Wednesday 26 October 2016

After O2 acquisition, get ready for price rises from 3 Ireland

Published 04/06/2015 | 02:30

3 Ireland can hike fees if former O2 customers are willing to pay
3 Ireland can hike fees if former O2 customers are willing to pay

Is the Irish mobile operator landscape getting less competitive? The question arises in the face of what looks like a series of price rises by the second largest operator, 3 Ireland.

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In summary, 3 Ireland is raising the prices of some plans and introducing new charges for others just months after completing the acquisition of O2 Ireland.

The net effect is that some plans are rising by as much as 50pc. At the same time, the operator looks set to water down its blanket core 'all you can eat' data proposition, the bedrock of its commercial offering for many years.

3 Ireland's reasons for doing all of this are pretty clear. It inherited a huge amount of bill-paying O2 Ireland customers who are used to paying more for calls, texts and data than 3 Ireland's existing (much smaller) customer base. So why give this potentially lucrative rump of customers stuff for free that they're willing to pay for?

Commercially, no one can blame them. 3 Ireland, owned by Hong Kong conglomerate Hutchison Whampoa, has lost a lot of money in Ireland. By its own reckoning, it has sunk €1bn into the operation with no profitable return. It needs to start making money here. So it makes business sense to try and leverage whatever it can from a customer base that may be willing to pay more than they are at present.

Or, in the case of its inherited 1.5 million O2 Ireland customers, to keep them as close as possible to the relatively high tariffs that these customers are used to paying.

This doesn't mean that the European Commission was wrong to allow 3 Ireland buy O2 Ireland. In a country the size of Ireland, four network operators was probably too many for the market to profitably sustain. And we must remember that we are yet to see two new operators - Carphone Warehouse and UPC - enter the market in a number of months.

Even still, 3 Ireland now has a very fine line to tread. Its central marketing message for the best part of a decade is that data is king and you shouldn't have to worry about monthly caps. Now it looks set to dilute that message considerably. The new motto will be: 'data is great but we're going to cap it on some plans as O2 customers are used to'.

In other words, it will start to get closer to the ongoing marketing strategy of its biggest rival, Vodafone. Vodafone is a veteran at trying to counterbalance data needs of customers with getting more money from them. It has had the lowest data-per-euro allowances in the market for some time. And there is a lot of evidence that it has lost tens of thousands of customers to rivals because of this. But it has been willing to take the hit because the customer hemorrhage has largely been in the lower value prepay category, while its lucrative bill-pay base has remained steady.

As it happens, Vodafone is raising its data limits a little. But financially, it has been worth it to have lower data allowances than rivals. It has squeezed more money out of loyal bill-pay customers who end up straying past the monthly data caps and provide the operator with high margin extra revenue.

3 Ireland can see this scenario clearly. It has inherited 1.5 million O2 Ireland customers who are used to paying the highest monthly data rates in the market. If even one in ten of those customers is happy to pay €5 or €10 more per month, that's an instant financial boost. 3 Ireland will argue that, even with its plan adjustments, it remains as cheap or cheaper than main rival Vodafone on key plans. As our price plan charts on the opposite pages show, this is true. And it also true that, by European and international standards, mobile data is actually quite cheap in Ireland.

On the other hand, for business users there is a lot more to choosing a plan than price alone. Coverage, network quality, data speeds and account management facilities all come into play. There are few independent metrics to definitively decide between operators on most of these issues. But at least one of them (4G speeds) appears to favour Vodafone more than 3 Ireland, however. And 4G is a core part of Vodafone's senior bill pay plans, whereas it will now be a €60 per year add-on with 3 Ireland.

Despite the new charges for 4G and the (considerable) speed differences, 3 Ireland arguably still has a data advantage over Vodafone. The fact remains that 15GB per month is a very, very attractive proposition. It means you don't have to worry about bill-shock charges because you gave your iPhone 6 to a child to watch some Netflix. It also means that you don't have to rely on patchy, expensive, error-prone wifi in public places because you can simply tether your phone to a laptop. And given a choice between 15GB of 8Mbs or 5GB (or less) of 30Mbs, the smart move is to take the bigger data allowance.

But that's from a customer's perspective. From an operator's viewpoint, it makes more sense to chase the marginal income that comes from that portion of bill-pay customers willing to fork out more for 1GB incremental 'add-ons'.

To date, that philosophy has been anathema to 3 Ireland. But now, it is set to become its commercial proposition.

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