Market Landscape and Forecast Mobile Operators, UK 2018-2022

December 2018 Update Topics Covered

. Operator landscape

. Other market developments

. Market forecast

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 2 Operator Landscape

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 3 O2 Continues "Customer-Led, Mobile-First" Strategy

. O2 Custom plans seek to improve billing transparency and flexibility – Choice of upfront cost and how to spread the remaining amount – Builds on flexible tariffs and O2 Refresh concept

. Partnership with Netflix rekindled in run-up to Christmas 2018 – Limited-period subscription again offered to new and upgrading customers

. Range of initiatives seek to build on customer-led image – New "breathe it all in" marketing campaign – New loyalty programme to reward tenure – Priority continues to seek to create greater brand engagement . Recent offers for music fans include interaction with 3D avatar

. Financial and operating results continue to impress – Good net additions, low churn, high net promoter score and brand loyalty – Major network outage on 18 December unlikely to have long-lasting impact

. Telefonica waiting on clarity on Brexit before initial public offering of stock

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 4 Vodafone Claims to Have Its "Mojo" Back after Recent Woes

. Contract churn falling, net promoter score at "best ever" level – Complaints falling, billing system troubles resolved

. Wide range of new initiatives to regain standing in consumer market – Recent launch of loyalty programme, VeryMe – Youth brand Voxi now selling mobile phones through PayPal deal . Zero upfront cost and zero interest . Flexible contracts that can be paused or cancelled at any time – Recent updates to TOBi chatbot ("TOBification") . Can now handle 32 types of customer enquiry . And sell SIM-only and handset plans – Update to V by Vodafone trackers in September 2018

. Vodafone seeking disruption in home broadband – Gigafast Broadband went live in Milton Keynes in September 2018 . Free installation and router, unlimited usage – 10 UK cities now included in partnership with CityFibre

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 5 Three Ups Focus on Segmentation, Readying for Big Push in 5G

. Focus on branding and partnerships for better segmentation – Three, iD, Superdrug, Smarty, Relish, Wuntu, EasyJet, Snapchat and others – Aims to become the UK's "best loved brand"

. Good momentum from Wuntu rewards app – 1.1 million active customers, more than 400 partners

. Go Binge replacing Feel at Home as leading message – Now has nine partners, but Vodafone Pass has more

. Lack of scale remains an overarching challenge – Operator has ambitious goals to double the size of its business

. Spectrum assets point to strong push in 5G – Greater focus on home broadband with fixed wireless access – Capitalize on pent-up demand for mobile data – Opportunity to overcome continued perception of a poor network

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 6 BT Makes Major Update to Consumer Strategy

. 24 new products and services launched as part of major overhaul

. BT Plus — its new converged service — was the highest profile – The best of BT: 4G, fastest fibre speeds, premium customer care – Already has more than 500,000 customers following launch in May 2018 – Reflects operator's focus on retention, rather than acquisition

. Range of other initiatives have steadily been introduced – Partnership with Enjoy for mobile phone repair – Mobile data gifting and zero-rating of BT Sport for EE customers – Launch of connected home services – Amazon Prime Video available on BT TV set-top box – "Stay connected" promise – Upgrade Anytime plans offer flexibility in smartphone purchase – New Flex plans are a hybrid of contract and pay-as-you-go

. Branding conundrum appears little closer to resolution – EE brand here for the long term, set to lead in 5G

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 7 BT Moves to Boost Its BT Plus Converged Offer

. Launch of Complete Wi-Fi in November 2018 seeks to add further value – Guarantees "strong reliable signal" in the home . For now, only available to Plus customers for £5 per month . Could lay foundations for launch of further services in the home

. Access to broadband, mobile, TV and Wi-Fi from multiple devices with a single bill – The best of BT: 4G, fastest fibre speeds, premium customer care – Mix-and-match bundles (TV and mobile are optional add-ons)

. BT is rightly positioning BT Plus at a premium – Wary of eroding value, as seen in other markets – Reflects BT's focus on retention and upselling, not acquisition

