Vodafone's announcement earlier today that it will "remove" line-rental charges for some of its broadband customers is a sure sign that competition is growing fiercer in the UK market. (See Eurobites: Vodafone UK Ditches Line Rental Charge for Broadband Newbies & Upgraders.)
Yet the tactic seems unlikely to give Vodafone UK the lift it craves unless the operator can burnish its broadband offering in other ways. Much will ride on the long-awaited launch of TV services later this year. (See Vodafone UK Enters Quad-Play Fray.)
The pricing change is largely cosmetic. Unlike in certain other markets, UK broadband subscribers pay a line-rental charge of about £18 ($23.41) a month in addition to their broadband fees. Elsewhere, customers are sometimes billed a single fee that covers everything. Vodafone is essentially following suit and amalgamating the various costs to the consumer.
Fees may fall -- Vodafone says monthly prices will start at about £22 ($28.61) -- but not as sharply as consumers might expect. Because it lacks its own fixed-line broadband network, Vodafone buys a wholesale service from BT Group plc (NYSE: BT; London: BTA), the UK's fixed-line incumbent, and resells this to its own customers. Operators that rely on similar arrangements, including Sky and TalkTalk , have regularly complained that the gap between BT's wholesale and retail prices is too narrow for them to compete effectively in the retail sector. This is one of the main reasons those operators want to see Openreach , BT's access networks business, regulated more stringently, or even spun off entirely. (See BT Clings On to Openreach – Just.)
Associated as they are with the old-fashioned telephony service, line-rental charges are undoubtedly unpopular among customers who use the fixed line solely for broadband. Yet broadband services run over much of the same infrastructure as ordinary phone calls. As more consumers ditch the traditional voice service, it is fair that broadband users pay some kind of rental charge for the upkeep of networks. Stricter oversight of BT could help to lower these rates, but they will obviously not disappear completely.
That does not, however, mean Vodafone's pricing move is without merit. Broadband retailers may be keen on separating out the line-rental charge to highlight the competitiveness of their "broadband" fees. But presenting subscribers with one number is far simpler and more transparent. It would be surprising if other broadband retailers do not copy Vodafone's example and introduce similar changes. Operators may balk at simply totting up charges and leaving customers with a high single figure, which means prices could fall across the board (even if the decrease is relatively small).
In the meantime, Vodafone will hope to attract new customers before it launches its own TV service later this year. Having only recently entered the UK broadband sector in earnest, Vodafone is still a minnow, with only 137,000 customers at the end of June. Market leader BT had more than 9 million retail subscribers on the same date.
But to really generate interest, Vodafone will have to look to its content offerings. For BT, Sky and cable operator Virgin Media Inc. (Nasdaq: VMED), the broadband battle has largely moved into the TV space. BT and Sky have spent exorbitant sums on rights to screen top-flight soccer and other sports events, while Virgin is expected to launch a more sophisticated set-top box over the Christmas period. Around 1.6 million of BT's customers were taking a TV service at the end of June, up from just 1.2 million a year earlier. Unless Vodafone can develop a strong "multi-play" capability of its own, the pricing maneuvers may have a marginal impact on the operator's broadband fortunes.
— Iain Morris, , News Editor, Light Reading