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Risky Business for EE

Quad-play competition may soon be coming to the UK, and that looks like better news for consumers than it does for the CFOs of the nation's telcos.

The newly launched TV offer from the UK's leading cellular operator, EE, does not initially include a mobile TV service, but the operator is already planning to let customers stream content over its 4G network and is now in prime position to introduce tariffs that lump fixed, broadband, TV and mobile services under one bill.

With fixed-line incumbent BT preparing to re-enter the consumer mobile market, and Vodafone pondering its own quad-play approach, consumers could soon find themselves facing a bewildering array of bundled service offerings.

But EE is entering dangerous territory with the introduction of EE TV. Unlike pay-TV giants BSkyB and Virgin Media, and broadband incumbent BT, it lacks rights to any exclusive content and hopes the functionality of the EE TV service will be enough to fuel interest in its superfast broadband packages.

Customers will be able to watch content on up to four devices at any one time, switch a movie from one device to another, program the set-top box remotely, and store content for future enjoyment.

Any customer subscribing to one of EE's fixed broadband deals will receive the TV service for no extra charge. That should dissuade some customers with itchy feet from defecting to one of EE's main broadband-and-TV rivals, and could tickle the fancy of consumers who like TV, but aren't desperate to receive premium content.

It's unlikely, though, to make EE a major TV competitor or radically transform its broadband fortunes.

EE provides fiber-based broadband services through a wholesale deal struck with BT in 2012, but it remains a relatively weak number five in the UK's broadband market, with 775,000 customers in June (when it last reported earnings). TalkTalk, the country's fourth-biggest broadband operator, currently serves more than 4 million.

While EE TV will not boost average spending per customer, it will clearly drive up costs. According to the operator, the set-top box is worth about £300 ($485), but customers will pay nothing towards it. If all of EE's existing broadband subscribers took up the deal, the cost to the operator on that basis would be £232.5 million (US374 million) -- about 30% of EE's EBITDA over the first six months of the year.

Moreover, EE may already be under some cost pressure in the broadband sector. Like TalkTalk, it rents capacity on BT's fiber network and sells this on to its own customers, but there have recently been complaints that BT's prices make it impossible for wholesale customers to compete profitably in the retail market. (See TalkTalk's Small Fiber Beginnings.)

If EE is dramatically to improve the attractiveness of its TV offer, it will probably have to invest in rights to exclusive or premium content, and this does not come cheaply. Last year, BT had to fend off criticism from investors after spending almost £900 million ($1.45 billion) on rights to screen Champions League football matches over a three-year period. (See BT Pays €1B+ for Euro Soccer Rights .)

No doubt, the availability of EE TV on the 4G network would be a draw. Yet this could also have cost ramifications if it led to a sharp increase in mobile data traffic, potentially requiring EE to make additional investments in backhaul capacity. (See Brighter Outlook For Dark Fiber in 4G Era.)

It could also explain, though, why EE has been pushing ahead aggressively with 4G broadcast trials. (See EE to Trial 4G Broadcast in Scotland.)

Ultimately, EE might consider plunging into quad-play to buttress the appeal of its offer, but tying customers into long-term contracts costing more than £100 ($160) each month could prove difficult in the straitened economic conditions.

To make quad-play seem worthwhile, EE would have to ensure it is less pricey for customers than buying services separately, and that is bound to squeeze margins.

With average revenue per user under constant pressure, it is no wonder the country's mobile operators remain wary of quad-play. But as BT flexes its own quad-play muscles, the move is one they may soon be forced to make.

— Iain Morris, Site Editor, Ultra-Broadband

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