Three looks to dispel cheap reputation with CAPEX boost

Three has released the numbers for 2017 and they are pretty impressive, especially CAPEX, where it has outspent the majority of the industry.

Total revenues increased to £2.4 billion, a year-on-year boost of 7%, while total subscribers were up 10% to just over 10 million. 6.9 million of these subscribers were the attractive and lucrative postpaid kind. Another interesting number was the Net Promoter Score of 19, down from 20 in 2016 but anything above 0 is considered good. However, the statistic we like the most is 19%, the ratio of CAPEX to total revenue, we’ll come to that in a bit.

One area which should be a bit of a concern would be APRU, which has been steadily declining over the last couple of years. For 2017 the gross ARPU stood at £18.07, down 6% on the 2016 figure of £19.24. 2016 gross ARPU was down 4% on 2015, which in turn was 3% lower than 2014 which stood at £20.81. Three might be acquiring more customers year-on-year but it should have a look at bringing this number back up, or at least stabilizing it; continued decline isn’t fun for anyone involved.

Now onto the CAPEX column. Over the course of the 12 months, Three said it spent £459 million on CAPEX, a 30% increase on the previous year, primarily down to transformation projects in the network and IT systems. The main project seems to link back to an announcement made in February 2017 which saw Three bring Nokia on-board to deploy a cloud native core network, fully replacing the existing 3G and 4G core with a 5G-enabled proposition.

“We don’t use the word transformation lightly,” said Dave Dyson, CEO of Three.

Looking forward, Three is remaining tight-lipped on how much will be pointed towards CAPEX for this year, though the signs are positive. £459 million is a 19.1% ratio of total revenues, not all of which will be directed towards the network or IT systems but it would be a fair assumption a good amount will. Just as a point of comparison, O2 in the UK spent £724 million on CAPEX which is 12.6% of total revenues, while across the Orange group 17.5% was spent.

Three has developed a bit of a reputation for doing things on the cheap or begging for regulatory/legislative assistance to tackle the big boys, but this number dispels this assumption. Considering the reputation Orange has for spending big on infrastructure as opposed to the bells and whistles, outspending this colourful beast is quite an achievement. If Three can continue this trend it might be the first UK telco to actually live up to the claim of being customer centric.

Such investments are probably coming at the right time considering growing tidal way of data consumption. The growing appetite for data is not a new concept, but Three’s desire to be a data-centric telco means it will be impacted more than others. This is evident in the consumption numbers.

Over the course of 2017, the average data usage per customer per month stood at 6.8 GB, an increase of 7% over 2016. While this number might seem feeble in comparison to some nations, the US for example, Three claims it customers use three times more data than rivals. 2017 looked to be a serious year for network investment at Three, but 2018 and beyond needs to be just as potent if the telco is going to continue positive moves.

As users, we will continue to be more reliant on data, and up-coming changes to regulations will make it easier for customers to ditch a provider. Offering lots of data to a customer will be no-where near enough over the next few years, experience will have to be top-notch.

“Our digital transformation is a programme of work that will significantly enhance customer experience, employee experience and cost efficiency,” said Dyson. “Investment in spectrum, next generation network and IT underpins the opportunity to deliver improved results over the long term.”

We had a few brief discussions with Three customers, all of whom are based in London but travel for work and pleasure, and the feedback was pretty consistent. Three is okay, but poor in indoors and connectivity is pretty average (rephrasing for bashful readers) when outside of cities.

“It kind of is what it is,” said Owen Davies, one of your correspondent’s drinking buddies. “Cheap and cheerful, and works pretty well most of the time. Some decent perks like the ‘At Home’ offering.”

Millennials and younger generations are not as loyal as older demographics which makes the challenge even more difficult.

Three said in the statement it has been working to improve indoor coverage, but this year’s network investment should only be considered the tip of the iceberg. If Three wants to become a major player in the UK it has to permanently remove this reputation of ‘short arms, deep pockets’. 2017 was a good year for this, more of the same please.

Bells and whistles aren’t all that, just look at Orange and T-Mobile

When you talk about the telcos in the digital era one of the super trends we’ve been watching is content. But is the desire to diversify causing more damage than good?

The theory is sound. Invest in content to add value to a converged offering and source new revenue streams to counter declining numbers in the quarterly statements. But when you look at the telcos who are making the most positive moves in the industry, they aren’t the ones making super investments in content. They are focusing on the boring job of improving the network and customer experience.

We’re going to focus on a couple of different telcos to argue our point. On one side of the equation you have BT and AT&T, while on the other side you have Orange and T-Mobile US. One side is buying Time Warner and trying to dominate the football broadcasting game, while the other is spending billions on trenching fibre networks and securing important spectrum licenses for the 5G world. One side is struggling to assert itself in the connected economy, while the other is raring to go.

Let’s start with the pro-content telcos; BT and AT&T. The last few years have seen BT go head-to-head with Sky in an effort to control access to football in the UK. It’s an expensive business, more recently BT scaled back its football ambition only paying £885 million for 32 matches a year over 2019-21, and the benefits haven’t really been that exceptional. Growth in video subscriptions have stagnated recently and there have been questions about how good the offering actually is.

On the other side of the Atlantic, AT&T is spending more than $100 billion to acquire Time Warner. Admittedly through this deal AT&T will be purchasing some of the most popular TV assets worldwide, but the whole transaction has proved to be unpopular in some corners of the country, most notably in the White House. Even if securing Game of Thrones is a major coup for the content ambitions of the telco, you have to wonder whether $100 billion could be better spent.

Both of these telcos are viewing content as a means to diversify and futureproof the business for the connected economy where consumers are increasingly hungry for on-demand entertainment. At the same time, both of these telcos are finding their influence in their home markets dwindling and questions are being raised by investors surrounding the suitability of these strategies to take the business forward.

Now let’s have a look at the other side of the equation. Orange and T-Mobile US are two companies which are performing well in a tricky period and laying what look like very stable foundations for the future. Both of these telcos are also spending a lot of money, but the difference here is the investment is being directed more towards the network. It might be boring, it may not grab headlines, but it looks like it is a strategy which is working.

In Europe, Orange has been rolling fibre out like it’s about to go out of fashion. Over the last 12 months, €7.209 billion was spent on CAPEX as the team seemingly looks to create a better customer experience as opposed to trying to compete with the OTTs in the cut-throat world of content.

In the US, T-Mobile has been improving its 4G experience steadily over the last couple of years and is now turning its attention to nailing 5G. CEO John Legere and his cronies aren’t looking to entice customers through attractive content offerings or gimmicks, they are rolling out the network to as many people as possible and making it as fast as possible.

Both T-Mobile US and Orange are making very positive impacts on the markets in which they operate in. There are success stories through awards and positive financial results, and a very optimistic outlook for the next couple of years. The rest of the industry might believe tempting customers through the promise of shiny red balls might be the way forward, but ultimately success is being seen by the companies who are focusing on what really matters to customers; connectivity.

And this seems to be having a very positive impact on the spreadsheets. Orange released its financial results last week, with year-on-year increases popping up all over the place, while T-Mobile US can’t stop bringing on new customers. On the other side of the coin, BT’s CEO Gavin Patterson is looking like a man on borrowed time and AT&T is looking very uninspiring.

Perhaps the relentless pursuit of relevance is ironically making some of the telcos less so. The basic principle of communications service providers is to connect customers to the rest of the world. Maybe some telcos have forgot what their basic purpose is. These are the telcos which might struggle the most when it comes to the next era of connectivity.