Virgin Loses Appetite For 4G Spectrum
Virgin Media , the leading UK cable operator, has reportedly abandoned plans to participate in the 4G spectrum auction expected in early 2013. The operator will , however , continue with plans to roll out small cell and Wi-Fi infrastructure in major urban areas - targeting both the retail and the wholesale market s . BMI believes the decision not to participate in the spectrum auction is strategically sound as the cost outweighs the potential benefit . Further, we believe small cell and Wi-Fi investment in urban areas has the potential to increase Virgin's operational efficiency by leveraging existing infrastructure and matching demand from mobile operators for offload and backhaul capacity .
|Monetising Mobile Proves Challenging|
|Virgin Media Quad-Play KPIs|
In December 2011 Virgin was reported to be considering participation in the UK's spectrum auction for use of a femtocell LTE network in urban areas. BMI argued that Virgin entering the UK 4G market was positive for consumers, but that spectrum acquisition was not the most economical strategy for the operator, and operating as an MVNO had significant advantages (see our online service, January 23, ' Cost And Coverage: Virgin Looking At LTE Options ' ) .
Virgin has a rapidly expanding mobile division, which has delivered growth through standalone subscriptions and as part of quad-play packages (bundles including fixed-voice, broadband, pay-TV and mobile services). However, a total of 3.027mn mobile subscriptions at the end of June 2012 means the level of capital expenditure required to acquire spectrum and roll out an independent 4G network is unlikely to generate sufficient returns. This argument is reinforced by the failure of mobile revenues to keep pace with mobile subscription and quad-play growth since 2010.
BMI believes that with mobile a non-core part of Virgin's business there is little justification for a large outlay on spectrum. Furthermore, Virgin's existing MVNO deal with Everything Everywhere (EE) could be extended to the provision of 4G LTE services given the latter ' s ability to roll out LTE in the 1,800MHz band ahead of the full auction in 2013, with service launch expected in October 2012 (see ' Litigation Pause But Progress Remains Elusive ' , September 11) . Although operating as an MVNO reduces the scope for service innovation , we believe Virgin can leverage its infrastructure to get a beneficial deal on which to base its mobile service provision in the short-to-medium term , as well as improving wireline operational efficiency .
|Margins Key To Virgin's Success|
|UK Telecoms EBITDA Margins (%), T12M Q212|
Building On Backhaul
While Virgin has abandoned plans to acquire spectrum it is continuing with plans to roll out a small cell and Wi-Fi network in urban areas where wireless data demand is highest. Virgin has been offering Wi-Fi on the London Underground, with services available at 80 stations, which is set to increase to 120 by YE12. The service was free during the London Olympics ; however , it is now preparing to migrate to a paid service, and is also in talks to operate as a wholesale Wi-Fi and small cell provider.
BMI expects paid Wi-Fi services to remain a small - scale service ; however , the potential to market free Wi-Fi to multiplay customers has considerable potential as an upsell tool as well as in reducing churn. We are also positive about the scope for Virgin to re-sell capacity to mobile operators such as EE , Telefónica O2 , Vodafone and Hutchison 3 which can use Wi-Fi offload to reduce pressure on their networks . We consider the model to have application beyond the London Underground system, with operators looking to experiment with solutions to meeting wireless data demand growth in congested urban areas while maximising operational and capital efficiency.
Virgin ' s wireline infrastructure is often underutilised at times of peak demand for wireless data networks, which provides the cost rationale for it to exploit backhaul and wholesale opportunities where there are synergies with mobile operators. LTE rollout is expected to accelerate demand from operators for solutions as wireless data growth increases rapidly. BMI therefore believes Virgin could improve its operating margin by selling underutilised capacity on its fibre infrastructure, helping preserve high margins that have been a key tenet of its recent success.
Virgin can target wholesale opportunities with all mobile operators , but BMI believes there to be an opportunity for Virgin and EE to reach a mutually beneficial agreement for Virgin to access 4G LTE capacity for its MVNO service, while EE can benefit from Virgin's Wi-Fi and small - cell network, as well as its fibre network for backhaul purposes. We argue that backhaul provision is becoming an increasingly important competitive factor with the rollout of LTE, and EE must be able to match its rivals, such as Vodafone , which can use the Cable & Wireless Worldwide network (see ' Backhaul Benefit Tips The Balance As Vodafone Announces Agreement To Acquire CWW ' , April 23) . Therefore, while Virgin could sell Wi-Fi and small services to a range of operators, its best option may be to reach an exclusive agreement with EE.