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The popularity of SIM-only contract tariffs across Western Europe has led to a steep decline in the growth of the region’s prepaid connections base, new data from Wireless Intelligence has revealed. Annual growth for Western European prepaid connections sunk to a historical low of 2 percent in 1Q09, from a high of 8 percent at the end of 2007. Annual growth in the region’s contract connections has remained steady at around 10 percent over the same period.

Prepaid connections accounted for 56 percent of total connections in Western Europe in 1Q09, but reported a first ever sequential (quarter-on-quarter) decline in the first-quarter, falling by around 1.1 million, a decline of almost half a percentage point. Contract connections rose 1.6 percent sequentially.     

The decline in the prepaid connections base is attributed to the rise of the SIM-only contract model, which typically offers a postpaid tariff on a rolling monthly basis that does not require the customer to enter into a lengthy contract. Western European operators are using the tariffs as a strategy to migrate their prepaid customers to contract plans and reduce churn levels. The lack of a handset in the offers also means lower customer acquisition costs as the operators do not have to fund handset subsidies. Popular SIM-only offers include O2 UK’s ‘Simplicity’ and T-Mobile’s ‘Solo.’ MVNO Virgin Mobile UK has also been a pioneer.

In some major Western European markets where such tariffs are commonplace the prepaid connections base is already registering negative growth. Annual prepaid connections in 1Q09 declined by 3.3 percent in France, by 3 percent in Italy and by 2 percent in the UK. Among the big five European countries, only Germany (8.2 percent) and Spain (2.1 percent) registered positive annual growth rates in their prepaid connections base in the quarter.

The situation in Western Europe is unique as growth in prepaid connections still outstrips contract growth in most other parts of the world. According to our figures, global prepaid connections (including Western Europe) registered annual growth of 22.2 percent in 1Q09, more than twice the annual growth rate seen in global contract connections, which grew by 10 percent over the same period.

As we highlighted in an earlier edition of Snapshot, Telefonica’s O2 has been a successful pioneer of the SIM-only model via its ‘Simplicity’ tariff in the UK. O2 UK added 286,267 contract customers in 1Q09 – a rise of 18 percent year-on-year – which saw its contract customers account for 42.6 percent of its total base, a higher proportion than any of its major competitors. O2 said that Simplicity has been a key factor in migrating its prepaid customers to contract plans and reducing churn levels. The strategy is also seen as a counter balance to its targeting of the high-end market segment, which is based around offering premium devices such as Apple’s iPhone 3G (which O2 continues to offer on an exclusive basis in the UK).

However, the SIM-only deals typically generate less revenue than the standard contract arrangements that lock a customer in for 12 months or more. This was evident at O2 UK, which reported a 3.6 percent annual decline in ARPU in local currency terms to EUR24.2 in 1Q09. 

The SIM-only deals have not been the only driver of contract connections growth in Western Europe. In a bid to persuade cost conscious prepaid customers to migrate to contract plans some operators have developed ultra-low cost contract deals. Orange UK, for example, has launched a monthly phone plan starting at just £5 for 50 free minutes, 50 free texts and a Nokia 2630 handset, but it locks the customer into a lengthy 36 month contract (with a handset upgrade at the halfway point). The operator is also deploying a slightly different SIM-only strategy by locking in customers to an 18 month – rather than a rolling month – contract, but with price plans that significantly undercut rival SIM-only offerings. 

Joss Gillet, Senior Analyst, Wireless Intelligence

In recent years, prepay has been at the heart of mobile operators’ customer acquisition strategies and a main driver of market share increases; prepaid connections grew by around 7 percent a year between 2005 and 2007 in Western Europe. Today, it appears that the decline in prepay connections has been steep but the reality of the situation is diluted in the numbers. In many cases, mobile operators report registered connections that include inactive SIM cards, and also take into account redundant oversupply of SIM cards to distributors. This practice results in multiple-SIMs per user, which is distorting “real” growth and “real” penetration.  According to our research, “real” penetration stands at around 85 percent in Western Europe and not the suggested 126 percent. Since 2008, most markets are showing clear signs of connections growth slowdown and an urgent need to react to high churn levels and shrinking margins. However, if operators were to report “real” installed base (number of SIMs per user along with active subscriber base) it will show that there is still substantial growth to be achieved in both revenue and customer share.