Sky invites its customers to “believe in better”. UK mobile operators are unlikely to see the company’s incursion into their market quite so generously. Sky has already shaken up the UK TV and broadband markets. Mobile looks likely to be next. And it is unlikely to see the market as just a handy way to win loyalty with existing customers.
Sky’s entry — due at some point in the first half of next year — comes at a delicate moment for the UK mobile market. The announced acquisitions of EE by BT Group, and O2 by 3, would not only collapse a four-operator market down to three, but would also bring a well-financed, fixed-line incumbent (BT) back into mobile against Vodafone and Hutchison. Sky faces daunting competition.
The combatants have strong finances, able to withstand some margin pressure if Sky enters with a cut-price offering. BT generates about £1bn in free cash flow, after dividends; Vodafone’s investment programme has peaked and should generate more free cash flow in the next couple years.
But Sky might turn out to be a particularly aggressive new entrant. It has already saved money by deciding to be a virtual operator, renting space on O2’s network, rather than building its own. Virgin Mobile does something similar and has taken a 3 per cent market share. Sky will probably want more than that. It went from nowhere to number two broadband provider in Britain — after BT — in a decade, partly by offering attractive, unlimited data services. It may well do the same with cheap mobile data packages — although such a subsidy would hit profits. An aggressive market share push (15 per cent), would hit Sky’s profits by £160m, thinks Citigroup.
Sky can absorb it. The cost is the equivalent to 7 per cent of next year’s estimated earnings before interest, tax, depreciation and amortisation. The company might be happy to take that pain, if it means building a stronger competitive position against BT-EE. If Sky could land a network sharing agreement with 3-O2 (which is one of the possible consequences of that particular combination), its competitive position would be bolstered further.
The market seems blasé about Sky’s entry into mobile. Yet, its record on tempting customers into discounted broadband deals suggests that the intensely competitive nature of the UK mobile market will continue.
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