Ofcom Telecoms 2007

The Communications Market 2007
4 Telecommunications
253
Contents
4.1 The year in telecoms
255
4.1.1 UK telecoms industry key metrics

4.1.2 Overall costs for residential consumers fell by 13% in 2006
4.1.3 Local loop unbundling accelerates
4.1.4 BTs share of voice call volumes falls below 50%
4.1.5 Majority of UK households have broadband
4.1.6 Broadband headline speeds double in 2006
4.1.7 Cable broadband accounts for less than 25% of all connections
4.1.8 Service bundling proliferates as LLU availability increases
4.1.9 Operators focus on retention
4.1.10 Operators focus on direct sales rather than those through third-parties
4.1.11 Substitution of fixed calls as mobile increases market share
4.1.12 Digital mums and silver surfers change landscape of internet
4.1.13 Different technologies deliver mobile broadband
4.1.14 Conditions in place for take-off of internet on mobile phones
4.1.15 New life in mobile advertising business models
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4.2 The telecoms industry
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4.2.1 Introduction
4.2.2 Revenue
4.2.3 Industry structure
4.2.4 Fixed line access
4.2.5 Fixed-line revenues
4.2.6 Fixed-line volumes
4.2.7 Mobile connections
4.2.8 Mobile revenue
4.2.9 Internet connections
4.2.10 Internet access revenues
4.2.11 Business markets
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4.3 The Telecoms User
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4.3.1 Introduction
4.3.2 Household spend and pricing
4.3.3 Fixed-line and mobile penetration
4.3.4 Fixed-line and mobile usage
4.3.5 Customer satisfaction
4.3.6 Switching
4.3.7 Internet access
4.3.8 Internet usage
4.3.9 Voice over internet protocol (VoIP)
4.3.10 Children
4.3.11 SMEs
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4.1 The year in telecoms

4.1.1 UK telecoms industry key metrics
UK telecoms industry
2002
2003
2004
2005
2006
Total telecoms retail revenue (bn)
32.3
34.4
36.3
37.9
38.5
8.6
8.8
8.6
8.3
8.5
Telecoms service revenues (bn)
40.9
43.1
44.8
46.2
47.0
Average weekly household spend on

telecoms services ()
60.7
64.2
66.7
65.7
64.7
Fixed access and call revenues (bn)
11.8
11.4
10.7
10.0
9.6
BT share of fixed revenues (%)
71.6
71.1
68.9
66.6
63.0
12.4
23.3
Total telecoms wholesale revenue (bn)
Proportion of unbundled exchanges (%)

Fixed lines (millions)
Mobile retail revenues (bn)
Active mobile connections per 100
population
35.2
35.0
34.6
34.1
33.6
9.0
10.5
12.0
13.0
13.9
82.6
88.0
99.5
109.1
116.6
0.4
4.3
7.7
13.0
18.9
22.2
25.1
26.0
27.6
2.3
5.2
10.2
16.5
21.7
Active 3G mobile connections per 100

population
Internet connections per 100 population
Broadband connections per 100
population
4.1.2 Overall costs for residential consumers fell by 13% in 2006

Increasing competition in the markets for fixed, mobile and broadband customers led to
continued price falls for UK residential telecoms customers during 2006. Our analysis of the
cost of a typical basket of residential telecoms services (consisting of a fixed line with
average call volumes fixed at 2006 levels, two mobile phones also with 2006 usage levels
and a broadband connection at average cost) shows that consumers would have paid 6.51
(9%) more for the same bundle of services in 2005 than in 2006 (Figure 4.1). In the five
years to 2006 the cost saving on the same bundle of services was 38% in real terms.
The largest like-for-like cost saving in 2006 was for mobile services, down 13%. Although
retail revenues from residential customers rose by 2% (mobile business revenues increased
by 15%), this fall reflects lower prices per minute. This was driven by operators increasing
the numbers of inclusive minutes in contracts (and usage has risen accordingly), while prepay prices have also fallen as competition heightens in a market where growth is slowing.
The average cost of a residential broadband connection fell by around 9% during 2006,
despite a doubling of the average blended headline speed to 3.6Mbit/s (rising to 4.6Mbit/s by
June 2007). The cost of fixed access charges and calls at 2006 volumes fell by 2% per
residential line, with average access charges going up (as rental packages increasingly
include a bundle of calls) and call spend falling.
Rising take-up of bundled communications services has contributed to the falling costs of all
services. (In this analysis the costs of individual services within a bundle have been
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allocated using the revenue splits in the raw data provided to Ofcom by communications
providers).
Monthly cost (s 2006 prices)
Figure 4.1
120
Real cost of a basket of residential telecoms services

104.82
100
86.98
29.83
76.36
25.27
80
60
20.00
16.11
45.04
43.20
40
20
0
Broadband
97.05
69.85
14.73
40.04
34.97
30.45
18.31
17.19
15.36
11.65
11.39
11.59
13.59
11.69
12.80
11.88
2002
2003
2004
2005
2006
Mobile voice
and text
Fixed voice
calls
Fixed access
Source: Ofcom
Note: Figures include VAT; figures have been restated from the 2006 Communications Market Report to reflect
more accurate data.
4.1.3 Local loop unbundling accelerates

A major driver of recent falls in the cost of telecoms services has been the accelerated rate
of exchange unbundling. During 2006 the proportion of UK premises able to receive fixedline and DSL broadband services based on local loop unbundling (LLU) increased from 40%
to 67% and by the end of March 2007 this figure had further increased to 72% (Figure 4.2).
This level of availability was achieved through the unbundling of just 25% of BTs 5,600 local
exchanges. The high upfront cost of unbundling an exchange (related to the purchase and
installation of equipment in an exchange) along with the relatively low cost associated with
connecting each additional customer means that LLU operators have tended to locate
equipment in exchanges connected to a large number of premises.
Figure 4.2
Proportion of unbundled exchanges and connected premises
80%
67%
72%
57%
60%
40%
45%
50%
% of
unbundled
BT
exchanges
40%
20% 12%
0%
Q4 2005
14%
16%
19%
Q1 2006
Q2
Q3
23%
Q4
25%
% of
premises
connected to
unbundled
exchanges
Q1 2007
Source: Ofcom / operators
As exchanges covering a larger number of delivery points tend to be found in more densely
populated areas (Figure 4.3), LLU availability is usually higher in urban than in rural areas.
This can result in lower-priced fixed telecoms services being more widely available in urban
areas; unbundling exchanges gives operators control over more of the value chain and
access to economies of scale not available when using BT wholesale tariffs. They are then
able to pass these savings on to consumers.
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Figure 4.3
Map of unbundled BT exchanges
Source: Ofcom / BT data; December 2006
Similarly, people living in areas without cable or an unbundled exchange (around 6.2m
households at the end of March 2007) do not have access to broadband services with higher
headline speeds than BTs standard up to 8Mbit/s DSL offering (such as Bes up to 24Mbit/s
and BSkyBs upto 16Mbit/s services). Around 4% of total UK fixed lines took LLU-based
fixed-line or DSL services at the end of 2006, equating to 7% of premises in areas where
LLU services were available (Figure 4.4). This was an increase of five percentage points on
the previous year and more recent data show that LLU penetration in unbundled areas had
further increased to 9% by the end of March 2007.
Figure 4.4
Proportion of premises in unbundled areas taking LLU services
10%
9%
8%
7%
6%
5%
2%
LLU take-up as
% of availability
4%
4%
3%
2%
0%
Q4 2005
Q1 2006
Q2
Q3
Q4
Q1 2007
The success of LLU fixed-line services in the UK has been partly driven by free broadband
offers. The launch of free broadband by TalkTalk in April 2006 for those taking fixed-line
services was a significant escalation in the industry battle for LLU customers. TalkTalk
struggled to cope with the response to its offer and some customers have experienced
connection delays, although there is evidence of improvements. In May 2006 Orange started
to offer free broadband to all customers committing to a minimum 35-a-month mobile
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contract. BSkyB followed with the introduction of a similar optional free broadband
proposition for customers taking its digital satellite services in July 2006.
Although LLU has opened up the retail market by allowing operators to offer differentiated
services by installing their own equipment in exchanges, the wholesale market provides
opportunities for an entrant to gain scale before deploying costly infrastructure of its own.
Vodafone and the Post Office have agreed major wholesale deals with BT in the past year,
while in May 2007 Cable & Wireless agreed terms to supply unbundled services to Virgin
Media customers in parts of the country not served by Virgins cable network. By the end of
2006, 4.2 million lines were using BT wholesale line rental services, compared to 2.3 million
a year previously (Figure 4.5). WLR growth has since slowed, and there were 4.3m WLR BT
lines at the end of June 2007.
The launch of bundled voice and broadband services also prompted a large increase in
carrier pre-selection (CPS) lines, whereby customers use another operator for voice calls but
continue to pay a line rental to BT. CPS lines peaked at 6.3 million in 2006. However, the
number has now begun to decline as CPS operators roll-out full LLU and migrate customers
to LLU-based services: at the end of June 2007 there were 6.1m CPS lines.
Figure 4.5
Carrier pre-selection, wholesale line rental and LLU lines
Lines (millions)
6.3
5.8
6
4.6
4.2
Carrier preselection
WLR
4
2.6
0.6
2.3
0.8
0.1
0
2002
2003
2004
Partial LLU
1.0
2005
0.3
Full LLU
2006
4.1.4 BTs share of voice call volumes falls below 50%

Growing take-up of wholesale line rental and LLU services has intensified competition in the
UK fixed-line market, and in 2006 BTs retail share of fixed voice call volumes (excluding
NTS voice calls) fell to under 50% for the first time (Figure 4.6). Indirect operators (those
offering services over another providers infrastructure such as CPS and WLR) were the
main beneficiaries as their share of voice calls increased from 25% in 2005 to 28%. Virgin
Medias share of voice call volumes was unchanged at 15%, as was that of other direct
network operators (9%).
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Figure 4.6
Market share of fixed voice call volumes
Share of voice call minutes
100%
80%
14.5%
16.7%
10.0%
10.1%
13.4%
13.5%
60%
20.9%
24.8%
28.2%
9.4%
8.7%
9.0%
14.3%
14.6%
14.9%
40%
Indirect
Direct
Cable
62.1%
59.7%
55.4%
51.9%
20%
48.0%
BT
0%
2002
2003
2004
2005
2006

Note: Excludes NTS voice calls
4.1.5 Majority of UK households have broadband

Ofcom data indicated that by March 2006, 13.3 million, or around 53% of UK households
had a broadband internet connection. During 2006 we estimate that the number of
residential broadband connections increased by 3.0 million, a slow-down from the 3.7 million
increase in 2005, as household broadband penetration approaches that of all internet
connections and PCs/laptops (64% and 71% respectively in Q1 2007).
Figure 4.7
UK residential internet connections
Connections (millions)
20
14.4
15
14.9
15.8
16.0
Broadband
12.8
10.8
10
5
12.4
13.3
2006
2007 Q1
9.4
5.8
1.3
2002
2.9
2003
2004
2005
Total
residential
internet
connections

Note: Figures have been restated from the 2006 Communications Market Report to reflect more accurate data
Broadband is becoming embedded in the daily lives of many consumers, making it vital to be
able to switch provider quickly, efficiently and without disruption to service. In December
2006 Ofcom published a statement on the broadband migration process which contained a
new general condition regarding Migrations Authorisation Codes (MACs), the codes required
to switch DSL broadband provider7. Under the new condition ISPs are obliged to provide
customers who are out of contract and request a MAC with the code within five working
days. This has made it easier for consumers to switch between DSL broadband services,
including to LLU providers.
Ofcom, Broadband Migrations: Enabling Customer Choice (December 2006),

http://www.ofcom.org.uk/consult/condocs/migration/statement/statement.pdf
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4.1.6 Broadband headline speeds double in 2006

While broadband prices continued to fall during 2006, headline connection speeds continued
to increase. At the end of 2006 the average blended headline broadband speed across all
residential and SME connections was 3.6Mbit/s, more than twice the figure of 1.6Mbit/s at
the end of 2005, and by the end of June 2007 this had risen to 4.6Mbit/s (Figure 4.8).
Figure 4.8
UK broadband connections by headline connection speed
15
Broadband lines (millions)
Faster than 8Mbit/s+

Faster than 2Mbit/s and up
to and including 8Mbit/s
10
Faster than 1Mbit/s and up

to and including 2Mbit/s
Faster than 512kbit/s and
up to and including 1Mbit/s
Less than or equal to

512kbit/s
0
2002
Data not available

2003
2004
2005
2006
2007 H1
Headline speeds will continue to rise during the next year (although as discussed below,
actual speeds experienced are often significantly lower). BT is upgrading the speed of its
basic broadband connection to upto 8Mbit/s, and some LLU operators, like Be with its up to
24Mbit/s core proposition, are using speed as a point of differentiation. Virgin Media is in the
process of upgrading its cable network and is offering broadband download speeds of up to
20Mbit/s. From 2008, BTs 21CN will use ADSL2+ technology to potentially provide speeds
of up to 24Mbit/s.The table below shows how these speeds translate into the time taken to
accomplish various common online tasks.
Figure 4.9
Theoretical time taken to perform online activities
Headline connection speed

56kbit/s
512kbit/s
Download 250kB webpage
36
seconds
4 seconds
Download 5MB music track
12
1 minute
20 seconds
minutes 18 seconds
Download 25MB video clip
1 hour
Download low quality movie

29+hours
(750MB)
Download DVD quality
movie (4GB)
6+ days
2Mbit/s
8Mbit/s
24Mbit/s
1 second 0.3 seconds 0.1 seconds

