Contract subs growth outstripping prepaid in Western Europe - Over half of all mobile operators in the region now have more contract than prepaid customers

Mobile operators in Western Europe are increasingly focusing on migrating subscribers from prepaid to contract tariffs in the face of high penetration and saturation in many markets, according to new research by GSMA Intelligence. The number of contract subscribers in the region increased by an average of 7.7 percent per annum between 2007 and 2010, rising from 41.5 percent to 47.4 percent of total connections. In contrast, prepaid connections dropped by an average of 0.5 percent per annum over the same period. Subsequently, some 55 percent of operators in Western Europe now have more contract subscribers than prepaid, compared to 46 percent three years previously.

The start of this trend coincided with Western Europe reaching 120 percent market penetration at the end of 2007. At the time, this was by some distance the highest penetration level in the world, and operators had become aware that most markets in the region were very much in the mature stage. With limited opportunity to increase market share through attracting new customers, operators looked to lock-in existing customers to guarantee revenue streams.

This phenomenon has been especially evident in the UK, where since Q4 2007 the share of contract customers has risen from around a third (35.4 percent) to almost half (48.6 percent in Q2 2011) of all subscribers, due in part to the introduction of new types of contract tariffs aimed at attracting existing prepaid users to switch to contracts. These pricing plans have included SIM-only tariffs, contracts with short cancellation periods and 'bundled' deals (e.g. discounted home broadband service bundled with mobile). The rapid rise in the popularity of smartphones has also been a major factor, with operators offering large subsidies on high-end devices to customers who are prepared to sign long-term contracts. Among the country's major operators, Vodafone UK saw the most significant shift in this respect during the period, closely followed by O2 UK. Between Q4 2007 and Q2 2011 Vodafone’s contract share of total customers increased by more than 12 percentage points from 39.5 percent to 51.9 percent, while O2 moved from 37.0 percent to 48.2 percent during the same period.

In 2010, GSMA Intelligence estimates that total revenues generated by mobile operators in Western Europe declined by 1.2 percent annually, compared to a global average growth of 2.3 percent in developed economies. This trend clearly reflects the pressure facing operators in the region to stabilise revenues, and the role of contract services is crucial in achieving this. In Spain, Vodafone noted in Q2 2010 that "stable contract revenue [was] offsetting continuing prepaid weakness," and to maintain this trend the operator repositioned its contract pricing in Q2 2011 – this helped to increase value perception and in turn keep ARPU stable at EUR33 over the first half of the year. Similarly in the UK, contract revenues have been driving Vodafone's growth in service revenues since 2010, aided by a commercial focus on consumer retention (including the launch of its 'VIP loyalty programme'), an increase in mobile broadband and smartphone adoption, and a data attach rate which reached 82 percent of the contract user base in Q2 2011. TeliaSonera Sweden managed to increase its contract base to 63 percent of its total user base in Q2 2011 compared to 59 percent a year ago, and kept its total ARPU stable thanks to an increasing contract ARPU. The latter increased from EUR29 on average in 2009 to EUR31 in 2010 helped by mobile data growth of 8 percent.

Indeed, of the 89 operators in Western Europe in business between 2007 and 2010 (excluding 100 percent contract operators from the analysis), some 73 percent increased their ratio of contract-to-prepaid connections during the period, and this figure increases to 80 percent if we consider the year 2010 only. As well as those described above, notable rises in contract subscribers as a proportion of the total customer base in that year were recorded by Yoigo in Spain (from 45.8 percent in Q4 2009 to 51.8 percent in Q4 2010), T-Mobile Germany (44.0 percent to 49.5 percent) and both T-Mobile (52.4 percent to 58.6 percent) and KPN (50.3 percent to 55.5 percent) in the Netherlands.

However, in an example of how regulation can affect the prepaid/contract split in a market, the most significant increases in contract subscribers as a proportion of the total in 2010 were witnessed in Greece – where a mandatory SIM registration programme was introduced in late 2009. The removal of unregistered SIM cards from Greek operators' reported figures led to the proportion of contract subscribers in the country increasing from 24.3 percent of total connections in 2009 to 31.2 percent in 2010. The effect of this regulatory measure was particularly acute at Vodafone Greece, where prepaid connections virtually halved from 4.9 million in Q4 2009 to 2.5 million a year later leading to an upturn in contract subscribers from 25.9 percent of total to 39.6 percent over the same period.

Calum Dewar, Analyst, GSMA Intelligence:

The clear incentive for operators in Western Europe (and elsewhere) to migrate their subscribers from prepaid to contract tariffs is the promise of higher revenues and sustained market share. Typically, contract ARPU is around four times higher than prepaid ARPU, therefore the importance of contract services in offsetting prepaid revenue declines in saturated markets is paramount. In the latter part of the last decade, the game in Western Europe changed from increasing customer share through prepaid connections growth to sustaining revenue share via the retention of high-value contract customers. In addition, mobile data growth is offsetting declining voice revenues and, despite the wider availability of prepaid offerings, mobile data continues to be a mainly contract-based proposition. Therefore, the balance of contract and prepaid users is especially significant at this time, given that many operators are making a strategic move away from 'all-you-can-eat' data plans to tiered data pricing, the initial success of which depends on the retention of customers through contract renewals and handset replacements. In summary, operators in Western Europe must continue to invest in consumer retention programmes and develop innovative methods to retain higher-value contract customers, in order to preserve margins and sustain their revenue market shares in a tough trading environment.

ARPU (€) versus % contract connections (selected Western European operators), Q2 2011
Source: GSMA Intelligence