UK mobile operator EE has reported its worst quarter for postpaid subscriber additions in more than two years while continuing to lose customers at its prepaid unit.

In a results statement published Monday morning, the operator revealed that its postpaid business had grown by just 53,000 customers in the January-to-March quarter -- a huge fall from the 123,000 it signed up in the same period of 2014 and the 144,000 it attracted in the final three months of 2014.

Although the decline in the prepaid customer base narrowed to 195,000 from 321,000 in the year-earlier period, the net effect was further dip in the operator's overall user base, which totaled 22.36 million mobile connections in the quarter -- excluding M2M activities -- or about half a million fewer than in the first three months of 2014.

Figure 1: Losing Momentum Number of subscriptions/connections added. (Source: EE)

A joint venture between France's Orange (NYSE: FTE) and Germany's Deutsche Telekom AG (NYSE: DT), EE remains the UK's biggest mobile operator but is facing intense competitive pressure from infrastructure-based rivals as well as mobile virtual network operators (MVNOs).

Orange and Deutsche Telekom recently agreed a £12.5 billion (US$19 billion) sale of EE to UK-fixed line incumbent BT Group plc (NYSE: BT; London: BTA), which launched its own branded mobile service at the end of March through an MVNO deal with EE. (See BT Threatens Price War With New 4G Offer and BT Locks Down £12.5B EE Takeover Deal.)

Awaiting regulatory approval of its plans, BT expects to have finalized the takeover of EE by March 2016.

In typically upbeat fashion, EE flagged another surge in the take-up of 4G services, claiming another 1.7 million customers had signed up to the higher-speed services in the quarter.

That brings the overall number of 4G customers up to 9.3 million, representing more than 40% of EE's entire subscriber base (excluding M2M), and the operator says it is "firmly on track" to finish the year with 14 million 4G users.

EE saw turnover fall by 0.5%, to £1.54 billion ($2.34 billion), compared with the first three months of 2014, while mobile service revenues dropped by 1.7% to £1.36 billion ($2.06 billion).

As usual, EE blamed regulation for most of the decline, although mobile service revenues would still have fallen -- albeit by only 0.2% -- if there had been no such impact.

Moreover, despite the attractions of 4G, average monthly revenue per user shrank by 3.8% at EE's postpaid business, to £27.70 ($42), and by 7% at the prepaid division, to £4 ($6.10).

EE insisted that blended ARPU rose by 1.1% on an "underlying" basis -- that is, ignoring the effects of regulation.

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A bright spot in the quarterly results was the performance of EE's small fixed broadband business, which served a total of 884,000 customers in the quarter, 18.7% more than in the same period a year ago.

Just as BT is making use of EE's mobile network, so EE has been renting facilities from BT to provide its own broadband services, and these appear to have received a boost from EE's launch, in October 2014, of a broadband-delivered TV offer. (See Risky Business for EE.)

EE says its broadband business is currently the fastest growing in the UK market, with revenues up by 15% on a year-on-year basis.

Clearly, a merger between BT and EE would open up huge cross-selling opportunities, allowing BT to pitch its fixed-line offers to EE's mobile customers and offer more advanced wireless services to its broadband subscribers.

The UK communications and entertainment market is currently in a state of flux as operators from all backgrounds try to plug gaps in their portfolios of fixed, mobile and TV products. (See BT, EE Put Squeeze on Broadband Rivals and BT & EE Spur UK Sector Shake-Up.)

Operators fear losing business if they cannot compete in the so-called "quad-play" market, offering the full spectrum of services to UK consumers. (See Convergence: All the Rage in 2015.)

In the meantime, consolidation may also be afoot in the mobile networks sector. Hong Kong's Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) -- which owns Three UK , the UK's smallest mobile network -- has agreed a £10.25 billion ($15.6 billion) takeover of Telefónica UK Ltd. , whose O2 brand is currently the second-biggest mobile operator in the country. (See Telefónica Seals $15.2B O2 Sale to Hutchison.)

A deal could yet fall foul of competition authorities concerned about the ramifications for mobile consumers, but it would produce the UK's biggest mobile company, relegating EE to second spot and leaving Vodafone UK as the smallest network operator in the market.

Although EE might welcome the deal for relieving some of the price-based competition in the market, regulatory authorities may require Hutchison to sell capacity on its enlarged network to new MVNOs -- which could further decimate pricing -- before allowing the transaction to go ahead.

— Iain Morris, , News Editor, Light Reading