5 seconds
2 seconds
6 minutes 1 minute 40
25 seconds
31 seconds
seconds
8 seconds
3 hours 15
minutes
50 minutes
17 hours 22
minutes
4 hours 27
minutes
12 minutes
4 minutes
30 seconds 10 seconds
1 hour 7
minutes
22 minutes
Source: Ofcom
UK broadband customers are therefore, on average, getting a better deal in terms of the cost
and the headline up to xMbit/s speed of their service. However, the actual speeds received
by broadband users are often much lower than the headline speed of the connection and are
affected by various factors including the quality and length of the physical line from the
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exchange to the customers premises, and connections being contended, meaning that
during busy periods speeds will slow as multiple premises share the same bandwidth.
The level of take-up of ADSL for broadband access, which uses existing copper wires from
exchange to the customer premises, places a constraint both on maximum broadband
speeds and also on actual speeds experienced, which decline rapidly with distance from the
exchange (Figure 4.10). These issues are discussed in detail in the Broadband Digital
Progress report8 published by Ofcom in April 2007. The speed of cable broadband
connections also varies with the number of simultaneous users.
Figure 4.10
Maximum DSL speeds by distance from BT exchange
25
Speed (Mbit/s)
20
15
ADSL2+
ADSL1
10
5
0
0.0
1.0
2.0
3.0
4.0
5.0
Distance from exchange (km)
Source: http://www.tpg.com.au/dslam/faq.php
UK operators do not currently seem to see a business case for rapid investment in access
networks which can deliver higher speed residential services, such as fibre to the home
(FTTH) or fibre to the cabinet. However, BTs announcement that it plans to deploy FTTH to
offer speeds of up to 70Mbit/s in greenfield sites in the future is the first sign that highly
localised high-speed fibre access will become available to some residential consumers.
4.1.7 Cable broadband accounts for less than 25% of all connections
At the end of 2006 cable modem broadband accounted for 23.5% of all UK residential and
SME broadband connections, a considerable drop from its 57.4% share in 2002 (Figure
4.11), although over time the number of cable broadband connections has increased from
under 800,000 to over 3 million. Cables share of broadband connections has declined as a
result of higher availability of DSL (nearly all premises are connected to a DSL-enabled
exchange while cable broadband is only available to around 55% of households) and, more
recently, increased competition from LLU operators.
The approach of Virgin Media, the UKs largest cable provider, has been to promote its
broadband offering bundled with TV, fixed-line and, more recently, mobile telephone
services to consumers in its cabled areas. It has not sought to increase the footprint of its
cable network, but has looked to increase the availability of its services by utilising wholesale
LLU services. An agreement with Cable & Wireless (C&W) in May 2007 gained Virgin Media
access to an additional 4 million UK households by the purchase of wholesale LLU services.
Virgin Media was already providing broadband to over 250,000 off-net DSL customers via its
Virgin.Net ISP, whose customers are currently being switched to C&Ws LLU network. It
Ofcom Communications Market: Broadband 2006 Digital Progress report:

http://www.ofcom.org.uk/research/cm/broadband_rpt/broadband_rpt.pdf
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intends to launch a video on-demand IPTV service, combined with a Freeview digital
terrestrial television (DTT) box, for its off-net customers.
Cables share was squeezed by LLU operators during 2006. Of particular note was BSkyBs
entry into the broadband market in June 2006, which put the company in direct competition
with Virgin Media for triple-play (digital TV, fixed-line and broadband) customers. At the end
of June 2007 BSkyB had 716,000 broadband customers.
Figure 4.11
Share of residential and SME broadband connections
Share of connections
100%
80%
57.4%
60%
44.0%
31.8%
0.5%
26.9%
23.5%
22.3%
1.9%
10.0%
16.8%
47.7%
42.6%
35.0%
Other
Cable
modem
LLU DSL
0.3%
40%
44.0%
0.2%
19.4%
29.9%
22.7%
25.6%
23.6%
23.4%
23.9%
25.8%
2002
2003
2004
2005
2006
2007 H1
BT wholesale
DSL
BT retail DSL
20%
0%
4.1.8 Service bundling proliferates as LLU availability increases

A key benefit of LLU is that allowing operators to locate their own equipment in a BT
exchange enables greater service differentiation as unbundlers are no longer tied to BTs
wholesale products. One outcome of this has been the proliferation of multiple
communications service product bundling in the last 18 months (Figure 4.12), much of which
is provided over unbundled local loops.
Figure 4.12
Bundled service offers from major suppliers, June 2007
Broadband and mobile
Broadband, mobile and TV
Broadband, fixed and mobile
Converged offers
Y
Y
Fixed, TV and mobile
Vodafone
Y
Y
Fixed and mobile
Virgin Media
Y
Y
Broadband, fixed, TV and mobile
Fixed and TV
Toucan
Tiscali
Tesco
TalkTalk
PlusNet
Pipex
Orange
Broadband, fixed and TV
BT
BSkyB
Fixed and broadband
Be (O2)
AOL
Standalone broadband
Y
Y
Y
Y
Y
Source: Pure Pricing

Note: Highlighted box denotes that the combination of services requires the purchase of additional services
Service bundling is popular with operators as it offers the potential to reduce churn in a
market characterised by rising acquisition costs; it can also increase average revenue per
user even though the prices of individual services are falling. Consumers typically benefit
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from discounts when buying a selection of communications services from a single operator
and in many cases receive a single bill and point of contact for customer services.
IPTV services are slowly being introduced by LLU operators and in August 2006 Tiscali
acquired Video Networks, operators of the London and Stevenage IPTV service
HomeChoice. The service is being re-branded Tiscali TV and is being rolled out in a number
of UK cities including Birmingham, Edinburgh and Newcastle, to be followed by parts of
Leeds, Sheffield and Liverpool. Tiscali plans to launch its triple-play service combining
fixed-line, broadband and TV services in September 2007, and in July 2007 announced the
purchase of Pipexs broadband and voice divisions for 210m.
In December 2006 BT launched its hybrid IPTV service BT Vision, which combines a
Freeview box with the ability to access additional video-on-demand films, TV programmes,
and music videos over a DSL broadband connection. Orange also plans to launch an IPTV
service (Orange TV) and BSkyBs premium channels are already available to HomeChoice
customers via BSkyBs Sky by Wire service.
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The complexities of quantifying broadband prices

Ofcom research in Q1 2007 indicated that 52% of people in the UK with broadband
purchased it in conjunction with another communications service, thereby often receiving
heavy discounts on the price of stand-alone broadband. Some suppliers provide free
broadband when customers buy additional communications services, the cost of the
broadband being subsidised by other services in the bundle.
A recent OECD report compared the lowest prices for broadband, on a cost per Mbit/s
basis, across 30 countries, of which the UK ranked 16th. The UK data came from three
ISPs (BT, HomeChoice and Telewest). As such it excluded pricing data from several
leading LLU operators which are gaining market share as a result of their low-priced
offerings. The report also looked at broadband prices in isolation, despite the fact that so
many UK consumers now buy broadband as part of a bundle of services, and some of the
largest broadband providers, like BSkyB, TalkTalk and Vodafone, do not supply standalone broadband products.
In the OECDs analysis, Japan, which has implemented fibre to the home (FTTH) offering
speeds of up to 100Mbit/s, had the lowest cost per Mbit/s. However, it is difficult to make
a direct comparison of broadband packages between countries; differing topographies
and population distributions mean that a service which is economically viable in one
country may not be in another, due to the level of infrastructure investment required. UK
broadband providers have not yet seen a rationale for the rollout of FTTH, meaning it is
unlikely that the UK will be able to challenge the cost per minute of those nations with
FTTH in the near-to-mid term.
There are also problems with using cost per Mbit/s as it fails to take into account that
many consumers have yet to see the need for broadband speeds in excess of those
already available in the UK. Recent Ofcom consumer research showed that broadband
speeds were not the main barrier to the use of bandwidth-hungry services like video
streaming in the UK (lack of interest was the key constraint).
Although international comparisons of broadband offerings and prices, such as the OECD
report, can be useful, more complex analysis, taking into account service bundling and
other points of service differentiation (such as data caps) is required. The 2007 edition of
Ofcoms International Communications Market Report (scheduled for publication around
Christmas 2007) will explore this issue further and place UK broadband pricing in an
international context.
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4.1.9 Operators focus on retention

In a market characterised by high acquisition costs and falling growth, operators have
focused strongly on customer retention over the last 18 months. The proliferation of bundled
offers can be seen as a manifestation of this, with operators looking to tie customers in to
multiple services with a longer contract term.
The migration to longer contracts is a key trend across the telecoms industry. Examples
include AOL increasing the contract length on its 2Mbit/s and 8Mbit/s offers from 12 to 18
months in June 2007 and the accompaniment of BTs fixed-line price reductions in June
2007 with minimum contract lengths of 18 months on Options 2 and 3. Orange Home is
currently offering 300 off/a free laptop to anyone signing up for three years to their 14.99 a
month DSL service.
However, it is in the mobile sector where the migration to longer-term contracts has been
most pronounced. Until 2005, the maximum contract length available was 12 months; in the
first three months of 2007, 79% of new contracts were for 18 months or longer (see Figure
4.13). In July 2007 the launch of a 24-month contract by O2 meant that all five network
operators were offering customers two-year contracts.
In the USA, AT&T signed an exclusivity contract with Apple to supply the iPhone, and
subscribers wishing to obtain the handset were only able to do so by signing up for a twoyear contract, even though it was not subsidised. It is not clear whether this even longerterm approach to contracts will be repeated when the iPhone is launched in Europe later this
year, although Apple is apparently seeking similar exclusivity deals with European carriers.
Percentage of total sales
Figure 4.13
100%
Lengths of new mobile contract connections

11%
80%
24%
27%
41%
55%
60%
40%
89%
64%
73%
79%
24 months
82%
18 months
76%
73%
58%
20%
45%
35%
12 months
27%
21%
18%
Q4
2006
Q1
2007
Q2
2007
0%
Q2
2005
Q3
2005
Q4
2005
Q1
2006
Q2
2006
Q3
2006
Source: GfK
Twelve-month contracts are still available on all networks, but the migration to longer
contracts is a reflection of the lower prices offered to customers willing to commit for longer
periods, as operators pass on the benefits of lower acquisition costs. One consequence of
this is seen in the greater usage levels associated with lower prices and higher levels of
inclusive voice and messaging. A second, longer-term consequence is likely to be a
reduction in switching, while a third could be a longer handset replacement cycle which may
place a constraint on the adoption of converged services by delaying take-up of new handset
technologies.
4.1.10 Operators focus on direct sales rather than those through third-parties
During the last 18 months, motivated by their focus on customer retention and a desire to
reduce acquisition costs, mobile operators have sought to increase sales through their own
direct channels rather than through third-parties. O2s purchase of The Link in June 2006
265
resulted in over 250 more operator-owned stores on the high-street, with O2 retaining
around 100, 95 being sold on to 3UK and the remainder to other operators. Vodafones
announcement in October 2006 that it was withdrawing from Carphone Warehouse was in
part also motivated by a new focus on direct sales. And 3UKs roll-out of over 100 new
stores since October 2006 has resulted in the proportion of direct sales increasing from a
claimed 33% to over 60% in May 2007.9
Operators have also made some of their special offer tariffs available only through their own
channels; for example, in July 2007, T-Mobile promoted free handsets with free crossnetwork calls 'only when you buy direct from us'. Similarly, all operators have focused on
their own internet sales; for example, Oranges web-exclusive offer in July 2007 offered free
Orange-to-Orange texts on its Speak Easy tariff.
4.1.11 Substitution of fixed calls as mobile increases market share

Ofcom research indicates that by the end of 2006 there were as many mobile-only
households as fixed-only households (10%). The vast majority of households have both
mobile and fixed lines and the requirement to have a fixed line for DSL broadband access,
combined with falling prices for fixed and broadband service combinations, constrains further
decreases in fixed-line numbers. Research by Analysys in 2007 found that the UK had the
second lowest proportion of mobile-only households in Europe (Sweden had the lowest).
However, there is evidence of accelerating substitution of fixed calls by mobile calls (Figure
4.14), driven by falling mobile prices and an increasing number of mobile contracts with a
large number of inclusive minutes. This trend is likely to continue - GfK reports that in the
first six months of 2007 sales of standard mobile tariffs with an attached package of over 300
minutes remained consistent at around 70%.
Figure 4.14
Billions of minutes
250
200
UK total outbound call volumes

226
228
231
234
216
52
59
64
71
82
Mobile
150
100
Fixed
165
167
164
160
152
2002
2003
2004
2005
2006
50
0

Note: Figures include non-geographic voice; figures have been restated from the 2006 Communications Market
Report to reflect more accurate data
Despite further growth in the number of mobile phone connections coming primarily from
ownership of multiple handsets (at the end of 2006 there were 69.7 million active mobile
connections, compared to the UK population of around 60 million), average outbound calls
per mobile connection rose to over 100 minutes for the first time in 2006, with average calls
per fixed line falling below 300 minutes.
Increasing use of voice over internet protocol (VoIP), which uses the internet to route voice
calls, and can either be in the form of a computer software application (often instant
messenger based) or a service which looks like a standard phone service, may also be
9
Mobile Today, 16 May 2007
266
having an impact on fixed-line voice volumes. However, Ofcom research finds that although
use of VoIP is increasing (17% of adults with broadband have used VoIP at least once), in
general the technology is still in the early-adopter phase. Only 14% of VoIP users claim to
use it every day, and VoIP users are more likely to have the use of a mobile and a fixed line
than UK adults as a whole.
4.1.12 Digital mums and silver surfers change landscape of internet

As internet penetration has grown (to around two-thirds of UK households by the end of
2006), the demographic centre of gravity has shifted towards women and older users.
Nielsen//NetRatings data from April 2007 show that women in the 18-34 age range are the
most active internet users by time spent (Figure 4.15). Use falls with age, but over 50s (who
make up 41% of the UK population) now account for nearly 30% of all time spent on the
internet. As section 4.3.8 details, over 65 silver surfers spend more time online per active
user, at nearly 42 hours per month, than any other age group.
Figure 4.15
Total internet use by age, April 2007
300
Millions of hours
253
204
200
51.7%
Female
161
49.0%
41.1%
100
76
48.5%
48.3%
51.0%
58.9%
21.0%
79.0%
51.5%
2-17
Male
64
18-34
35-49
50-64
65+
Source: Nielsen//NetRatings, April 2007 At home data including internet applications
Analysis of surfing time shows that the average internet user spends one hour online each
day and that Britain is a nation of shoppers and social networkers. eBay is a very clear
leader in terms of total time spent on its web site, with in total, twice as much as second
placed Bebo. Other social networking sites populate the top ten sites by time spent,
including MySpace, Facebook, YouTube and Runescape (see for more details).
4.1.13 Different technologies deliver mobile broadband

With consumers increasingly using home wireless networks to access broadband internet in
the home, and 3G mobile phones to access the internet elsewhere, the past 18 months have
seen fixed and mobile operators invest in infrastructure, handsets and propositions designed
to provide data services outside the home, and bridge the consumer experience inside and
outside the home.
High-Speed Downlink Packet Access (HSDPA) is an upgrade to a WCDMA 3G network that
enables an increase in peak download speeds from 384kbit/s to between 1.6Mbit/s or
3.6Mbit/s (and up to 14.4Mbit/s in the future), thereby enabling mobile operators to offer
download speeds comparable to those typically experienced by residential broadband
consumers. T-Mobile was the first UK operator to launch HSDPA services over its 3G
network in August 2006, with the four other operators all having followed by July 2007. With
limited availability of compatible handsets, HSDPA is currently primarily targeted at business
users using PC data cards.
267
Meanwhile, a number of initiatives by fixed-line operators (e.g. BT), mobile providers (TMobile) and start-up WiFi network operators (e.g. The Cloud), sometimes with municipal
support, have increased the number of public WiFi access points to 11,447 (at the end of
March 2007, compared to 10,339 a year previously), according to Informa. This maintains
the UKs position as the European country with the most wireless hotspots and 12 UK cities
now have sizeable joined up wireless zones.
WiFi networks potentially provide an alternative to fixed-line broadband access in highly
populated areas, but the limited range of WiFi networks makes them impractical for wide
geographical coverage. WiMAX technology offers longer-range coverage and in the long
term represents a potential alternative to cellular networks for geographically-spread
wireless broadband.
Pipex Wireless began the UKs first commercial WiMAX trial in Milton Keynes in December
2006 and plans to launch in Manchester in late 2007 and then roll-out services to 50 UK
towns and cities by 2009. However, because its licence (for the use of 3.6-4.2GHz spectrum)
does not support mobility, in the absence of any future investments in mobile spectrum,
Pipex will use WiMAX for fixed applications. It has stated plans to focus on providing
backhaul for municipal WiFi deployments, while also offering a wireless local loop equivalent
to consumers and businesses which require faster uplink services than those typically
provided by basic DSL services.
WiFi-enabled cellular handsets represent a way of integrating home and public wireless
networks with cellular networks, enabling customers to make VoIP calls when in range of a
compatible WiFi router and mobile calls over a cellular network when out-of-range. Two UK
companies are now offering converged fixed and mobile services in this manner: BT (which
launched BT Fusion in June 2005, initially over Bluetooth, but now uses WiFi technology)
and Orange (which launched Orange Unique in September 2006).
4.1.14 Conditions in place for take-off of internet on mobile phones

