TalkTalk banking on price promises to turn around churn
The latest trading update from TalkTalk appears to acknowledge that the broadband providers situation could be better and is very much highlighting that they believe their next results in three months time we mean they can at last report net adds in terms of customers once again and a lower churn rate.
The update covers the three month period to the end of 31st December 2016, and losing 42,000 customers in the quarter is something that is difficult to be positive about. There was 74,000 net adds for fibre customers (no split was available as to how many were part of the York FTTH roll-out) which is very positive and suggests that many of those leaving were old ADSL2+ customers.
"Short term impact on Q3 on-net performance, as expected
As highlighted in November, the high levels of re-contracting and the re-pricing of our legacy tariffs has had a number of short term impacts on Q3 on-net revenue: heightened churn amongst legacy cohorts that were repriced in line with our strategy of simplifying tariffs, driving on-net churn 1.6%; on-net net adds -42k, impacted both by churn and by lower new acquisition activity in October driven by our decision to launch integrated pricing a month earlier than the rest of the industry. These effects were partially mitigated by the positive impact of pricing activity on customers who have chosen to remain on legacy tariffs, and continued growth in fibre (74k net adds) and mobile (75k net adds) penetration, helping to limit the year-on-year decline in Q3 onnet revenues to 5.4% with ARPU of £28.05 (Q3FY16: £28.91).Extract from Q3 TalkTalk Group trading update
The change to a focus of fixed price plans, with no price rises guaranteed during the minimum contract term is proving popular with customers as some 516,000 re-contracted on an 18 month plan in Q3 (over 13% on the on-net base suggesting an on-net base of 3,969,000 customers). Interestingly in the first 4 weeks of January 2017 another 81,000 have re-contracted but 3 out of 4 are picking the 24 month contract. This big flip in choice of contract lengths is interesting and might be people choosing that, or could be a reflection of people not noticing there are other 12 or 18 month contract options. If the majority are fully aware of the contract options, then it does highlight the price sensitivity of the UK consumer broadband market and give an indication of how hard getting very high levels of newer generation broadband will be.
24 months is the longest contract Ofcom allows for broadband services sold to consumer and while we fully understand people seeking price certainty, if providers can lock in so many for such a long period it may distort the market, for example areas of rural Wales due to get Fibre to the Premises via Openreach in 2017 will see low take-up as TalkTalk does not see the GEA-FTTP product (at present). Also there is a risk for the operator that with a LOT of peoples contracts now ending in June 2018 to January 2019 we might see a surge in churn after a few quarters of stability.
With the continuing roll-outs of superfast broadband, the changes the Universal Service Obligation may bring by 2020 then ensuring that a large chunk of the consumer market is not able to exploit changes in technology availability is something that should cause sleepless nights at Ofcom and DCMS, beyond all the other reasons for losing sleep.
The other big bit of news is that Dido Harding is to step down as CEO in May 2017 with Charles Dunstone will take on the role of Executive Chairman. The success to Dido will be Tristia Harrison who currently heads up the TalkTalk consumer division. The vacancy left at Dixons Carphone by the Charles Dunstone move will be filled by the existing Deputy Chairmain Ian Livingstone on 30th April.
Hopefully the next set of results will feature more detail, but based on comparisons with product splits other providers do announce we can be reasonably confident in talking about what we see in terms of TalkTalk customers, and that is that it appears that the ADSL2+/fibre split has improved from 25% to 30% compared to the same quarter 12 months ago, and that while 40% of the fibre customer base are enjoying FTTC upload speeds above 2 Mbps, only ~15% see download speeds above 38 Mbps. Since TalkTalk sells up to 76 Mbps/up to 19 Mbps or an up to 38 Mbps/up to 1.9 Mbps as the two VDSL2 options, it is likely that some people are electing to buy the top tier product when their only benefit will be the faster upload. Is this perhaps a suggestion of how important upload is to some people, i.e. willingness to pay a £5/month premium.
One quick bit of advice to those TalkTalk laying out the shop pages, the options to boost your fibre speeds are not immediately obviously, and we suspect many will see the 'minimum guaranteed download speed' and speed range figures and think this is the best they can do, and not realise that the up to 76 Mbps option may change the estimates given, i.e. our suggestion is in the estimated broadband speed section make it clearer if faster speeds are available and also include some mention of upload speeds. The later issue of broadband providers never mentioning upload speeds is far from unique to TalkTalk.