into decline.

It added also that “the contract market may even see decline as the six-month gap between the end of the last 18-month tariffs sold and the first 24-month tariffs begins.”

Contract terms
It’s an interesting point and highlights the downside of longer contracts.

Before 2005, most pay-monthly mobile connections were sold as 12-month contracts; in 2006 there was a shift towards 18-month contracts; and in 2009-10 there has been a shift towards offering 24-month contracts as standard – that’s according to Ofcom.

The telecoms and media regulator found in its annual Communications Market Report that eight out of ten new pay-monthly contracts now last for two years, up from less than one in three the year before, and less than one in thirty in the second quarter of 2007.

“The savings which consumers make on longer contracts are in part related to the greater commitment they make to mobile operators, but are also driven by the cost of the mobile handset – with mobile operators able to charge a lower monthly fee as they recoup the cost of a subsidised handset over a longer period,” wrote Ofcom in its doorstopper report.

The watchdog also noted the increasing popularity of 12-month SIM-only contracts. These accounted for 15 per cent of all SIM-only sales in March 2010, compared to less than 3 per cent in March 2009, according to GfK, and some operators are offering alternative shorter contracts to those consumers who are wary of a 24-month lock-in.

“For example, Tesco Mobile launched the first 12-month contract on the iPhone 4 in June 2010, and in July announced that all Tesco Mobile contract tariffs would be available on a 12-month basis,” wrote Ofcom.

Ofcom’s report highlighted some other interesting tit bits about the state of the industry, particularly the incredible take-off of smartphone usage.

Smartphone ownership was up by 81 per cent from 7.2 million users in May 2009 to 12.8 million in May 2010.

In June 2010, over a quarter of people in the UK (26.5 per cent) said they had a smartphone, more than double the number two years previously.

And in the first quarter of this year nearly a quarter of adults accessed content or sent emails on their mobiles, up from 20 per cent in the first quarter of 2009.

Perhaps unsurprisingly, the same is true of almost half of 15 to 24 year olds.

Surfing the internet on your mobile phone is now the fastest growing mobile media activity and Facebook was the most popular mobile website, accounting for almost half of total time spent online on mobiles in December 2009.

And the good old SMS is still in fashion. UK consumers sent a record number of text messages (104 billion) in 2009 – equivalent to 1700 for every person in the UK and up 25 per cent on 2008 and 290 per cent on 2004.

Data and revenue
The result of all this activity is that data volumes over mobile networks increased by 240 per cent in 2009 as the market for wireless broadband – via smartphones of laptops with dongles – skyrocketed.

Take-up of mobile broadband increased by 8 percentage points among those aged 15 to 24 and by three percentage points among 35-54 year olds.

“This suggests that younger age groups may be switching from fixed to mobile broadband (and driving overall mobile broadband growth by doing so), while increasing fixed broadband take-up among older consumers has offset the resulting fall in take-up among younger people,” wrote Ofcom.

But the question remains, which companies are going to profit from all this increased activity?

Well, the sobering fact is that total retail telecoms revenue actually fell for the first time in 2009 with operator-reported retail telecoms revenue down by 2.6 per cent in 2009 to £30.4 billion.

According to Ofcom: “This was driven partly by the economic downturn plus the first year-on-year fall in mobile voice revenues (down 3.5 per cent) due to an increasing amount of bundled voice minutes and text messages included in line rental charges and an increase in SIM-only tariffs.”

Growth tends comes at a cost.

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