Although non-SMS data revenue still only accounted for around 5% of mobile operators
retail revenue in 2006, there are indications that the mobile internet may finally begin to
deliver on some of its promises in the near future. In the past year, four key pre-conditions
for the take-off of the mobile internet have been met. First, 3G use has become more
widespread, with 7.8 million connections by the end of 2006, and penetration is expanding
well beyond the base of 3G-only operator 3UK as other MNOs migrate their subscribers onto
their 3G networks (Figure 4.16).
Figure 4.16
UK 3G subscriptions
Subscriptions (millions)
15
11.2%
12%
3UK
Orange
7.0%
10
8%
T-Mobile
7.8
4.3%
4.6
4%
2.6
O2
Vodafone
0.4%
0%
0.2
2002
2003
2004
2005
2006
As % of
total
Source: Ofcom/operators/Informa; includes estimates where Ofcom does not receive data from the operators
268
Second, the large majority of mobile handsets now have internet capability, with data from
GfK showing that nearly 80% of the handsets sold in the first three months of 2006 had
XHTML capability, which is required to enable internet pages to be correctly rendered on
mobile phones. Third, the cost of browsing the mobile internet has reduced, with four of the
five network operators offering unlimited data tariffs (subject to a fair use policy) for 5 a
month.
And finally, the services available are beginning to offer a customer experience approaching
that available to users of the fixed-line internet, as internet site providers increasingly provide
mobile-enhanced versions of their services, and mobile operators partner with the leading
internet brands. All of the main five operators now promote search from Google, Yahoo or
MSN and within the social networking category MySpace has partnered with Vodafone and
Bebo with Orange.
4.1.15 New life in mobile advertising business models

Like the mobile internet, mobile advertising and the power of the brand in the hand has
been much-hyped for many years with little end result. However, with the development of the
mobile internet, there is a new focus on mobile advertising and the development of new
business models.
Two factors can be identified behind this. First, operators have largely failed to drive
significant revenue from customer-paid content. Second, the introduction of flat-rate tariffs
for open internet access has highlighted the imperative to use the intelligence they have
about their customer base to prevent them from being reduced to the dumb pipe status of an
ISP.
The most common new business model is a partnership between operators and online
advertising service providers for search-based advertising. For example, Vodafone uses
Google for internet search in return for a share of revenue from the sponsored links, while
3UK has a similar deal with Yahoo!.
In another model, operators are beginning to see opportunities to offer advertiser-funded
content. In partnership with technology provider Rhythm, 3UK offers a large part of its video
content free of charge to customers, who in return provide demographic data. This
information is then used to serve highly-targeted adverts which are incorporated within the
video.
Perhaps even more ambitious is a business model which proposes offering free calls and
texts to customers in return for permission to serve adverts. This is the approach of new
virtual network operator Blyk, which at the time of writing is scheduled for a UK launch in
October 2007.
269
4.2 The telecoms industry

4.2.1 Introduction
In this section of the report we look at the major trends in the UK telecommunications market
from an industry and operator perspective. The next section (4.3) will complete the picture by
examining the same trends from the point of view of the user.
When reporting market size data we have focused on the retail market rather than on
operator-to-operator (wholesale) transactions. For most of the more granular analysis in this
section we concentrate on the residential and small/medium business end-user markets as
only limited data are available on the corporate telecoms sector.
4.2.2 Revenue
Turnover increases to 47bn but growth slows
Ofcom collects relevant turnover data from all providers of telecoms networks and services
which generate more than 5m in revenue per year. From these data we estimate that the
UK telecoms sector generated revenue of 47.0bn in 2006 (Figure 4.17).
Figure 4.17
UK telecoms industry revenue
50
Turnover (bn)
40.9
40
8.6
44.8
46.3
47.0
43.1
8.6
8.3
8.5
8.8
Wholesale
30
20
32.3
34.4
36.3
38.0
38.5
2002
2003
2004
2005
2006
Retail
10
0
Note: Includes estimates where Ofcom does not receive data from operators; figures have been restated from the
2006 Communications Market Report to reflect more accurate data
Ascertaining the overall size of the telecoms industry is difficult as a result of the level of
network competition in the market, which has led to increases in interconnection payments
and as a consequence a large amount of intra-industry revenue transfer. BT, together with
other network operators like Cable & Wireless, offers wholesale voice and data carrier
services which provide capacity for pure service providers. From the available data we
estimate that in 2006 the value of wholesale telecoms activities was 8.5bn or 18% of total
turnover, a similar proportion to that in 2005.
Retail revenue provides a measure of total end-user spend on UK telecoms services. We
estimate that total telecoms industry retail revenues in 2006 were 38.5bn, an increase of
1.4% from 2005, representing a significant slow-down from 4.7% growth in the previous year
as fixed-line revenues declined, growth in mobile and broadband slowed, and prices fell.
The UK telecoms industry continues to make a significant contribution to the UK economy,
and the most recently available Office for National Statistics (ONS) estimates show that the
271
sector contributed 21.3bn in Gross Value Added in 200410, equating to 2.0% of total gross
value added, broadly defined as revenue minus cost of goods brought in. By way of
comparison ONS data put Gross Value Added from agriculture at 9.6bn and that from oil
and gas extraction at 19.8bn in the same year.
ONS figures also estimate telecoms industry turnover at 56.7bn11 in 2006. This figure is
higher than ours as it includes revenues from telecoms services which Ofcom does not
regulate, such as network hardware provision and maintenance. To give an idea of the size
of the telecoms market relative to other sectors, the same ONS dataset puts UK revenue
from the retail sale of automotive fuel at 19.6bn and that from bars and restaurants at
48.4bn.
BT remains the largest telecoms provider in terms of UK revenue
In 2006 BT continued to be the largest UK telecoms provider, with its estimated overall UK
turnover of 17.2bn accounting for 37% of total telecoms turnover (Figure 4.18). This share
was 0.2% higher than in 2005, following strong growth in BTs so-called new-wave
revenues, i.e. mobility, broadband, LLU and IT services, which offset falls in revenues from
traditional voice services. BTs revenues are lower than those of comparable European
incumbents in part because it does not own a mobile network business; in 2006 BTs global
turnover was 20.1bn while Deutsche Telecom and France Telecom reported revenues of
42bn and 36bn respectively.
The five mobile network operators, together with independent service providers and mobile
virtual network operators (MVNOs) such as Virgin Mobile and Tesco Mobile, contributed
35% of total UK telecoms turnover, an increase of two percentage points on 2005, following
continuing growth in the number of subscriptions and higher use per subscriber. Turnover
share for other fixed operators fell from 30% to 28% as growth in LLU services was offset by
the continued decline in fixed telecoms connections and prices.
Figure 4.18
Share of retail and wholesale telecoms industry revenue in 2006
Total = 47.0bn
Other fixed, 28%
BT, 37%
Mobile, 35%
Note: Includes estimates where Ofcom does not receive data from operators; basis of calculation of BT share
now excludes international revenue which we have included in previous years.
10
http://www.statistics.gov.uk/downloads/theme_economy/Input_Output_Analyses_2006_edition.pdf
P142
11
http://www.statistics.gov.uk/STATBASE/tsdataset.asp?vlnk=4702&More=Y
272
Mobile revenues higher than fixed line and internet combined

Mobile revenue accounts for an increasing share of the total telecoms sector. This trend is
driven by the retail market, where revenue from mobile voice and data services in 2006 was
45.6% higher than that from fixed voice services (Figure 4.19). The mobile market
contributed 13.9bn of retail revenue in 2006 (36.2% of the total and two percentage points
higher than in 2005) while retail revenue from fixed voice services continued to decline.
Between 2005 and 2006 fixed calls and access revenue fell by almost 400m to 9.6bn;
fixed-line revenue accounted for less than a quarter (24.9%) of total telecoms retail revenue
in 2006 compared to 26.3% in 2005. This is partly due to falling numbers of fixed lines, along
with increasing substitution of mobile for fixed voice calls; in 2006 the proportion of all UK
voice call minutes made from mobile phones increased from 29.0% to 33.7%.
Figure 4.19
UK telecoms industry retail revenue
Retail revenue (bn)
40
32.3
30
20
34.4
8.0
38.0
38.5
8.6
9.9
9.5
36.3
Other retail
7.3
2.2
1.9
2.3
2.2
2.5
2.5
2.6
2.5
2.7
2.8
Corporate
data services
9.0
10.5
12.0
13.1
13.9
Internet &
broadband
11.9
11.4
10
10.7
10.0
9.6
0
2002
2003
2004
2005
2006
Mobile voice
& data
Fixed calls &
access

Note: Figures have been restated from the 2006 Communications Market Report to reflect more accurate data.
Internet is fastest growing sector by revenue

The highest retail telecoms revenue growth was in broadband and narrowband internet
services (excluding corporate connections) which rose by 10.9% from 2.5bn in 2005 to
2.8bn in 2006, driven by increasing take-up and migration of narrowband internet
subscribers onto broadband services. However, falling prices are limiting internet revenue
growth, and during 2006 internet and broadband only accounted for only 7.2% of total retail
telecoms revenues. Revenues from mobile voice and data increased by 6.9% during 2006,
with growth in revenues from business customers (14.6%) being higher than that from
residential users (2.0%). Fixed-line voice calls and access revenues declined by 3.9% during
the year.
In this and the following analysis other retail includes estimates of some elements of the
wider telecoms value chain such as mobile handsets and a range of value-added services.
The contribution of each sector to the total 0.5bn growth in retail telecoms revenue in 2006
is shown below in Figure 4.20. The box above each sector gives a brief description of the
main drivers of revenue growth or decline.
273
Figure 4.20
Telecoms revenue growth between 2005 and 2006
Key drivers
Subscription
growth &
increasing
usage
Increasing
take-up &
Broadband
migration
Ethernet and
IP VPN
Networking
services
Falling prices
Equipment
&
usage as
sales
mobile
/ VoIP
use grows
Falling prices
& usage as
mobile / VoIP
use grows
0.1bn
-0.4bn
0.3bn
-0.4bn
0.9bn
0.5bn
Mobile
Internet &
broadband
Corporate data
services
Other retail
Fixed voice
Total
4.2.3 Industry structure

Two mobile subscriptions to every UK fixed line
Despite penetration of more than 100%, the number of active UK mobile subscriptions
continued to grow during 2006 as more people started to use secondary mobile devices,
either for business purposes (e.g. a personal digital assistant (PDA) or BlackBerry), or to
take advantage of different tariffs from competing operators (Figure 4.21). At the end of 2006
there were 69.7 million active mobile connections in the UK compared to a population of
around 60 million people (a mobile subscription is usually defined as being active when it
has been used during the previous 90 days). Ofcom consumer research in Q1 2007
indicated that 93% of adults lived in a household with at least one mobile phone and that
84% personally used a mobile, although penetration levels vary according to sociodemographic profile.
Continued growth in the number of mobile subscriptions, coupled with falling numbers of
fixed lines, meant that the number of mobile subscriptions in the UK outnumbered that of
fixed lines by more than two-to-one for the first time in 2006.
Figure 4.21
Total UK fixed lines and mobile subscriptions
Lines/subscriptions (millions
80
65.5
60
69.7
59.7
49.6
52.8
40 35.2
35.0
34.6
Mobile
subscriptions
34.1
33.6
Fixed
lines/ISDN
channels
20
0
2002
2003
2004
2005
2006

Note:Figures have been restated from the 2006 Communications Market Report to reflect more accurate data
274
Growth in mobile connections continues while fixed lines fall

Although the number of fixed lines continued to fall in 2006, the rate of decline (1.4%) was
slightly lower than in the previous year. The number of internet connections grew during
2006, and at the end of the year there were 16.6 million residential and SME internet
connections in the UK, an increase of 1.0 million on 2005. In addition to overall growth in
internet penetration, there was large-scale migration from narrowband to broadband access,
with the number of total residential and SME broadband connections growing by 31% to 13.0
million during 2006 and broadband household penetration hitting 50%.
Figure 4.22
Total telecoms connections
75
69.7
65.5
Millions
59.7
Fixed
49.6
52.8
35.2
35.0
34.6
34.1
11.3
13.4
15.1
15.6
1.4
3.1
50
25
0
2002
Mobile
6.1
2003
2004
33.6
9.9
2005
16.6
Total
internet
13.0
of which
broadband
2006

Note: Includes estimates where Ofcom does not receive data from operators; broadband excludes corporate
connections
The market share of total fixed and mobile telecoms connections gives an indication of how
competition in the voice telecoms market is changing over time (Figure 4.23). Between 2002
and 2006 BTs share of total connections fell from 34% to 23%, while the mobile operators
share (including MVNOs) increased from 58% to 67%.
More recently, growth in the take-up of LLU and wholesale line rental (WLR) services has
stimulated an increase in the share of alternative fixed network operators, and this
contributed to an increase in the share of other fixed operators of two percentage points in
2006 to 6%. With low levels of fixed network infrastructure investment among providers other
than BT (which is currently rolling out its 10bn 21CN next-generation network), it is likely
that competition in the fixed-line market will be driven by the continuing take-up of LLU.
Proportion of total connections
Figure 4.23
100%
80%
60%
Share of total UK fixed and mobile telecoms connections

6%
2%
16%
6%
2%
16%
7%
2%
3%
15%
12%
11%
11%
13%
14%
14%
40%
12%
3%
3%
14%
2%
3%
14%
2%
3%
20%
34%
33%
2002
2003
9%
4%
4%
15%
11%
14%
10%
6%
4%
15%
11%
15%
15%
2%
3%
14%
4%
29%
26%
23%
2004
2005
2006
0%
Other mobile
Other fixed
3UK
Orange
T-Mobile
O2
Vodafone
Telewest
ntl
ntl:Telewest
BT

Note: Includes estimates where Ofcom does not receive data from operators; ntl and Telewest merged during
2006; other includes CPS, WLR Mobile ISP and MVNO subscribers in additional to fixed OLOs.
275
4.2.4 Fixed line access

Carrier pre-selection starts to decline as operators switch to full LLU
Carrier pre-selection (CPS) allows a BT customer to route all of their calls via another
operator while continuing to pay line rental to BT. Growth in the number of CPS-enabled
lines slowed during 2006 before starting to fall in Q4, a trend that has continued into 2007. At
the end of 2006 there were 6.3 million CPS lines, 9% more than at the end of 2005, but this
had fallen to 6.1 million by the end of June 2007 (Figure 4.24). This decline is as a result of
operators such as TalkTalk migrating their CPS customers onto full LLU-based services.
Figure 4.24
Carrier pre-selection (CPS) enabled lines
8
5.8
6.3
6.1
2006
2007 Q2
Millions
4.6
4
2.6
2
0.6
0
2002
2003
2004
2005
Strong competition in fixed line services

At the end of 2006 the number of lines using wholesale line rental (WLR) services stood at
4.2 million, an increase of 1.9 million on a year previously. By combining data on the use of
full LLU and CPS services with data on the number of cable operator and alternative network
operator lines we can see that at the end of 2006 36% of UK fixed lines were taking a fixed
access or call service from an operator other than BT, an increase of two percentage points
since 2005 (Figure 4.25). This calculation excludes WLR lines to avoid double-counting, as
these will use a CPS service to route calls.
Figure 4.25
Share of lines taking non-BT voice services
40%
Proportion of total lines
34%
36%
CPS lines
31%
30%
20%
Full LLU
25%
13%
17%
19%
1%
4%
19%
2%
4%
7%
5%
4%
4%
13%
13%
14%
13%
2002
2003
2004
2005
10%
13%
0%
Other direct
(exc. WLR
and LLU)
Cable
WLR lines
2006

