O2 records lowest churn rates in UK - O2 UK success in customer retention linked to iPhone, loyalty schemes and SIM-only contracts

O2 UK has established itself as the best performing UK operator with regards to churn rates, a legacy of its two-year exclusive hold over the Apple iPhone, a successful loyalty programme and its pioneering SIM-only contract offers. According to a new GSMA Intelligence study, Operators winning battle against churn in Western Europe, O2 was the only UK operator to reduce its overall churn rate in both 2008 and 2009, the period in which it offered the iPhone on an exclusive basis. In its contract customer base, O2's churn rate decreased by a third over the period and stood at just 1.1 percent by Q4 2010, currently the lowest level in the UK market (see chart).

The Telefonica-owned operator launched the first-generation iPhone in November 2007, an exclusive arrangement that lasted until the launch of the iconic device by Orange UK in November 2009. During this two-year period, O2 was able to attract a number of high-value subscribers away from rivals and lock them into 18-month and later two-year contracts. Over the same period, churn at Vodafone UK rose from 2.8 percent to 3.4 percent, and from 2.2 percent to 2.4 percent at Orange. The impact was less evident at T-Mobile UK, which – prior to its recent merger with Orange – generally targeted lower-value customers. In further evidence of the iPhone effect, O2's churn rate rose slightly in Q1 2010, the first full quarter in which UK customers could buy the Apple device on rival networks. Vodafone began offering the iPhone in January last year, a factor that helped it reduce churn levels during 2010.

The report cites other factors that were influential in O2 reducing churn rates and retaining high-value contract customers. Its 'Priority Club' loyalty programme, launched in 2008, offers a myriad of benefits for contract customers, including the opportunity to buy advance tickets for concerts at O2-sponsored music venues. Subscribers in the highest spending bracket (over GBP80 per month) are entitled to VIP concert tickets, a six month early upgrade option and a personal account manager.

Until recently, O2 also led the UK market in migrating its customers from prepaid to contract tariffs, another factor that helped lower churn. Between 2005 and 2009, O2's contract share of total customers increased by more than 10 percentage points from 34.4 percent to 44.9 percent, edging ahead of Vodafone which grew its UK contract base from 38.6 percent to 44.0 percent during the same period (Vodafone regained the lead last year). O2 began making significant gains in prepaid-to-contract migration in 2007, partly due to iPhone customers churning from other operators but also as a result of its new 'Simplicity' tariff. This tariff – since mimicked by most of O2's rivals – is a SIM-only contract available on a rolling one-month basis, enabling customers to stay on the network after their initial contract has expired without the operator needing to fund another handset subsidy. Single month only contracts accounted for 18 percent of all UK contract subscriptions in Q2 2010, according to figures from UK regulator Ofcom.

Meanwhile, O2's position as the UK market leader was lost last year following the merger between Orange UK and T-Mobile UK to create Everything Everywhere. Uniting the third- and fourth-placed operators, the new market leader has focused strongly on growing its contract base and reducing churn. It now has 58 percent of its contract customers on two-year contracts and achieved a low contract churn rate of just 1.4 percent in 2010 (see chart)

According to the new GSMA Intelligence report, the migration from prepaid to contract, which is being driven largely by demand for smartphones, is starting to reverse years of rising churn in Western Europe's mobile markets. Overall churn for the region fell to 2.3 percent in 2010, down from an all-time high of 2.4 percent a year earlier, the study found. However, of the eight Western Europe markets tracked in the study, the UK was found to have the highest levels of overall churn in the region (2.9 percent in 2010), reflecting the highly-competitive nature of the country's mobile sector. At the other end of the scale, Switzerland was found to have the lowest churn rate, averaging just 1.1 percent in 2010.

Matt Ablott, Analyst, GSMA Intelligence:

The decline in churn levels across Western Europe is directly linked to increasing smartphone penetration, which has allowed operators to lock-in high-value customers to lengthy contracts. Those operators in the region that were able to offer the iPhone on an exclusive basis were the first to benefit from this trend. Like O2 UK, both Orange France and T-Mobile Germany were able to restrict churn in their contract base to around 1 – 1.2 percent during the period when they offered the device exclusively, despite rising levels of churn overall. O2, however, has been particularly effective in retaining these high-value customers even after their contracts expire: the Simplicity SIM-only model was such a success that it has since been replicated by most of its UK rivals. The operator has followed this up recently with a new offer that guarantees existing customers a smartphone upgrade every 12 months in order to keep them on the network, a strategy that should serve to keep its contract churn levels at around 1 percent (or below) for the forseeable future. However, the UK market is one of the most competitive in Western Europe and all the UK operators are now pursuing similar strategies. The recent improvements in churn levels at the new market leader, Everything Everywhere, and at Vodafone, reflect the fact that customer retention is now a key battleground in the UK market.

UK contract churn (%) by operator 2005-2010 (annual average)
Source: GSMA Intelligence, company data