Spanish operators under pressure as economic crisis hits mobile sector - Market shrinks as operators withdraw subsidies; focus turns to customer retention strategies

Spain’s mobile sector has shrunk significantly in the year to date, a combination of a clean-up of inactive subscribers, the withdrawal of handset subsidies and the knock-on effects of the country’s economic crisis.

According to the latest GSMA Intelligence data, the market contracted by almost 2.5 million connections in Q1, though the decline was attributed mainly to the 2 million inactive SIMs cancelled by market-leader Telefonica Movistar in the quarter. The total market stood at 56.4 million connections in Q1, marking a 2 percent decline year-on-year.

Recent figures from the Spanish regulator suggest that the number of line losses has accelerated into the following quarter. The Telecommunications Market Commission (CMT) reported a record 380k customer cancellations in April, and announced last week that a further 254k losses were identified in May.

Movistar and second-placed Vodafone Spain are said to have shouldered the majority of the losses, shedding 205k and 196k lines, respectively, in May, according to the CMT. In both cases, the declines are linked to the withdrawal of handset subsidies by the two operators as part of a cost-cutting drive, replacing them with device financing schemes. Movistar said it had "completely removed" subsidies for new customers by March, while Vodafone followed suit a month later. Spain is thought to be the first market where either operator group has implemented the new strategy.

The situation appears to have led to a small boost in subcribers for Orange Spain, which is still offering subsidies; the France Telecom-owned network added 23k new lines in May. The fourth and smallest player Yoigo, which has reportedly been put up for sale by its Swedish owner TeliaSonera, lost 7k.

All four Spanish operators claim to have been impacted by Spain’s gloomy macroeconomic conditions. The country’s contracting economy has triggered a sharp decline in private consumption and pushed up unemployment to around 20 percent. This suggests that near-term subscriber growth could be limited to those offering low-cost deals. This would disproportionately affect the larger networks, possibly leading to churn to low-cost MVNOs such as Lycamobile, KPN’s Simyo and Lebara. The CMT reported a 130k rise in MVNO subscribers in May.

Telefonica cited weaknesses in Spain as largely responsible for a 54 percent decline in Q1 group net income (to €748 million). European revenue was down 6.6 percent (to €7.6 billion); this included a 10.7 percent revenue decline in Spain (to €3.9 billion) and a 13.7 percent revenue decline at the Spanish mobile unit (to €1.7 billion). Spain is still the group’s largest single market, accounting for 25 percent of Q1 revenue, but only just: Brazil accounted for 23 percent of sales in the period, reflecting the firm’s increasing reliance on its Latin American markets for growth.

The group also faces problems due to its exposure to the crisis-hit Spanish banks. Telefonica had €57 billion in debt at the end of Q1 and the escalating crisis has seen its debt ratings downgraded, sparking concern that borrowing costs could increase significantly over the next few years.

Vodafone is experiencing similar difficulties in Spain, which was the UK-based group’s second worst-performing European market after Greece in its last fiscal year (ended 31 March). In Q1, service revenue at Vodafone Spain declined by 9.5 percent (to £993 million). Like Telefonica, Vodafone blamed “intense competition, continuing economic weakness and high unemployment.” On the plus side, Vodafone talked up a 23 percent rise in Spanish mobile data revenue (to £171 million) and a 15.4 percent rise in fixed revenues (to £90 million).

Orange Spain appeared to buck the trend with revenues up 2.3 percent year-on-year on a comparable basis in Q1 (to €981 million), though growth mainly came from the fixed broadband side. Mobile revenue increased 1 percent to €797 million.

Matt Ablott, Analyst, GSMA Intelligence:

The dramatic decision to withdraw subsidies in Spain reflects the need to reduce subscriber acquisition costs in a market that is shrinking in both size and value. The strategy in part represents a refocusing of efforts on customer retention (rather than acquisition), as evidenced by new loyalty programmes and schemes to buy-back old devices from upgrading customers. In Telefonica’s case, it is also ramping up efforts to combine mobile and fixed broadband tariffs; the number of Telefonica customers using both services passed the 1 million mark in Q1. Such initiatives reflect the fact that for the operators that have scrapped subsidies, and are therefore seeing gross additions sharply decline and disconnections increasing, it is imperative to limit churn levels. Early signs are encouraging; according to the CMT’s latest figures, number portability requests reduced to 325k in May from about half a million in December 2011, while contract churn levels at the three large operators are improving. In addition to retention strategies, and with subscriber growth unlikely in the near term, the Spanish operators are now looking at ramping up smartphone penetration, increasing data revenue and maximising efficiencies behind-the-scenes in areas such as infrastructure and headcount reduction.

Spain mobile connections, Q1 2012
Source: GSMA Intelligence, company reports