276
Local loop unbundling (LLU)

Local loop unbundling is the process by which an alternative operator is able to provide
fixed line and DSL broadband services over the twisted copper pair local loop which
connects a customers premises to a BT local exchange.
When an operator unbundles a local exchange, it sites its own network equipment in the
exchange and connects it to the customer premises using BTs (or Kingston
Communications) local loop. The LLU operators equipment is then connected to its own
trunk network to route customer voice and data traffic to its destination.
BT local exchange
To BT
trunk
network
BT
Customer
BT equipment
LLU operator
equipment
LLU
Customer
To LLU operator
trunk network
ISDN suffers at the hands of cheap broadband

ISDN (Integrated Services Digital Network) is a digital dial-up service which uses existing BT
lines to offer download and upload speeds at least twice as fast as ordinary dial-up. There
are two types of ISDN connection, ISDN2 (which consists of two 64Kbit/s channels) and
ISDN30 (up to 30 64kbit/s channels). Unlike most broadband technologies, ISDN is
uncontended and has equal upstream and downstream capabilities.
As broadband take-up grew during 2006, the number of ISDN channels continued to fall,
although the rate of decline has slowed (Figure 4.26). Broadband data speeds are faster
than the 128kbit/s of ISDN, and services are cheaper, so many ISDN customers have
switched to broadband, although the more reliable upstream speeds of ISDN mean that the
service remains more suitable for some consumers, particularly business users.
In April 2007 BT announced the withdrawal of its Home Highway residential ISDN product as
the availability of cheap, fast broadband services had reduced demand for the service.
Home Highway has been unavailable to new customers since September 2005 and ISDN
access has now virtually disappeared from the residential market. There is the potential for a
small number of consumers who currently use ISDN to be disadvantaged when the service
ceases, but with broadband available to over 99.6% of premises, the large majority will be
able to access an equivalent or better internet service in terms of price and speed.
277
Figure 4.26
Fixed telecoms lines
Fixed lines (millions)
40 35.2
35.0
34.6
34.1
33.6
Total fixed
lines
30
ISDN
channels
20
9.9
10
5.1
5.1
1.7
0.8
0
2002
7.2
4.9
DSL
4.6
4.7
1.4
4.2
2.0
2.7
3.1
2003
2004
2005
2006
Cable
modem

Note: Includes estimates where Ofcom does not receive data from operators; broadband excludes corporate
connections; figures have been restated from the 2006 Communications Market Report to reflect more accurate
data
4.2.5 Fixed-line revenues

Fixed-line voice revenues decline as number of lines and prices fall
The average monthly voice revenue per fixed line fell by 0.63 to 23.74 during 2006 (Figure
4.27) driven by a decline in voice call volumes per line and by falling fixed-line prices fuelled
by growing competition. Fixed voice volumes per line are falling as a result of the increasing
substitution of mobile calls, along with growing use of email and instant messaging, while
use of voice over internet protocol (VoIP) may also be beginning to have an impact.
Revenues from fixed access increased slightly, despite an overall fall in the number of lines.
Although average voice revenue per line continued to fall in 2006, the rate of decline slowed
significantly, from 6% in 2005 to 3%. This could be because some consumers are not taking
full advantage of the bundles of calls included with their monthly fixed access charges, and
also because the figures do not take into account the fact that some customers are prepared
to pay more for fixed voice access in order to get additional bundled non-voice services such
as free broadband.
Figure 4.27
per month
30
20
Average monthly voice revenue per fixed line
28.01
17.1
27.17
16.2
25.87
14.8
24.37
23.74
13.3
12.5
Voice calls
Access
10
10.9
11.0
11.1
11.1
11.2
2002
2003
2004
2005
2006
0
Note: Includes spend on NTS voice calls; figures have been restated from the 2006 Communications Market
278
Access revenues unchanged as call revenues fall

Falling fixed voice call volumes and prices in 2006 led to continued drops in fixed voice
revenues during the year. While access revenue was unchanged at 4.5bn in 2006, revenue
from all calls (excluding dial-up internet calls) was down 7% from 5.4bn in 2005 to 5.0bn in
2006 (Figure 4.28). This change in the profile of access and call revenues is a result of
continued tariff re-balancing, with the increasing inclusion of bundled calls in fixed rental
tariffs.
Figure 4.28
Fixed voice telecoms revenue
billions
15
11.8
11.4
1.5
1.5
10
2.1
0.9
2.1
0.8
2.4
2.7
10.7
Other voice
10.0
9.6
1.4
1.8
0.6
1.7
1.2
1.7
0.6
1.6
To mobile
Access
1.5
2.0
0.7
2.0
4.6
4.6
4.6
4.5
4.5
2002
2003
2004
2005
2006
International
UK geographic
0
Note: Includes spend on NTS voice calls; figures have been restated from the 2006 Communications Market
Falling fixed-line numbers drive down revenues

Although falling prices continued to have a downward effect on overall fixed voice revenues
in 2006, the decline was smaller than in any of the previous three years at 202m (Figure
4.29). While prices remain the biggest factor in the fall in fixed voice revenues, in 2006 the
decline in the number of fixed lines (almost 500,000) had a growing downward effect on
revenue (a fall of 118m). Falling average voice call usage per line also continued to have a
downward effect on total revenues in 2006.
Figure 4.29
Factors affecting the reduction in fixed voice revenue
200
43
millions
0
-206
-82
-84
-85
-53
-200
-16
-400
-339
-107
-120
-118
-53
-202
-490
-483
Price
Average use
Lines
-600
-800
2002
2003
2004
2005
2006

Note: Calculation excludes NTS voice calls; figures have been restated from the 2006 Communications Market
279
BTs market share continues to fall as fixed competition intensifies

Increasing competition from LLU and WLR operators further eroded BTs share of residential
fixed call volumes during 2006, with the steepest decline being a drop of over five
percentage points for UK geographic calls, compared to three and one percentage point falls
for calls to mobiles and international calls respectively (Figure 4.30). The drop in UK
geographic calls is not surprising, as CPS and LLU operators often include these call types
in their tariff bundles, making them more attractive to people making large volumes of calls
to UK fixed phones.
Figure 4.30
80% 74.1%
73.8%
BT share of residential voice call volumes by type

72.8%
70.9%
60%
66.2%
61.1%
64.4%
52.9%
58.8%
51.8%
40%
47.9%
44.8%
57.7%
53.3%
43.6%
International
To mobile
20%
0%
2002
UK
geographic
2003
2004
2005
2006

BT cuts prices to maintain competitiveness of call packages

The falling number of BT fixed lines is now by far the largest factor contributing to BTs
declining retail fixed voice revenues (Figure 4.31). BT lowered the prices of its Option 2 and
Option 3 call packages in August 2006 and June 2007 as a result of increasing competition
from both WLR and LLU operators, and is continuing to promote special offers on these
packages. Shortly after BTs announcement in June 2007 TalkTalk responded by reducing
the cost of its own call packages. From August 2007 BT is simplifying its pricing structure for
calls to mobile and Number Translation Services (NTS) calls, with lower pence-per-minute
rates.
The downward trend in prices has been offset by shifts in calling patterns, with lower use of
inclusive call minutes, and with UK geographic call volumes declining faster than the more
expensive international calls or calls to mobiles. In January 2006 BT increased its line rental
charge for residential customers not on Option 2 or 3; in April it increased the residential
minimum call charge from 5p to 5.5p, and then replaced this with a call set up fee of 3p in
October.
280
Figure 4.31
Factors affecting the reduction in BT retail fixed voice revenue
200
0
millions
-124
-200
14
-11
-35
-106
-156
-151
-439
Average use
-78
-140
-400
Price
-283
-169
-389
-263
-30
2004
2005
2006
Lines
-600
-800
2002
2003

Note: Calculation excludes NTS voice calls; figures have been restated from the 2006 Communications Market
4.2.6 Fixed-line volumes

Voice call volumes fall by 5% during 2006
The total volume of calls from UK fixed lines fell by 19% between 2005 and 2006 (Figure
4.32). Most of this drop came from a reduction in the number of dial-up internet calls as
users continued to migrate to broadband internet packages. During 2006 dial-up internet call
volumes fell by 47% to 44 billion minutes, and accounted for 22% of total call volumes; in
2002 dial-up internet calls had made up over half (51%) of all call volumes.
Fixed voice call volumes also declined during 2006, and although the rate at which they fell
(5%) was much lower than that of dial-up internet calls it was higher than in 2005 when voice
volumes fell by 2%. Continued fixed-to-mobile migration is the primary cause of this, while
VoIP may also be starting to have an effect.
Figure 4.32
Fixed telecoms call volumes
400
Billions of minutes
333
335
304
300
168
168
242
141
200
82
195
Dial-up
internet
44
Voice
100
165
167
164
160
152
2002
2003
2004
2005
2006
0
BTs retail market share of fixed voice call volumes (excluding NTS voice calls) fell from 52%
in 2005 to 48% in 2006. Indirect operators (including CPS and LLU) were the main
beneficiaries as their share of voice calls increased from 25% in 2005 to 28% in 2006.
Cables share of voice call volumes was unchanged at 15%, as was that of other direct
network operators (9%).
281
Decline in fixed non-geographic call volumes continues

Fixed NTS call volumes fell by 38% to 59 billion minutes in 2006 (Figure 4.33). The largest
drop was in call volumes to freephone services (which include unmetered internet volumes)
where volumes fell by 51% during the year, as narrowband customers switched to
broadband services. Migration to broadband from narrowband also contributed to a 12%
decline in calls to basic rate special services numbers. Calls to premium rate numbers made
up only 1% of NTS call volumes from fixed phones in 2006, but contributed an estimated
23% of revenues owing to their higher call charges, which averaged 44 pence per minute
during the year, an increase from 41 pence per minute in 2005.
Figure 4.33
Millions of minutes
200
150
Non-geographic fixed call volumes

179
4
44
182
4
38
95
4
23
100
131
138
50
Premium rate
services
155
4
31
119
67
Higher rate
special svcs
59
5
20
Basic rate
special svcs
33
Freephone
calls
0
2002
2003
2004
2005
2006

Note: Basic rate special services and freephone calls include dial-up internet calls; figures have been restated
from the 2006 Communications Market Report to reflect more accurate data
4.2.7 Mobile connections

Mobile subscriptions approach 70 million
Growth in the number of active mobile subscriptions continued in 2006, largely driven by
individuals use of multiple handsets or multiple SIMs (either to take advantage of tariffs from
different operators, or for business purposes, for example by combining use of a mobile for
personal calls with a PDA or BlackBerry). At the end of the year there were 69.7 million
active UK mobile subscriptions, 4.2 million (6%) more than a year previously. With mobile
penetration already high (84% of adults reported personally using a mobile phone in Q1
2007) operators are focusing less on acquisition and more on attempting to increase
revenue per user and reduce churn. An example of this is the networks efforts to move prepay customers (who on average spend much less than post-pay customers) onto monthly
contracts, which typically results in higher monthly spend and a minimum contract length of
at least 12 months. At the end of 2006 the proportion of mobile subscribers on monthly
contracts was 35.0%, one percentage point higher than in 2005 (Figure 4.34).
282
Figure 4.34
Pre-pay and contract mobile subscriptions

40%
31.4%
32.6%
34.0%
33.3%
75
52.8
49.6
69.7
65.4
59.7
50
35.0%
19.9
22.2
24.4
30%
20%
15.6
17.2
34.0
35.6
39.8
43.2
45.3
2002
2003
2004
2005
2006
25
10%
0%
Proportion contract (%)
Active subscribers (millions)
100
Contract
Pre-pay
%
contract
(RHS)

Notes: based on network operator reported figures; likely to overstate activity in reference quarter; includes
estimates where Ofcom does not receive data from the operators
Similarly, in order to boost customer loyalty, operators have been offering incentives (either
cheaper line rental or larger call and text bundles or greater handset subsidies) for users
who sign up for contracts longer than the standard 12 months, typically 18 or 24 months.
This approach appears to be working, and GfK reported that in March 2007, less than two
years after the availability of contracts longer than a year in duration became commonplace,
more than four in five new mobile contracts sold were for 18 months or more.
O2 remains largest network in terms of subscribers
O2 remained the largest network during 2006 with 19.0 million subscribers (including Tesco
Mobile), a 12% increase on a year previously (Figure 4.35). This was the fastest growth rate
among the five operators, the lowest being Vodafones, whose customer base shrank by 1%
in 2006. 3UKs subscriber base continued to grow during 2006, and at the end of the year it
had around 3.8 million subscribers, a 5% market share. At the service provision level, Virgin
Mobile (which uses T-Mobiles network) reported approximately 4.5 million subscribers at the
end of 2006, while Tesco Mobile (which uses O2s network) reported 1.4 million.
Active subscriptions (millions)
Figure 4.35
Mobile subscriptions by network operator

3UK
80
69.7
65.5
59.7
60
40
20
49.5
2.5
52.8
13.3
13.6
12.1
13.1
12.0
13.2
12.2
2002
14.2
3.5
14.9
3.8
15.3
15.3
16.8
14.7
17.0
19.0
12.6
13.7
14.8
14.7
2003
2004
2005
2006
14.6
Orange
T-Mobile
(inc. Virgin)
O2 (inc.
Tesco)
Vodafone

2006 Communications Market Report to reflect more accurate data.
283
4.2.8 Mobile revenue

Voice and SMS account for 95% of mobile revenue
Mobile telephony continues to make up the largest proportion of the UK telecoms industry, in
revenue generation as well as number of subscriptions. In 2006 total UK retail revenue from
mobile telephony was 13.9bn, an increase of 0.8bn (6%) on the previous year (Figure
4.36). Voice calls and rental continued to make up the large majority of mobile retail revenue
in 2006 (77%) although this represented a decline of two percentage points from 2005.
The proportion of revenue from SMS messaging increased by one percentage point during
the year to 17%, while revenue from non-SMS data applications was unchanged at 5%. The
proliferation of web-based mobile applications and services, along with all-you-can-eat
mobile data tariffs, should ensure further growth in the use of non-SMS data services in the
future.
Figure 4.36
Estimated mobile retail revenue by service
15
Revenue (bn)
12.0
0.4
10.5
10
13.9
13.1
8.7
1.7
0.2
1.8
0.7
2.1
0.8
2.4
1.1
5
7.6
Data
SMS
9.7
10.3
10.8
8.6
2003
2004
2005
2006
Voice
0
2002

