Data helps defend against cheap no-frills tariffs

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Data helps defend against cheap no-frills tariffs

Tesco's SIM-only offering provides 100 minutes of calls and unlimited texts for a monthly fee of £6

By MATT LEWIS

Published: 16 August, 2010

READ MORE: UK | Tesco Mobile | Billing | MVNO

Britain's largest supermarket chain has launched what it describes as the country's cheapest mobile tariff - a SIM-only offering which provides 100 minutes of calls and unlimited text messages for a monthly fee of £6 ($10). One hundred minutes is not a significant amount of talk time, but unlimited texts for under 10 buck is a sweet deal for a sizeable portion of the mobile market who communicate primarily through this medium - typically the youth. Nonetheless, while the tariff may not appeal to most, it provides a frame of reference against which all mobile tariffs can be compared, forcing downward pricing pressure on all mobile service providers.

Tesco Mobile is one of the UK's most successful virtual operators and piggybacks on the O2 (Telefonica) network. Its supermarket parent is hugely profitable - $5 billion according to its most recent filing - and this likely gives it massive bulk purchasing capability in its dealings with O2 for network voice minutes and SMS volumes. Combined with one of the UK's largest retail footprints and an enormous customer base, Tesco Mobile has all the ingredients for a strong MVNO business.

Recent research conducted by Tesco showed that just under one-third of 16 to 24-year-olds are spending more than £30 a month on their mobile phone bills. It is this demographic which the MVNO is chasing with the new tariff.

The launch of such a mobile offering is important because as consumers shop around for the best tariff, Tesco's £6 a month deal acts as a frame of reference against which all mobile deals will be compared. As a result, it will be hard to justify signing up to a tariff which, for example, offered 200 minutes of calls and 500 texts for say £15.

Over time it is likely that such low SIM-only deals will place considerable downward pricing pressure on all mobile service providers. The problem for these carriers is that so much has now been invested in their networks that voice and SMS are essentially commodity items. While we don't know what pricing terms Tesco has negotiated with O2, it is likely that Tesco is the one negotiating from a position of strength. With four competing operators in the UK market (recently down from five operators), all with lots of voice and SMS capacity, an MVNO with deep pockets can play carriers off against each other.

The saving grace for operators is data. The ramp in internet usage on mobile devices has seen most operators struggle to maintain sufficient network bandwidth. Evolution to HSPA+ is at best keeping up with demand as opposed to adding spare capacity. The same is likely to be true for LTE when it arrives.

A tariff with bundled data will be more resistant to competitive pricing, and operators prefer to add voice minutes and text messages to the data bundle rather than discount the price of a package. However, there are only so many calls and messages a typical user needs. Some tariffs which include 1000 minutes of calls and 1000 texts might seem generous, but only appeal to high usage subscribers. While data is helping to stabilise tariff prices, it does not make them immune to long-term erosion.