. The UK is only tentatively moving into converged consumer services – BT Plus will not radically change the UK's laggard position – But the operator has hinted at major enhancements in 2019 . If this triggers a response, the market could finally accelerate

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 8 Sky Mobile Slowly Making Impact As It Extends Partnership with O2

. Understood to have around 750,000 subscribers as at December 2018 – Yet to fully exploit extensive content assets . Strong marketing investment; it still has the firepower to disrupt

. Renewal of mobile virtual network operator (MVNO) deal with O2 shows commitment to mobile – Sky customers will gain access to 5G as soon as O2 launches . Cooperation on 5G testing . Premium content and 5G could form a potent mix

. Comcast acquisition should see little impact in medium term – US company has guided that it plans to keep Sky's operations independent

. Recent initiatives appear to be resonating well – Option to redeem unused data on phones and accessories – Launch of tablets with data rollover . And option to share data "piggybank" between five different SIMs in a household

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 9 5G Current Status and Market Forecast

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 12 Operators Engage in Trials ahead of Commercial 5G Launches

. In October 2018, Vodafone switched on 5G at a site in Salford – It claims to be first in the UK to carry full 5G traffic over a commercial network – It began trials in seven UK cities in 4Q18 – Impressive demonstration of UK's "first holographic call using 5G" . From England football captain Steph Houghton (in Manchester) to Newbury (see top right)

. BT began trials in east London and Canary Wharf in October 2018 – Focus on deployment (obtaining planning permission, managing power outputs and so on) and assessing customer experiences and usage – Recent 5G broadcasting trial at Wembley stadium (see bottom right)

. O2 has run trials in four test beds in England, Wales, Scotland and Northern Ireland – Every FTSE 100 company invited to participate – Big focus on public sector and the benefits to cities and communities – Aim is to seek feedback from customers and partners . Focus on virtual and augmented reality and live streaming

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 14 Government Initiatives Seek Leadership in 5G, Next Spectrum Auction Looming

. West Midlands selected in September 2018 as UK's first multi-city 5G test bed . Initial focus on the health, construction and automotive sectors . Overarching ambition to drive economic growth for the region . Project is set to receive an initial £50 million of funding

. £16 million test bed connects Bristol University, King's College London and University of Surrey – King's College London has installed 3.5 GHz and 26 GHz networks at its site, using Ericsson infrastructure

. £25 million allocated to six projects to become test beds for 5G systems – Focus on areas including rural communities, tourism, transport and healthcare – Led by small and medium businesses, universities and local government

. Bold forecasts see big benefit from 5G in the UK – Department for Digital, Culture, Media and Sport says 5G could boost GDP by £173 billion between 2020 and 2030

. Auction of 700 MHz spectrum — earmarked for late 2019 — will be vital to 5G coverage in UK – Sale will almost certainly include some form of coverage obligation – 3.6 GHz airwaves likely to be sold off at the same time

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 16 5G Forecast: Key Assumptions for Market Development

. Mobile broadband – Mobile broadband will be the leading use of 5G in the next five years. Adoption of 5G technology in smartphones will be driven by a need for speed and bandwidth, as data usage per device grows quickly . Our current forecast assumes that EE, Vodafone and Three will launch their 5G networks in the second or third quarter of 2019, with O2 following suit in early 2020 . 5G-enabled devices – 5G-enabled smartphones are expected to arrive on the market in 2Q19 – In the second half of 2019, all major Android makers will have a 5G-enabled smartphone on the market – The first 5G-enabled iPhone will be launched in 2020, and so dampen 5G adoption in late 2019 and early 2020 . Fixed wireless access – We expect that at least Three and EE will start offering fixed wireless access services as soon as networks are launched – For Vodafone and O2, this is also a viable strategy – However, high penetration of high-speed fixed-line broadband will limit the appeal of fixed wireless to niches . Machine-to-machine (M2M) and the Internet of things (IoT), and mission-critical will be important uses of 5G connectivity, but the numbers will be small within the forecast period