Vodafone no longer biggest network in terms of revenues

According to our estimates, in 2006 O2 overtook Vodafone to become the UKs largest
mobile network in terms of retail revenue (including that from Tesco Mobile) (Figure 4.37).
Although O2 has been larger than Vodafone in subscriber terms since 2003, Vodafone had
continued to generate higher revenues due to its large subscriber base of business users
and also because of its higher proportion of contract customers (45% of its total base). O2,
T-Mobile and 3UK all enjoyed revenue growth of over 15% in the year, while Vodafone and
Oranges revenues both fell slightly during the year.
284
Figure 4.37
Estimated mobile retail revenue by network operator
Retail revenue (bn)
15
13.9
12.0
12
0.3
10.5
9.0
3.0
3.1
2.2
2.1
1.6
2.4
1.9
3.0
3.3
3.8
Orange
2.5
T-Mobile
(inc. Virgin)
2.0
3UK
1.0
3.0
2.7
2.5
13.1
0.9
3.0
3.4
3.6
3.7
3.7
2002
2003
2004
2005
2006
O2 (inc.
Tesco)
Vodafone
0
Note: Includes estimates where Ofcom does not receive data from operators; figures have been restasted from
the 2006 Communications Market Report to reflect more accurate data.
Average retail revenue per mobile subscription declining

During 2006 average mobile retail revenue per subscription declined slightly to 17.21 a
month, a 1% decrease on the previous year (Figure 4.38). During the same period revenues
from access and voice calls fell by 3% to 13.31 while increasing revenue from SMS
messaging contributed to an increase in average data spend per user of 6%, to 3.90 a
month.
Figure 4.38
Average retail revenue per mobile subscription
20
15.39
per month
15
2.01
17.13
17.74
17.39
17.21
3.08
3.37
3.67
3.90
Data (inc
SMS)
10
Voice
13.39
14.05
14.37
13.72
13.31
2002
2003
2004
2005
2006
5
0
Average contract revenue nearly four times pre-pay

Analysis of average retail revenue per mobile subscription, by subscription type, shows that,
on average, a monthly contract connection generates almost four times as much revenue as
a pre-pay connection (32.96 for contract against 8.92 for pre-pay). Given that UK mobile
penetration may be approaching saturation, it is unsurprising that the mobile operators see
converting their existing pre-pay subscriber base onto monthly contracts as a way to protect
their customer base and ensure continued revenue increases in the face of slowing
subscriber growth.
285
Figure 4.39
Monthly ARPU ()
40
33.94
Average retail revenue per mobile subscription by subscription type

35.27
35.81
34.25
32.96
30
Contract
20
Pre-pay
7.73
10
0
2002
8.57
8.84
8.83
2003
2004
2005
8.92
2006

Average mobile call charges per minute: trend is downwards

From operator revenue and usage data it is possible to calculate average call charges per
minute and charges per message; these are illustrated in Figure 4.40 below. However, it is
not possible to use these data as an exact proxy for prices because the increasing inclusion
of calls and messaging in post-pay tariffs makes it difficult to calculate exact charges per call
and per message, as a proportion of the costs of calls and messages will be included in
monthly access payments.
Ofcoms mobile data on UK geographical call charges includes an element of monthly
access charges, so the cost per minute of UK fixed calls in this analysis will be overstated
due to the inclusion of a large element of these charges. Similarly, the cost of other call
types and messages are likely to be understated as an element of the revenues from these
will be included in the rental revenues included with UK geographic calls, due to bundled
tariffs. However, the downward trend in cost per minute/message for all call and message
types (except MMS) indicates that overall UK mobile prices declined during 2006.
Figure 4.40
Average mobile retail call and messaging revenues
Pence per minute/message
International
40
39.1
38.0
30
22.6
22.9
37.4
23.7
20.6
35.2
32.1
MMS
23.0
23.8
20.5
19.5
UK geo calls
and rental
Off-net
8.9
5.6
3.5
20
18.6
16.5
10 8.0
17.2
8.0
14.3
7.5
11.2
6.6
5.1
4.9
4.1
2003
2004
2005
5.1
0
2002

Note: Includes estimates where Ofcom does not receive data from operators
286
2006
SMS
On-net
Average pre-pay cost per minute falls below contract cost for the first time
Analysis of the average cost per voice minute by subscriber type shows that during 2006 the
average per minute cost of voice calls for pre-pay users fell below that for contract
subscribers for the first time (Figure 4.41). Pre-pay was introduced in the mid-to-late-1990s
to enable consumers who did not want to sign up to annual contracts to use mobile services.
Initially, the cost of pre-pay calls was often in excess of 1 a minute and as competition has
increased over time, pre-pay prices have fallen significantly and now offer parity with
contract services.
However, this analysis excludes the subsidisation of mobile handsets; many contract
customers receive a free or heavily discounted handset in return for their commitment.
Although basic pre-pay handsets can be bought for around 20, mid-range handsets
frequently cost more than 100, and more feature-rich devices in excess of 300.
An additional issue raised by the higher cost per minute for contract customers is the underutilisation of bundled minutes. It appears that many customers are not using the minutes
included in their bundles, and are prepared to pay more for a more expensive tariff with a
large number of inclusive minutes even though they do not use them.
There are a number of possible explanations for this, including users over-estimating their
potential use, or paying for more minutes than they will need most months in order to have
certainty in monthly costs, or upgrading their monthly commitment in order to gain a higherspecification handset, or paying more for a mobile tariff in order to get a free or discounted
additional service (such as bundled broadband). Additionally, some contract customers will
be on inappropriate tariffs based on lack of awareness or insufficient information at the time
of initial purchase, or are yet to change to a contract that more closely matches their usage.
Figure 4.41
Average mobile cost per voice minute by customer type
Pence per minute
20
15
14.3
14.6
15.8
16.6
14.9
13.3
14.3
14.7
14.3
12.7
10
Contract
Pre-pay
5
0
2002
2003
2004
2005
2006

Note: Includes estimates where Ofcom does not receive data from operators; contract includes rental element;
figures have been restated from the 2006 Communications Market Report to reflect more accurate data.
4.2.9 Internet connections

Internet connections continue to grow
Ofcom estimates that there were 16.6 million residential and SME UK internet connections at
the end of 2006 (Figure 4.42). Of these, 78% (13.0 million) were broadband connections,
compared to 64% at the end of 2005. Absolute growth in the number of broadband
connections slowed from 3.8 million during 2005 to 3.1 million in 2006, and this trend is likely
to continue; Ofcom research indicates that at the end of 2006 50% of UK households had a
broadband connection while home computer / laptop penetration stood at 69%.
287
Figure 4.42
UK residential and small business internet connections
20
15
10
5
11.3
0.3
1.3
9.6
13.4
0.3
0.1
2.9
9.9
15.1
0.3
0.4
15.6
0.2
0.5
16.6
0.2
0.3
SME
narrowband
5.8
9.4
12.4
Residential
broadband
8.7
5.5
3.4
0
2002
2003
2004
0.6
SME
broadband
2005
2006
Residential
narrowband

Note: Figures have been restated from the 2006 Communications Market Report to reflect more accurate data;
SME broadband includes some connections over leased lines
Higher availability favours DSL and LLU broadband operators

Ofcom data showing the market share of broadband subscribers by service provider shows
that BTs retail share increased by one percentage point during 2006 to 24%, while the share
of ntl:Telewest (Britains largest cable provider which has now rebranded as Virgin Media)
fell from 29% to 25% in 2006 (Figure 4.43). Two factors can be identified here. Firstly, the
lower availability of cable broadband services; 46% of UK households were able to access
cable broadband services at the end of 2006 compared to the 99.6% able to receive DSL
broadband. At the same time, 67% of premises were connected to an unbundled local
exchange, and so should be able to receive LLU-based DSL broadband services (72% by
the end of March 2007).
A second contributing factor is that broadband is now a mass-market service. A few years
ago people taking up broadband services were early adopters and more likely to use
alternative internet service providers (ISPs) to their fixed-line supplier. With household
broadband penetration now in excess of 50%, new broadband connections are being made
by the late majority who may be less interested in shopping around and instead go for an
all-in service from a known provider.
At the end of 2006 ntl:Telewest (including Virgin.Net) was the largest broadband provider
with a market share of 25%, although in 2007 BT has overtaken Virgin Media (the rebranded ntl:Telewest) in terms of retail subscribers. BT reported that it had 38% of new
broadband connections in Q2 2007 to take its total retail customer base to 3.8 million
(compared to around 3.4 million for Virgin). Carphone Warehouses TalkTalk/AOL is the
UKs third largest supplier of broadband, reporting 2.4 million customers at the end of June
2007, while BSkyB was the fastest-growing, adding 259,000 customers in Q2 2007 to lift its
total number of subscribers to 716,000 in less than a year after launch.
288
Figure 4.43
100%
UK broadband service provision share of retail connections

13%
16%
16%
18%
16%
16%
80%
Other
Tiscali
60%
Orange Home
57%
44%
40%
34%
29%
25%
24%
TalkTalk/AOL
ntl:Telewest
20%
24%
26%
24%
23%
24%
26%
2002
2003
2004
2005
2006
2007 H1
BT
0%
Note: TalkTalk/AOL, Orange Home and Tiscali shares are commercially sensitive and are purposefully omitted
from the chart. Ofcom is unable to release these data.
LLU accounts for 17% of broadband connections as all sectors grow

During 2006 the number of LLU broadband lines increased from 0.2 million to 1.3 million and
at the end of the year LLU accounted for 10% of all UK broadband connections, compared to
2% a year previously (Figure 4.44). By the end of June 2007 the number of LLU broadband
connections had risen to 2.4 million, or 17% of the total, with 966,000 of these connections
being either TalkTalk or AOL, and around 580,000 being BSkyB LLU connections.
TalkTalk/AOL and BSkyB therefore account for almost two thirds of UK LLU broadband
connections.
BSkyB has acquired over 700,000 broadband subscribers in less that a year by marketing
free broadband services to its subscriber base of 8 million digital satellite TV customers,
while a similar offer from Orange to its 15 million mobile subscribers has had lower take-up.
One possible reason for this may be that that while digital TV and broadband are seen as
household purchases, a mobile phone is seen as an individual purchase.
The increasing availability of LLU services in 2006 and aggressive pricing by providers
increased LLUs share of broadband connections. This was at the expense of cable and
nonLLU DSL connections, where growth slowed and market share reduced. Cables market
share fell by three percentage points to 24% in 2006, while total non-LLU DSL connections
fell by five percentage points to 66%.
Figure 4.44
UK residential and small business broadband connections

14.4
15
13.0
3.2
9.9
10
Other
3.1
1.4
0.8
2002
0.3
0.3
6.1
2.7
0.2
2.0
4.7
3.1
1.3
2.4
Cable
modem
LLU DSL
5.5
5.0
1.4
0.9
0.8
2.7
1.4
2.3
3.1
3.7
2003
2004
2005
2006
2007 H1
Other nonLLU DSL

BT retail DSL

289
4.2.10 Internet access revenues

Falling prices limit growth of internet access revenues
We estimate that during 2006 total revenue from residential and SME internet connections
increased by 11% to 2.8bn (Figure 4.45). In the same period, revenue from broadband
services went up by 29% from 1.7bn to 2.2bn, while revenue from residential broadband
connections rose by 33%, from 1.5bn to 2.0bn. Falling prices for broadband, associated
with bundling offers, are constraining further growth in revenue and as LLU availability and
take-up grows it seems likely that prices will continue to fall as competition for subscribers
intensifies.
Figure 4.45
UK internet and broadband service provision retail revenues
billion
2.5
2.2
0.2
0.4
1.9
0.2
0.4
0.6
0.3
1.0
1.0
0.3
0.3
2.5
0.2
0.2
1.1
1.5
2003
2.0
SME
broadband
SME
narrowband
Residential
broadband
0.9
0.6
0.5
2005
2006
0
2002
2.8
0.2
0.1
2004
Residential
narrowband

Note: Figures have been restated from the 2006 Communications Market Report to reflect more accurate data;
dial-up metered revenue figure is based on revenue paid to telecom provider not the element retained by ISP.
4.2.11 Business markets

Strong growth in mobile revenue from business customers
Total retail revenue from business telecoms services grew by 4% to 12.3bn during 2006.
The largest increase was in revenue from mobile services, which grew by 0.7bn (15%) to
5.8bn in 2006 (Figure 4.46). Non-corporate internet revenue fell by 0.1bn during 2006 as a
consequence of falling broadband prices, while fixed voice revenues declined by 7% to
3.5bn due to increasing use of mobile services. Estimated revenue from corporate data
services increased by 4% to 2.7bn over the year, mainly due to growth in revenue from IP
VPN and ethernet services.
Figure 4.46
UK business telecoms services revenue
Revenue (bn)
15
10
11.5
11.6
11.7
11.8
12.3
2.2
0.7
2.3
0.7
2.5
0.6
2.6
0.4
2.7
0.3
3.7
4.1
4.5
5.1
5.8
Corporate
Data Services
Non-corporate
internet
Mobile
4.9
4.6
4.2
3.8
3.5
Fixed
0
2002
2003
2004
2005
2006
Source: Ofcom / operators / IDC

290
While business mobile voice revenues grew by 12% to 4.1bn during 2006, Ofcom
estimates that revenues from mobile data services (including SMS messaging) increased by
around 40% to 0.8bn. Much of this increase is a result of growing business take-up of
advanced handsets such as mobile personal digital assistants (PDAs) and BlackBerry
devices and the services required to exploit fully their capabilities. Despite business data
revenues strong growth, this sector still accounted for only 13% of total business mobile
revenue, compared to around 30% in the residential market where SMS use is higher.
Figure 4.47
Breakdown of business mobile revenue

5.8
6
Revenue (bn)
5.1
4.5
0.4
0.5
4.2
4.6
3.4
3.8
2002
2003
2004
2005
4.1
0.3
3.7
0.2
0.8
Data
(inc. SMS)
5.1
Voice
0
2006
Source: Ofcom / operators / IDC

Revenues per business fixed line falling as mobile substitution increases

Average voice revenue per business line declined 4% to 27.33 during 2006, with most of
the decrease being in line rental fees, which fell, on average, by 0.56 per month (Figure
4.48). Increased take-up of wholesale line rental (WLR) products contributed to this fall; at
the end of 2006 there were 1.8 million business PSTN lines and ISDN channels provided
using BTs WLR products, compared to 1.3 million at the end of 2005. Total business voice
call revenues per line (excluding NTS voice calls) fell by 1.05 per month during 2007 due to
lower prices and a slight decrease in average call volumes per line.
Figure 4.48
40
per month
30
20
10
Average voice revenue per business fixed line
35.02
33.61
7.58
7.58
3.05
5.37
30.42
6.99
28.38
27.33
6.25
1.97
2.60
2.85
13.66
3.79
2.53
4.52
3.39
2.29
3.52
2.93
6.50
2.13
2.83
2.70
15.23
15.59
14.68
14.22
To mobile
International
National
Local
Rental
0
2002
2003
2004
2005
2006

Note: Excludes revenues from NTS voice calls; figures have been restated from the 2006 Communications
Market Report to reflect more accurate data.
291
Business fixed call volumes per line continue to decrease

Average voice call volumes per business fixed line fell by 1% during 2006 to around 83
minutes per week (Figure 4.49). We estimate that during the same period, total business
voice call volumes from mobile phones increased by 21%, suggesting that mobile calls are
being substituted for fixed. Increasing use of email and other electronic forms of
communications such as instant messenger and VoIP will also exert a downward effect on
call volumes per line, although it is difficult to estimate the extent. However, Ofcom
consumer research conducted in Q4 2006 suggested that 14% of SMEs had used VoIP at
least once, compared to 8% a year previously, indicating that VoIP use is rising.
Figure 4.49
100
Minutes per week
80
60
Average voice call volumes per business fixed line

