In the broader market of unlimited UK geographical calls, BT has reduced its package to £7.95/month with three months free out of a 12 month contract. The equivalents are: TalkTalk - £8.99/month; Tesco - £9.87/month and Sky - £5/month.
BT has three main advantages in this market and is playing its advantage to the maximum:
Biggest network of users – BT incurs zero termination rates for most calls; other networks will all be net termination payers. Even though the rates are a lot lower than in the mobile world, the effect is identical – favoring the latest network with a multiplier effect. Largest and most loyal base – BT has 11.4m customers who have not signed up a cheaper package either because of extremely low call volumes or extreme laziness. The probability of these people moving to another tariff or supplier is low. BT is actually punishing this base by increasing the prices. In comparison, BT only has 2.3m lines of unlimited evening/weekend calls and 835k on unlimited calls. BT is targeting the majority of customers who shop around for the best deal here. Moment of weakness for competitors – the adverse publicity surrounding “free broadband” has created a lot of negativity for non-BT home telephony. BT will be calculating that there is a lot of pent up demand for a return to “quality”, if the price is right.
I think the biggest loser in the market will be TalkTalk who has nearly 2m voice-only customers alone – most of whom will not be within a contract period. The revenue loss will be quite severe because a line loss will involve the loss of line rental at £11/month and incremental calls to mobile, non-geographical and other add-ons. On a more important note with the cost of calls being now so low and the margins so limited, I cannot see how anyone can make a decent return with a standalone non-bundled voice product.
Also, it should be noticed that several Virgin Media (NASDAQ:VMED) customers will now be thinking about their telephony only deals with BT now cheaper than the equivalent Virgin Media M, L and XL packages. Again, the answer is lowering prices, just at the time Virgin Media needs all the margin they can muster.
The bigger question was whether this was what OFCOM had in mind when it freed of BT from regulatory constraints on pricing. I cannot for the life of me see how BT is going to make any money on these returning customers over 18-month contract even with the incremental add-ons. This is very, very close to predatory pricing and I suspect that several companies with nothing to lose may be thinking of taking BT to the competition commission.
In fact if I was Sky (BSY), I would be giving careful consideration to doing just that – if BT can take Sky to the competition commission for the PayTV market with the reasons still kept secret, Sky probably has a stronger case in the residential telephony market. This would also increase the possibility of people looking at a more complete “converged” market rather than just a standalone telephony, broadband or PayTV market.
Companies with much more to lose, such as Carphone and Vonage (NYSE:VG) UK, may just preempt any possible Sky move and decide the last rites of the residential voice market may just be best served by litigation.
I am reminded of one of the more famous Sir Christopher Bland quotes relating to the settlement with OFCOM: “We sued for peace and won…”