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 18 5G Connections Are Forecast to Surpass 800,000 by the End of 2019

5G connections by type, UK Connections (M) % of total 70 68 80% Mission-critical

60 70% 54 M2M and IoT 60% 50 50% Fixed wireless access 40 37 40% 66 30 Mobile broadband 21 53 30% 20 37 20% 5G as % of total connections 10 10 21 3 10% 0.05 10 5G mobile broadband as % of mobile 0 3 0% phone and data device connections 2019 2020 2021 2022 2023 2024 2025

. Mobile broadband will make up the vast majority of 5G connections for a long time . At the end of 2019, just over 700,000 5G mobile broadband connections are forecast, despite three network launches (EE, Vodafone and Three). The reason for this will be the lack of a 5G-enabled iPhone in 2019. 5G connections will grow to over 5 million in 2020 . We expect about 100,000 5G fixed wireless connections at the end of 2019. This number is projected to grow to about 2 million connections in 2025, equivalent to adoption by 7% of UK households

. Mobile connections, excluding M2M, will remain stagnant in the mature UK market, growing only marginally thanks to addition of children to the total and small growth in enterprise adoption . The share of prepaid connections will continue to drop, to reach 27% of the total in 2022, or 22.5 million connections, down from 29.9 million at the end of 2017 . The SIM-only proportion of the consumer contract base will continue to grow, albeit more slowly than in the recent past, to reach 50% at the end of 2022. We expect that contracts with phones will remain firmly on the market, given the increased prices of high- end devices . 0.7 million mobile broadband connections on 5G will be achieved by the end of 2019. In 2020 the addition of a 5G-enabled iPhone and continuous roll-out of networks will mean that 5G connections will surpass 5 million by the end of the year . Older technologies will gradually be switched off, 3G before 2G . Ofcom's actions to support consumers' access to information after their contracts have ended will mean that contract average revenue per user (ARPU) will decline in the next two years. This will be partially offset by increases thanks to growing prices of high- end smartphones. . Note that all mobile connection forecasts from this point onward exclude M2M and fixed wireless access connections

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 25 Mobile Connections: Business and Consumer

Mobile connections, excluding M2M and fixed wireless access, Mobile connections, excluding M2M and fixed wireless access, by customer type, UK (M) by customer type, UK (%)

85.5 84.8 85.2 84.6 84.7 84.8 84.8 84.9 13.5% 13.7% 13.8% 14.1% 14.1% 14.1% 14.2% 14.3% 11.5 11.6 11.8 11.9 11.9 12.0 12.0 12.1

46.4% 49.4% 51.2% 53.2% 55.3% 57.1% 39.6 41.9 43.6 58.2% 59.4% 45.0 46.9 48.4 49.4 50.4

34.3 40.1% 36.9% 31.3 29.8 35.0% 32.7% 30.6% 27.7 25.9 24.4 23.4 22.4 28.8% 27.6% 26.3%

2015 2016 2017 2018 2019 2020 2021 2022 2015 2016 2017 2018 2019 2020 2021 2022 Consumer prepaid Consumer contract Business Consumer prepaid Consumer contract Business . Business connections will remain roughly flat in the coming years – BT reports a growing number of business connections, but this gain is at the expense of other network operators . Once the uncertainty of Brexit starts to diminish, we expect business connections to return to gradual growth

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 28 Churn Will Remain Low Despite High Level of Competition

Monthly churn, UK 5%

Prepaid 4%

Blended 2%

Contract 1%

0% 2015 2016 2017 2018 2019 2020 2021 2022

. Contract churn will remain low despite a very slight rise in 2019 and 2020 when a small group of consumers prefer to switch to an operator that provides 5G services in their area . Prepaid churn will remain relatively high as consumers continue to switch from prepaid to contract connections

Market Landscape and Forecast: Mobile Operators, UK, 2018-2022 © CCS Insight 33 [email protected] ccsinsight.com @ccsinsight