99.8
11.7
5.8
45.3
95.3
12.3
5.8
42.3
89.4
12.3
5.7
38.4
83.7
82.9
12.6
5.2
13.7
5.6
To mobile
35.3
34.7
National
40
20
International
Local
37.0
35.0
33.0
30.6
28.9
2002
2003
2004
2005
2006
0
Note: Excludes NTS voice call volumes; figures have been restated from the 2006 Communications Market
Report to reflect more accurate data.
BT share of business call volumes continues to fall

BTs share of business fixed call volumes fell by one percentage point to 38% during 2006,
as did that of ntl:Telewest (now Virgin Media) to 6% (Figure 4.50). The market share of other
indirect operators, which includes CPS operators offering service over WLR lines, increased
by one percentage point to 32%, as growth in the number of WLR lines continued. The
market share of other direct operators, i.e. providers who own and operate their own network
infrastructure, also increased during the year, to 25%.
Figure 4.50
Market share of business fixed voice call volumes
100%
23%
80%
60%
24%
8%
40%
20%
45%
26%
29%
31%
32%
Other
Indirect
25%
24%
24%
25%
Other
Direct
7%
7%
7%
6%
Cable
42%
40%
39%
38%
2005
2006
BT
0%
2002
2003
2004
Source: Ofcom/operators
Note: Excludes NTS voice call volume; figures have been restated from the 2006 Communications Market Report
to reflect more accurate data.
292
4.3 The Telecoms User

4.3.1 Introduction
This section looks at trends in consumer take-up and use of telecoms services to provide a
bottom-up approach which relates consumer behaviour to the wider industry trends
discussed in the previous section.
We define consumer as any end-user of telecoms services. These may be separated into
three categories: residential, SME and large business/corporate.
We focus primarily on the residential sector, both in order to provide continuity with
the rest of this report (as broadcasting is focused very much on the residential
sector), and because we believe that the residential sector benefits most from this
type of analysis and guidance.
SME telecoms take-up and consumption has more in common with residential
consumers than with big corporates, and the specific nuances of the SME market are
addressed in section 4.3.11.
We do not address corporate users here in any detail for two reasons; firstly, general
information about this market is well served by large companies own IT/telecoms
departments and relevant industry bodies; secondly, information about large
business/corporate behaviour is difficult to obtain as most telecoms contracts are
bespoke and details are generally confidential.
The analysis that follows is based on operator data and Ofcoms own consumer research.
Third-party research is used to supplement this primary data where appropriate.
4.3.2 Household spend and pricing

Household mobile spend down for the first time
For the second consecutive year, household expenditure on telecoms services fell, both in
actual terms and (marginally) as a proportion of average total household weekly spend.
Average household spend on telecoms services
per month (2006 prices)
100
3.39%
3.33%
3.32%
64.17
6.94
66.67
65.71
64.73
60
60.69
5.59
8.35
8.72
9.76
40
24.37
28.31
31.36
32.42
31.72
80
20
3.08%
3%
2%
1%
30.73
28.92
26.95
24.57
23.26
0%
2002
2003
2004
Internet &
broadband
4%
3.27%
2005
% of total expenditure
Figure 4.51
Mobile
voice &
text
Fixed
voice
% of total
2006
Source: Ofcom / operators / ONS

Notes: Includes estimates where Ofcom does not receive data from operators; figures have been restated from
the 2006 Communications Market Report to reflect more accurate data; adjusted to RPI
293
For the first time, average household spend on mobile fell in real terms, as falling prices
more than compensated for an increase in both the total number of connections and the
average use of voice calls and text messaging. Although estimated total mobile revenue
increased by 6.9% during the year, the majority of this growth came from the business
sector; we estimate that residential mobile revenue growth was just 2% in 2006. Estimated
average household spend on mobile services was 31.72 per month in 2006, compared to
32.42 in 2005. Average spend on fixed-line telephony continued to fall, although at a slower
rate than over the previous four years, driven by a combination of falling prices, fewer
connections and lower usage.
Falls in mobile and fixed-line spend were offset by an increase in spend on internet access,
as a result of the growing penetration of broadband. Internet access now accounts for an
estimated 15.1% of household spend on telecoms services (up from 13.3% in 2005). These
figures are based on operators own allocation of revenues; the prevalence of broadband
being bundled with voice and/or other services makes it difficult to apportion spending
definitively.
Cost of fixed-line voice steadies after years of decline
We use analysis of the cost of a basket of telecoms services as a means of comparing costs
over time. This analysis derives the real cost by identifying the average cost per minute for
access and calls (and cost per message for mobile) in a year, and then defining the basket
as the average number of minutes (and messages) used in 2006. Costs are then adjusted
for changes in RPI in order to provide a year-on-year comparison.
As Figure 4.52 illustrates, after five years of decline, the real cost of a basket of residential
fixed voice services has started to level out. A 1.6% increase in the access (or line rental)
fee is a result of the increased availability and take-up of inclusive services, where
customers receive inclusive or reduced-rate calls in return for a higher monthly access fee.
For example on BT Together plans, customers can choose to pay a monthly premium to get
unlimited inclusive evening and weekend calls to fixed lines (under Option 2) or an additional
premium to get unlimited calls at any time to fixed lines together with discounted mobile calls
(under Option 3).
Figure 4.52
Real cost of a basket of residential fixed voice services
30
25.45
5.21
20
2.00
2.12
4.47
23.69
4.83
1.75
1.77
3.95
22.11
21.04
20.88
4.36
1.48
1.27
3.41
3.97
1.32
0.98
3.07
3.93
1.34
0.97
2.77
To mobile
International
National
Local
10
11.65
11.39
11.59
11.69
11.88
2002
2003
2004
2005
2006
Fixed access
0
Note: includes VAT; excludes NTS; figures have been restated from the 2006 Communications Market Report to
reflect more accurate data.
Costs fall for all mobile services

The cost of mobile services fell significantly in 2006 (see Figure 4.53) with falls in the
average costs of calls to other mobile networks (off-net), to the same mobile network (on-
294
net) and UK geographic fixed calls, as well as falls in the average cost of messaging. In
addition, average line rental (or access) prices for contract services fell for the first time,
driven by higher availability and take-up of lower price line rental contracts with more
inclusive minutes and messages (which in turn has driven a decrease in the cost of on-net
and off-net calls and messaging, as more of these are included within the monthly rental
charge). For example, in February 2006, T-Mobile introduced its Flext tariffs, beginning at
20 per month and offering customers the choice of a large number of inclusive voice
minutes and/or text messages.
There is a significant difference between the actual cost of services to the consumer as
detailed below, and the price of these services. Research by Noodle in June 2007 estimated
that 900 million minutes are paid for each month as part of contracts but not used; for
customers with more inclusive minutes than they use, the price of each incremental minute
is effectively zero.
Figure 4.53
25
20
Real cost of a basket of mobile services

21.78
5.53
20.72
5.50
17.29
5.06
4.40
15
7.55
5.65
4.54
1.89
1.98
6.81
2002
10
5
Messaging
19.56
14.82
Off-net
3.59
1.85
3.46
1.51
2.68
1.25
On-net
7.58
8.11
7.91
7.31
UK fixed calls
& rental
2003
2004
2005
2006
0
Note: Based on the average number of minutes used in 2006. Includes VAT. Excludes 3UK.
Comparison of the average cost of a basket of contract and pre-pay voice services (again
based on average usage in 2006) shows that average spend is five times higher on contract
than on pre-pay, as a result of monthly line rental payments and much higher usage (Figure
4.54). (Regrettably, it is not possible to include messaging within this analysis as the
messaging data which Ofcom receives from operators does not currently distinguish
between contract and pre-pay.)
Contract voice costs have fallen more slowly than pre-pay costs (an 11.0% decrease
between 2005 and 2006 compared to 20.6% for pre-pay). This is in part a consequence of
the increasing value passed on to contract customers in handset subsidies (which is not
captured in the data below). However, it is also indicative of growing competition in the prepay market, with operators seeking to recruit new customers not only for retail revenue, but
also for the interconnect revenue they receive from terminating inbound calls and messages.
Mobile operator 3UK has been giving pre-pay customers credit in return for calls they
receive under its Wepay proposition, while new virtual network operator Noodle launched in
2007 with a similar model.
295
Figure 4.54
Real costs of baskets of mobile contract and pre-pay voice services
30
27.52
25
5.42
20
24.50
Off-net
3.99
1.35
1.62
On-net
15
10
20.48
19.16
5.35
4.25
1.99
1.20
1.06
2.36
1.71
1.29
0
2005
2006
Contract
2005
UK fixed calls
& rental
2006
Pre-pay
Note: includes VAT; excludes 3UK
Narrowing of difference in costs between fixed and mobile calls

These trends are all contributing to a narrowing of the gap in the overall average cost per
minute for mobile and fixed calls, although mobile calls still cost nearly twice as much on
average as fixed-line calls (see Figure 4.55). It should, however, be noted that the cost per
minute for mobile is over-stated as it does not include the value of the handset subsidy
which mobile operators recoup over the course of a contract.
A decrease in the average mobile price per minute is caused by competition in the market
which has driven down prices and in turn increased usage, but is also partly a consequence
of operators increasingly focusing on 18-month rather than 12-month contracts, which has
led to offers of more minutes and texts within lower value-contracts.
Although the cost of a basket of residential fixed-line voice services (based on customers
making the same number of calls year-on-year) has fallen slightly, the average real price per
minute has risen slightly. This small change is not indicative of pricing but is driven by lower
average use of fixed lines, meaning that a higher proportion of total spend is accounted for
by the fixed-cost line rental, combined with a small increase in the proportion of fixed-line
calls that are made to mobiles (and are therefore more expensive), which rose from 11.8% in
2005 to 12.3% in 2006.
296
Figure 4.55
Comparison of average fixed and mobile voice call charges
Pence per minute
20
15
14.7
14.6
15.2
14.5
13.1
10
Mobile
Fixed
5 7.1
6.9
6.6
6.5
6.6
0
2002
2003
2004
2005
2006

Notes: the analysis takes rental revenues and bundles into account and is based on actual usage of all types of
calls; figures have been restated from the 2006 Communications Market Report to reflect more accurate data.
Bundled broadband generally less expensive than buying services separately

While the cost of a basket of fixed and mobile services can be estimated, we cannot use
similar analysis as a proxy for broadband pricing, as almost 50% of broadband connections
are paid for within a bundle of services alongside other communications services and it is
difficult to allocate costs within bundles. TalkTalk, Orange and Sky promote free broadband
offers in order to attract new customers and retain existing subscribers to their fixed-line,
mobile and TV services, while most providers offer heavily discounted rates for broadband
by bundling it with other communications services.
Figure 4.56 provides an illustrative guide to the value that customers can receive by
subscribing to broadband in combination with other services. The table should not be used
to make comparisons between operators; only the lowest cost option from each provider is
shown; actual costs vary according to factors such as broadband speeds, usage caps,
different bundles of fixed, mobile and television services, and hardware subsidies.
297
Figure 4.56
Provider
Lowest cost broadband options from major suppliers, June 2007

Broadband
only
AOL
25.99
Be
25.00
Broadband
& fixed line
Broadband
& mobile
Broadband
& fixed &
mobile
Broadband
& fixed &
TV
Broadband
& mobile &
fixed & TV
25.99
BSkyB
26.00
BT
28.99
Orange
25.99
Pipex
25.99
29.89
PlusNet
20.99
20.99
TalkTalk
28.99
41.49
28.99
41.49
30.00
20.00
30.00
41.00
19.99
Tiscali
25.99
19.99
Virgin Media
18.00
20.00
Vodafone
28.00
45.00
Source: Pure Pricing UK Broadband, Bundling and Convergence Update, June 2007
Notes: Includes 11.00 BT line rental as relevant; lowest cost option / lowest price combination is shown;
activation charges and promotional discounts are excluded; mobile options may be SIM-only; allowances for
fixed-line and mobile calls, plus availability of TV channels included within packages may differ by operator and
option
Although bundling makes quantification of broadband pricing a complex issue, it is clear that
broadband bundling has exerted a significant downward pressure on overall household
prices for communications services. A free offer is, of course, rarely truly free and
customers often have to pay a connection fee, commit to a longer contract than they may
wish to and sign up for a premium service that they might otherwise do without. Another
downside for some customers is that switching can be more onerous because of the
complication of needing to find a new supplier for each service and because bundled deals
are generally associated with longer contracts (typically at least 18 months). In addition, for
some customers the offer of bundled broadband actually reduces choice; if they want
broadband only, they have fewer suppliers to choose from.
Customer value has also been increased by the option of higher broadband speeds; Ofcom
data show that the average headline speed rose from 1.6Mbit/s at the end of 2005 to
4.6Mbit/s at the end of June 2007, although as discussed previously there is a difference
between headline speed and actual speed. (See Section 4.1.6 for more details.)
4.3.3 Fixed-line and mobile penetration

More households now have mobile than fixed-line connections
A decrease in the cost of mobile access and calls has contributed to fixed-to-mobile
substitution, and, for the first time, the number of households with a mobile now exceeds
those with a fixed line (see Figure 4.57).
298
Figure 4.57
Percentage of respondents
100%
80%
Household penetration of key telecoms services
92%
93%
90%
89%
85%
80%
90%
90%
90%
Fixed line
60%
60%
57%
40%
93%
64%
Internet
connection
50%
42%
20%
Q4 2002
Q4 2003
Mobile
Q4 2004
Q1 2006
Q1 2007
Source: Ofcom research
The vast majority of households, however, have both mobile and fixed line (see Figure 4.58),
and the requirement to have a fixed line for DSL broadband access may put a constraint on
further increases in mobile-only households.
Percentage of respondents
Figure 4.58
100%
Household penetration of fixed and mobile telephony

1%
7%
2%
8%
1%
0%
1%
9%
10%
9%
80%
60%
None
73%
70%
Mobile only
80%
80%
84%
40%
Fixed and
mobile
20%
19%
20%
Q4 2002
Q4 2003
0%
Fixed only
10%
9%
7%
Q4 2004
Q1 2006
Q1 2007
Our research shows that mobile-only households tend to be in the lower socio-economic
groups; in Q1 2007, 5% of ABC1 households were mobile-only, compared to 15% of C2DE
households (Figure 4.59). This may be partly caused by the higher penetration of broadband
in ABC1 households (63% compared to 38% of C2DE households), while other contributing
factors include the higher numbers of tenanted households among C2DE groups (which are
less likely to have a household fixed line) and the desire among lower socio-economic
groups to have greater control and flexibility over spending, as is offered by pre-pay mobile.
299
Figure 4.59
Household telecoms connections by socio-economic group
% of adult users 15+
60%
40%
ABC1
63%
C2DE
20%
0%
38%
9%
4%
15%
5%
Fixed line only
Mobile only
Broadband
Source: Ofcom research, Q1 2007
4.3.4 Fixed-line and mobile usage

Fixed to mobile substitution driven by more inclusive minutes
As the price gap with fixed-line narrows, an increasing proportion of people claim that their
main method of making calls is now via mobile (see Figure 4.60). However, a majority of
people (59%) still claim that their fixed line at home is their main method of making calls.
Figure 4.60
Proportion of adults 15+
100%
Main method of making and receiving calls among UK adults

2%
21%
80%
31%
35%
Public payphone
4%
Mobile phone
4%
6%
60%
Fixed line -work

40%
73%
63%
59%
Q4 2005
Q1 2007
Fixed line - home
20%
0%
Q4 2004
This is consistent with average usage data for fixed-line and mobile connections reported by
operators. Partly because fixed-line connections are often shared by members of a
household, while mobiles are typically used by individuals, there are still nearly three times
as many call minutes per fixed-line connection as per mobile connection, but average
monthly mobile minutes rose to over 100 for the first time in 2006, while average fixed-line
minutes fell below 300.
300
Figure 4.61
Minutes per month
300
200
100
Average outbound voice minutes per residential fixed line

303
304
306
301
294
28
10
29
10
30
11
30
10
29
10
81
78
78
76
75
To mobile
International
186
184
National
188
184
180
Local
0
2002
2003
2004
2005
2006

Note: Excludes NTS voice calls; figures have been restated from the 2006 Communications Market Report to
reflect more accurate data.
Figure 4.62
Average outbound voice minutes per mobile connection
Minutes per month
120
96
95
9
1
13
11
1
17
11
1
19
13
1
21
26
30
31
30
28
30
93
80
60
13
1
Other
International
Off-net
40
20
102
99
100
On-net
40
38
35
32
32
2002
2003
2004
2005
2006
UK fixed
0
Note: Includes estimates for MVNOs where Ofcom does not receive data from operators; excludes 3UK. Other
calls include roaming, premium rate calls, WAP calls and all other call types; figures have been restated from the
Increasing use of mobile is partly driven by significant increases in the number of inclusive
minutes included in new contract connections (Figure 4.63).
Figure 4.63
Minutes per month
100%
Inclusive minutes in new mobile contract connections

8%
4%
8%
7%
32%
27%
80%
17%
17%
13%
14%
16%
18%
12%
10%
18%
14%
17%
14%
26%
32%
35%
10%
9%
18%
60%
14%
11%
36%
42%
8%
5%
11%
30%
33%
29%
20%
0%
501 to 700
11%
40%
701+
20%
301 to 500
201 to 300
17%
16%
12%
10%
101 to 200
0 to 100
13%
14%
13%
15%
10%
11%
11%
12%
Q3
2005
Q4
2005
Q1
2006
Q2
2006
Q3
2006
Q4
2006
Q1
2007
Q2
2007
Source: GfK
301
In mobile, average voice use increased for both contract and pre-pay customers throughout
2006 (Figure 4.64). There were more than five times as many contract minutes as pre-pay
minutes.
Figure 4.64
Average outbound mobile minutes by customer type
Minutes per month
300
225
214
220
219
213
200
Contract
Pre-pay
100
36
0
2002
35
33
35
40
2003
2004
2005
2006

Note: Includes estimates where Ofcom does not receive data from operators; excludes 3UK; figures have been
restated from the 2006 Communications Market Report to reflect more accurate data.
The average mobile user is now sending more than 12 text messages a week, with usage
increasing by 20% between 2005 and 2006 (Figure 4.65). In part, this may be related to
lower costs, with large numbers of text messages often included within bundles (see Figure
4.65) or available as separate add-ons; for example, T-Mobiles Flext tariffs which enable
users to choose between inclusive texts and inclusive minutes. However, it is also probably
an example of the network effect as text messaging has widened from a predominantly
young user base into a communications tool for the older population.
Figure 4.65
Average outbound text messaging use per mobile connection
Messages per week
15
10
12.4
5
7.2
8.3
9.0
2002
2003
2004
10.3
0
2005
2006

Note: Includes estimates where Ofcom does not receive data from operators; excludes 3UK; figures have been
restated from the 2006 Communications Market Report to reflect more accurate data.
302
Figure 4.66
Messages per month
100%
Inclusive texts messages in new mobile contract connections

2%
2%
3%
5%
4%
80%
38%
33%
9%
8%
2%
12%
4%
5%
21%
28%
60%
15%
19%
22%
7%
6%
14%
6%
29%
32%
9%
9%
37%
36%
40%
40%
20%
24%
23%
12%
0%
Q3
2005
Q4
2005
Q1
2006
Q2
2006
201 to 300
51 to 100
1 to 50
26%
22%
>300
101 to 200
43%
36%
40%
21%
8%
6%
3%
21%
1%
Q3
2006
Q4
2006
27%
25%
1%
1%
Q1
2007
Q2
2007
Source: GfK
4.3.5 Customer satisfaction

Over 90% of customers satisfied with fixed and mobile services.
Levels of overall customer satisfaction with both fixed and mobile telecoms services remain
high among residential customers, with over 90% claiming they are satisfied or very
satisfied. The most significant change since 2005 is a steep rise in the proportion of
customers satisfied with their mobile network access, which has risen by 24 percentage
points to 83%. This may partly reflect improved handover between 2G and 3G networks,
which has led to fewer dropped calls.
Residential consumer satisfaction with fixed and mobile services
85% 86%
58%
Very satisfied
Satisfied
50%
54%
2006
29%
54%
52%
2006
2005
47%
43%
2006
2005
39%
49%
2006
2005
45%
2005
51%
42%
40%
20%
83%
29%
40%
47%
48%
55%
Mobile
33%
94% 92%
32%
94% 91%
29%
34%
41%
51%
80%
60%
Fixed
79% 78%
Overall
Value for
money
Reliability
Overall
Value for
money
2006
2005
2006
0%
2005
% of consumers with service
100% 93% 92%
31%
Figure 4.67
Accessing
the network
Source: Ofcom research, Q3 2005 and Q4 2006

Note: Includes only those who expressed an opinion
Falling satisfaction with internet access

Overall satisfaction levels with internet service provision are markedly lower than those for
fixed and mobile services (see Figure 4.68). In part, this may because the technology is still
developing, and standards are yet to be fully established and understood.
303
A fall in the number of customers who are satisfied with internet cost is interesting in the
context of the falling prices associated with bundling. However, it may be a reflection of a
perceived gap between some of the marketing messages associated with broadband (for
example, the free offers) and the reality of often having to pay connection fees, or upgrade
fees, or commit to other premium services.
Similarly, satisfaction with speed of access has not increased despite migration to
broadband and the rising average headline connection speeds of broadband, and may
reflect dissatisfaction with performance compared to advertised speeds, combined with
increasing use of high-bandwidth services such as streaming video.
A small fall in satisfaction with reliability may be partly attributed to contention issues which
can mean that, as the number of broadband customers rise, during busy periods
connections slow down and can fail. The increasing use of home wireless networks which
are more prone to intermittent failure than wired access may also be a contributing factor
(Oxford Internet Institute research finds that 29% of households with internet access could
access WiFi in April/May 2007 compared to just 5% two years previously).
Residential consumer satisfaction with aspects of internet service
83%
34%
39%
71%
88%
77%
30%
81%
24%
70%
31%
85%
83%
24%
60%
35%
80%
40%
84%
34%
91%
30%
100%
Very satisfied
Satisfied
49%
49%
47%
47%
47%
54%
46%
53%
20%
49%
40%
51%
Percentage of adult users 15+
Figure 4.68
0%
Q1 Q1
2006 2007
Q1 Q1
2006 2007
Q1 Q1
2006 2007
Q1 Q1
2006 2007
Q1 Q1
2006 2007
Overall
Cost
Value for
money
Speed
Reliability
4.3.6 Switching
New telecoms landscape prompts high levels of switching
The high level of satisfaction of mobile and fixed customers comes against the background
of rising levels of switching: it appears that more consumers are shopping around for the
best deal and when they are dissatisfied with a particular provider they are now willing and
able to do something about it by changing provider.
An eight percentage point increase in the proportion of fixed-line users who have ever
switched provider in 2006 (see Figure 4.69) reflects increased competition in the market,
driven by local loop unbundling and wholesale line rental services and the associated rise in
bundled offers where other communications services, in particular broadband, are included
with basic fixed telephony. There is also a greater awareness of alternative service options.
304
Figure 4.69
Residential customers who have ever switched provider
% of adult users 15+
40%
30%
2005
20%
36%
37%
34%
28%
2006
26%
21%
10%
0%
Fixed line*
Mobile*
Internet+
* Data Q4 2005 and Q4 2006

+ Data Q1 2006 and Q1 2007
There is little change in the perception of the ease with which a fixed-line supplier can be
changed (see Figure 4.70), but a decreasing perception of the ease of changing internet
supplier. New regulation was introduced from February 2007 to ease broadband switching
by requiring internet service providers to provide customers who are out of contract and
request a Migration Authorisation Code with the code within five working days.
A rise in the perception of the difficulty of switching broadband provider could well be caused
by the rise in bundled offers, where customers cannot change broadband provider without
changing the provider of another service, generally in association with a minimum contract
length of at least 12 months. In the short-term, multi-service offers have been one of the
main drivers of switching as customers seek greater value, but in the longer term the higher
prevalence of bundled services may lead to a reduction in switching levels.
Figure 4.70
Ease of switching supplier
100%
80%
60%
16%
5%
6%
9%
2%
6%
13%
3%
7%
11%
2%
6%
35%
36%
15%
4%
9%
17%
8%
14%
35%
42%
43%
37%
Very difficult
41%
40%
20%
Don't know
48%
47%
34%
Difficult
Fairly Easy
31%
18%
Very easy
0%
Q4 2005
Q4 2006
Q4 2005
Fixed line
Q4 2006
Q1 2006
Mobile
Q1 2007
Internet
Base: All adults who have ever switched

4.3.7 Internet access

Over 50% of UK households now have broadband
The take-up of broadband over the past five years has been faster than the take-up of any
other new technology by the UK public around 50% (12.4 million) of households had
broadband access at the end of 2006 a result of migration from narrowband (dial-up)
305
access and also new internet households. However, over three million households still use
narrowband access; where high-bandwidth services such as video streaming, music
downloading or picture uploading cannot be used effectively.
Figure 4.71
UK residential and small business internet connections
20
15
10
11.3
0.3
1.3
9.6
0.1
13.4
0.3
2.9
9.9
15.1
0.3
0.4
15.6
0.2
0.5
16.6
0.2
0.6
0.3
SME
narrowband
5.8
9.4
12.4
Residential
broadband
8.7
5.5
3.4
Residential
narrowband
0
2002
2003
SME
broadband
2004
2005
2006
Source: Ofcom / operators; figures have been restated from the 2006 Communications Market Report to reflect
more accurate data.
Internet penetration grows with home computer ownership

For the last three years, internet penetration has closely followed household computer
ownership levels (Figure 4.72), suggesting that desire to use the internet has been a key
motivation for households to invest in a computer.
Figure 4.72
PC and internet penetration in UK homes
Proportion of households
100%
80%
64%
65%
53%
57%
67%
60%
57%
69%
71%
63%
64%
40%
PC
Internet
20%
0%
Q4 2003
Q4 2004
Q4 2005
Q4 2006
Q1 2007
Overwhelmingly, people who do not have the internet at home do not use it at all: only 7% of
UK internet users do not access it at home. After the home, the second most common
location for access is at work (Figure 4.73).
306
Figure 4.73
Location of internet access

Proportion of internet users 15+
0%
20%
40%
60%
64%
At home
27%
At work
In library or educational institution
13%
In someone else's home
13%
71% UK
adults
5%
Anywhere via a portable device
6%
In internet caf, shop or kiosk
3%
At other locations
Lack of perceived need for internet is major constraint on further penetration

The limited extent to which people are seeking alternative locations to the home for
accessing the internet is backed up by our research which finds that only one in five
households without the internet state cost as a reason for not having it. With only one in ten
claiming their reason is because they do not understand how to use it (a fall from 17% in
2004), the reasons for not having internet access are primarily voluntary (although some
consumers may give voluntary non-ownership reasons because they do not wish to discuss
affordability/competency issues within research). Nearly half of all adults without access say
that they have no need for the internet. This equates to around 4.5 million households (18%)
and, as the next section on internet usage illustrates, there is a strong correlation with age.
When it comes to internet penetration, a large element of the so-called digital divide is
related to perceived need and is a divide between younger and older generations.
Reasons for not having the internet at home
50%
Q3 2004
40%
No need for
Don't
Haven't got
internet
understand round to
how to use connecting
All cost
factors
Satisfied
using
elsewhere
20%
7%
8%
5%
0%
4%
2%
2%
0%
20%
16%
20%
20%
10%
16%
21%
23%
20%
Q3 2005
17%
14%
13%
10%
30%
37%
46%
43%
48%
Figure 4.74
Q1 2006
Q1 2007
Other

Note: Multi-coded question respondents were asked to state all reasons that were applicable
307
4.3.8 Internet usage

UK has most active online population in Europe
The widespread availability of broadband, together with the emergence of the internet as a
mainstream channel for communication, information and entertainment, has led to increasing
time spent online by those who have internet access. Ofcoms research finds that in Q1
2007 56% of internet users claimed to use the internet every day, a four percentage point
rise on a year previously (Figure 4.75). A Home.net report commissioned by Orange
Broadband found that in April 2007 47% of households spent three or more hours on the net
every day). ComScore research published in June 2007 reported that the UK had the most
active online population in Europe, with users spending an average of 34.4 hours online a
month, with a peak of more than 21.8 million people online in any given day.
Figure 4.75
100%
Frequency of internet access
80%
8%
7%
14%
8%
7%
12%
5%
5%
12%
60%
24%
21%
19%
Don't know
Less often
At least once a month
40%
20%
At least once a week

48%
52%
56%
Several times a week

Every day
0%
Q1 2005
Q1 2006
Q1 2007
Internet take-up highest among the young, but silver surfers are the most active
Unsurprisingly it is the internet generation of 18-24 year-olds who are the greatest users of
the internet, with (according to Nielsen//NetRatings and ONS data) around 65% accessing
the internet at least once in April 2007 (Figure 4.76). Penetration falls with age, with just 16%
of over-65s using the web, although these silver surfers spend on average almost 42 hours
online every month, more than any other age group. Indeed, far from being just a young
persons technology, one quarter of all Britons online are over 50 and 30% of total time spent
on the internet is by over-50s.
308
Figure 4.76
Internet use by age, April 2007
60
% using internet at least once
80%
Average monthly hours

online per active user
65%
51%
44%
48%
40
60%
47%
44%
40%
20
37.9
30.5
29.0
24.9
33.5
32.1
41.6
20%
16%
0%
All
(>12yrs)
12 to 17
18 to 24
25 to 34
Hours
35 to 49
50 to 64
65+
Penetration (RHS)
Source: Nielsen NetRatings / ONS
25-34 year-old women spend more time online than their male counterparts
As internet take-up has grown, women have accounted for an increasing proportion of use.
Although in April 2007 55% of total use was by men, among younger age-groups the
balance is reversed; women in the 25-34 age group spent ten percentage points more time
online than their male counterparts (See Figure 4.77). This is driven both by a larger user
base (2.18 million 25-34 year-old women used the internet in April 2007 compared to 1.83
million men), and women spending slightly more time on average online than men (29 hours
and 9 minutes compared to 28 hours and 51 minutes). Conversely, among the older age
groups, men spend much more time online than women, with only 21% of internet usage
among over-65s accounted for by women.
Figure 4.77
Internet usage by gender, April 2007 (total time spent online)
100%
21%
80%
45%
47%
49%
55%
51%
41%
Female
60%
40%
20%
79%
55%
53%
51%
45%
49%
All
(>12yrs)
12 to 17
18 to 24
25 to 34
35 to 49
59%
Male
0%
50 to 64
65+
Source: Nielsen NetRatings
Broadband customers use higher bandwidth services

According to Ofcom research, email is the most popular use of the internet, followed by web
surfing, although the majority of broadband users also use the internet for online shopping
(66%) and banking (58%) (Figure 4.78). Broadband users do more of everything than
narrowband users, with a particularly marked difference in high bandwidth applications such
as gaming and video downloading.
309
Figure 4.78
Online applications used by broadband and dial-up users, Q1 2007

0%
20%
40%
60%
80%
84%
82%
77%
Email
General surfing
Downloading information for personal reasons
48%
Making purchases
66%
47%
Banking
58%
36%
43%
Downloading information for work
33%
39%
27%
Downloading information for studies

Downloading video clips/movies etc
47%
21%
Gaming
16%
SMS messaging
Real time gambling/ trading
59%
56%
7%
14%
17%
32%
Broadband
34%
Narrowband
eBay and social networking services most popular web sites, by time spent
Measures of online use by domain or category usually focus on reach in terms of numbers of
unique visitors in a given period. However, Nielsen NetRatings data measuring use by time
is also a useful metric and presents a very different picture (Figure 4.79). Based on usage in
April 2007, eBay emerges as a very clear leader, with users spending over twice as much
time on the UK website as on its nearest rival.
Social networking websites also rank very highly, with Bebo, MySpace and Facebook all in
the top ten. Bebo was the second most popular website in times of total time spent on it,
despite being only ranked 20th in terms of unique users, with users spending on average 162
minutes on it every month. Average monthly use of multiplayer role-playing game
Runescape was 318 minutes per user, lifting it to into the top ten by time, even though it only
ranks 131st by reach.
Research by the Oxford Internet Institute in March-April 2007 showed that 17% of UK
internet users have created a profile on a social networking site, and that use of social
networking sites is strongly related to life stage; 42% of students have created a profile,
compared to just 2% of retired internet users.
Web portals and search engines rank highly by time spent, but are more dominant in terms
of unique users. Google has consolidated its number one position in terms of reach with 17
million unique users visiting Google.co.uk in April 2007 (or 69% of the online population).
This is 43% more than its nearest rival MSN.com, which it led by 10% in April 2006 (and
Google.com has 12 million unique users).
The dominance of brands and companies that did not exist a decade ago illustrates the
sweeping changes that the internet has brought to the UK media landscape. Among the top
20 websites by use and by reach, the BBC is the only representative from the old media of
broadcast and print.
310
Top 20 UK websites by time spent online, April 2007

20
17.1
10.4
8.5
7.8
6.0 6.1
3.0
Total hours online
3.0
1.2
1.5 1.4 1.4 1.4 1.3 1.1
live.com
aol.co.uk
yahoo.com
google.com
runescape.com
facebook.com
youtube.com
yahoo.co.uk
msn.com
myspace.com
google.co.uk
bbc.co.uk
bebo.com
0.7
19.3 9.1 8.2 8.2 8.1 7.0 5.3 4.5 4.3 3.9 3.4 2.9 2.2 2.2
2.1
Unique users
5
0
virginmedia.com
3.8
2.0
piczo.com
3.4
5
0
10
6.2
tiscali.co.uk
5.3
wikipedia.org
10.7
10
15
12.9
11.9
amazon.co.uk
11.7
orange.co.uk
15
Unique visitors (millions
20
ebay.co.uk
Total time online (millions of hours
Figure 4.79
Source: Nielsen//NetRatings, April 2007 At home data excluding internet applications
4.3.9 Voice over internet protocol (VoIP)

VoIP slowly gets foothold among residential consumers
Ofcom research in Q1 2007 found that 18% of households with broadband were currently
using VoIP (Figure 4.80), a four percentage point increase since December 2005. With
awareness of VoIP remaining fairly steady at around 70%, the increase in use may be a
consequence of the network effect, i.e. a service becoming more valuable as more people
use it, rather than the result of new product offers or marketing campaigns.
Typical of new technologies, younger people are more likely to use VoIP services (in
October 2006, 13% of all 15-24s and 14% of 25-44s compared to 9% of 45-64s and 2% of
over-65s did so), as are higher socio-economic groups (14% of ABC1s compared to 6% of
C2DEs).12
Figure 4.80
Awareness and use of VoIP
100%
80%
68%
77%
72%
Q4 2005
Q4 2006
Q1 2007
60%
40%
14%
20%
20%
18%
0%
Awareness of VoIP
Currently using

Base: All adults with broadband
12
For more information on use of and attitudes towards VoIP, see Ofcoms research publication, Research
Report: Voice over Internet Protocol (VoIP), 26 July 2007,
http://www.ofcom.org.uk/research/telecoms/reports/voip/
311
Perceived interoperability issues constrain growth of VoIP

The most common use of VoIP services is for making calls to others using the same VoIP
provider (Figure 4.81), again emphasising the importance of critical mass before VoIP
becomes widely adopted. Ofcom research in October 2006 found that 67% of users used
Skype as their service provider, with MSN a distant second at 18%. Almost a quarter of
respondents (23%) stated that they were with more than one operator, suggesting that
perceived interoperability issues create a need to sign up with different providers, and that
this is easily done as a number of the basic services are free of charge, meaning that
switching providers or using multiple providers incurs no extra cost.
Figure 4.81
Usage of VoIP services, October 2006
Make calls to VoIP same service
86%
Make calls to VoIP different service
36%
3% 11%
Make calls to ordinary

numbers
65%
Receive calls from

ordinary numbers
0%
20%
40%
21%
14%
39%
17%
43%
Yes
No
Unsure
51%
13%
60%
80%
100%
Source: Ofcom research of VoIP users, October 2006
VoIP has not yet reached the mass market

Difficulties in sizing VoIP take-up stem from problems with identifying call volumes. We
estimate that 70% of VoIP users use it at least once a week, with 44% using it every day or
several times a week. About 30% of users do so less often than once a week (Figure 4.82).
Our research finds that, to date, VoIP services have not replaced fixed or mobile services.
VoIP users are more likely to have a fixed line than UK adults as a whole; 97% of the users
surveyed said they had access to a fixed line. Likely contributory factors are the requirement
for most broadband households also to have a fixed voice line, the generally low per-minute
cost of UK geographic calls from fixed lines, and the familiarity and ease of use of fixed-line
equipment. But 10% of users surveyed said they did not have access to a fixed line (3%) or
had one but did not use it (7%).
Figure 4.82
Frequency of VoIP usage, October 2006

Less often
30%
How often do you or someone in

your household make voice calls
using the internet?
At least once a week

26%
Source: Ofcom research of VoIP users, October 2006
312
Every day
14%
Several times a week

30%
VoIP users are also more likely to have the use of a mobile service than UK adults as a
whole; all 500 VoIP users surveyed had use of a mobile phone. Substitution of VoIP services
for mobile services is likely to be slower than for fixed-line services because, currently, most
operators are restricting use of VoIP. Orange and Vodafone modified Nokias N95 handset
to disable the function that allows users to make VoIP calls; Vodafone excludes VoIP from
its mobile internet data pack (as of June 2007, VoIP is charged at 2 per Mbit/s plus a 5p
minimum charge for each data session); while T-Mobile explicitly prohibits phone customers
from making VoIP calls under the terms of its Web & Walk contract. Among mobile
operators, only 3UK has actively promoted VoIP, using its partnership with Skype to promote
its X-Series add-on (from 5 a month), although availability is restricted to a small number of
handsets.
Data are not available, but it is likely that there is some substitution of call volumes,
particularly of international calls as this is where most cost savings can be made.
4.3.10 Children
Children feel left out without their own mobile and the internet at home
As described in section 1.9.6, children are at the vanguard of the convergence of media and
telecoms technologies, and their use of communications provides insight into the cultural
shifts that are taking place in the digital world. Ofcom research finds that over 60% of tenyear-olds own a mobile phone, rising to over 90% of 15-year-olds. Seventy per cent of tenyear-olds use the internet at home, rising to nearly 80% of 15-year-olds.
Mobile phones and the internet are essential to the way in which children live their lives and
define themselves. Around two thirds of children do not believe they could easily live their
lives without a mobile phone and the internet and claim that they would feel left out if they
had to do so (Figure 4.83).
Figure 4.83
Childrens attitudes towards mobile phone and the internet
80%
70%
63%
60%
55%
73%
63%
72%
66%
75%
71%
66%
57%
50%
40%
All aged 8-15

Aged 8-11
20%
Aged 12-15
0%
Would feel
"left out"
without the
internet
Could not
"easily live
without" the
internet
Would feel
Could not
"left out"
"easily live
without a
without" a
mobile phone mobile phone
Source: Ofcom research, April / May 2007

Base: Children who own their own mobile phone / use the internet at home
Children send nearly four times as many texts as they make mobile calls
There is a wide range in the amount that children use their mobile phones. A large
proportion of younger children make very few calls or texts. For these children, ownership of
a mobile phone appears to be primarily about safety, and when questioned 96% of 8-15
year-olds said that their phone kept them safe and in contact with parents.
313
However, 10% of children make over 20 calls a week, and 29% send over 20 texts. As might
be expected, use rises with age, but all ages make many more texts than voice calls. Texting
seems to be a way of life for many children, with children between 8 and 15 who have
mobile phones sending on average 30 texts a week, compared to making just eight phone
calls.
Figure 4.84
Voice calls and texts sent in a typical school week & weekend
Mean number of calls
100%
10%
3%
7%
80%
19%
9%
5%
2%
4%
15%
42%
60%
Mean number of texts

2%
2%
7%
11%
4%
10%
29%
23%
10%
17%
9%
10%
17%
8%
17%
42%
20%
19%
48%
27%
21%
14%
16%
Aged
12-15
All aged
5-15
23%
Aged
5-7
Aged
8-11
6-10
None
14%
7%
0%
All aged
5-15
11-15
Up to 5
27%
46%
20%
11%
10%
38%
Over 20
16-20
6%
32%
48%
40%
39%
Aged
5-7
Aged
8-11
Aged
12-15
Mobile phone calls made in a typical

Text messages sent in a typical
school week & weekend
school week & weekend
Source: Ofcom research, April / May 2007
Base: Children who own their own mobile phone / use the internet at home
12-15 year-olds spend an average of two hours a day on the internet

The internet also forms a major part of childrens lives, with those with home access
spending on average nearly one and a half hours a day online (Figure 4.85). This rises to an
average of two hours a day among 12-15 year olds, nearly one fifth of whom spend over 20
hours a week on the internet.
Figure 4.85
100%
80%
Hours using the internet at home in a typical school week and

weekend
10%
10%
5%
25%
2%
4%
8%
11%
15%
27%
40%
0%
Mean hours
16%
Over 20 hours
23%
Up to 20 hours
29%
60%
20%
17%
Up to 15 hours
61%
46%
36%
27%
Up to 5 hours
17%
2%
7%
2%
All aged 5-15
Aged 5-7
Aged 8-11
Up to 10 hours
None
Aged 12-15
Source: Ofcom research, April/ May 2007

Base: Parents of children aged 5-11 who use the internet at home and children aged 12-15 who use the internet
at home
314
Over three-quarters of households with children have internet access

Households with children are more likely to have internet access than those without, and
those with internet access are more likely to have broadband (Figure 4.86). Levels of
internet access and broadband use also rise as children in the household get older,
suggesting that childrens needs are a significant driver in the take-up of household internet
services. However, over a quarter of UK households with children do not have internet
access.
Figure 4.86
Internet access in households with children
100%
36%
80%
27%
8%
60%
12%
40%
52%
20%
32%
30%
9%
7%
21%
6%
No internet
access
Dial-up /other
65%
59%
62%
Households
with children
aged 5-7
Households
with children
aged 8-11
72%
Broadband
0%
All
households
Households
with children
aged 5-15
Households
with children
aged 12-15
Source: All households, Ofcom research, Q1 2007; Households with children, Ofcom research, April/ May 2007
4.3.11 SMEs13
SMEs have less need for company mobile connections
Ofcoms research into small to medium businesses (<250 employees) finds that mobile
penetration is slowly falling (Figure 4.87). However, this should not be seen as a decrease in
the use of mobile communications; it is more likely that as mobile penetration among the
population as a whole has risen, smaller companies are increasingly relying on employee
subscriptions, with costs claimed back as staff expenses.
% of SMEs with at least one mobile
Figure 4.87
Penetration of mobile telephony among SMEs
80%
60%
40%
61%
54%
59%
2003
2004
55%
54%
2005
2006
20%
0%
2002
13
Ofcom changed its SME research methodology in 2006 and now excludes sole traders. Therefore,
trends should be treated as indicative rather than definitive.
315
50% of SMEs have ever changed fixed-line supplier

As in the residential market, 2006 saw a significant rise in the numbers of small businesses
who have at some point switched their supplier of fixed-line services. This was particularly
true among the larger SMEs (50-249 employees) in 2006, of which half reported that they
had at least once switched supplier, compared to 38% in 2005. This may be partly due to
Cable & Wirelesss decision to rationalise its customer base and focus on the corporate
market, but also comes in the context of increasing competition, particularly from the
availability of unbundled lines, and the effective targeting of larger SMEs by alternative
network providers.
Figure 4.88
SME switching of fixed and mobile suppliers

Fixed
80%
Mobile
64%
60%
40%
63%
50%
34%
39%
42%
38%
2005
38%
2006
20%
0%
1-50
employees
51-250
employees
1-50
employees
51-250
employees
High levels of satisfaction with telecoms services

Increased levels of switching do not, however, appear to be a reflection of dissatisfaction,
with overall satisfaction with both fixed and mobile remaining high. However, satisfaction in
terms of value for money and customer service was higher for mobile than for fixed, perhaps
as a result of the mobile market being more stable in 2006 in terms of the providers and
propositions available.
Figure 4.89
100%
SME satisfaction with fixed and mobile services, 2006

Fixed
86%
80%
60%
Mobile
89%
71%
45%
27%
78%
79%
70%
46%
27%
43%
51%
36%
Customer
service
Overall
VFM
34%
39%
Very
satisfied
40%
20%
41%
44%
Overall
VFM
40%
0%
316
Customer
service
Fairly
satisfied
Broadband dominates, but over 10% of SMEs still use dial-up

The internet is well established as an essential tool for small businesses, with our research
finding that 83% had an internet connection in 2006. In line with changes to the residential
market, these connections are now overwhelmingly broadband (Figure 4.90), although the
12% who still use dial-up indicate that for a significant minority either their level of internet
usage is not sufficient to prompt them to move to broadband, or they are not aware of the
benefits that broadband can offer.
Figure 4.90
SME internet access by main connection method, 2006
2006
79%
2005
73%
2004
50%
2003
2002
4%
1% 12% 2%
34%
10%
0%
14% 3%
22%
32%
20%
6%1%
4%
41%
4%
48%
4%
40%
16%
Broadband
ISDN
Leased lines
PSTN/ordinary dial-up
Other
61%
60%
80%
100%
Proportion of SMEs with internet connection
Small fall in satisfaction with internet service

Satisfaction with the service levels provided by internet providers is lower than for fixed and
mobile providers, and matches the pattern among residential consumers. Satisfaction levels
are similar to 2005 (when, overall, 45% were very satisfied and 46% satisfied).
Figure 4.91
Proportion satisfied
100%
SME satisfaction with aspects of internet service

86%
75%
80%
60%
43%
30%
81%
86%
68%
40%
Very satisfied
46%
32%
40%
20%
43%
45%
41%
40%
36%
Overall
VFM
Speed
Reliability
Customer
service
Fairly satisfied
0%
Source: Ofcom research, 2006
317

Ofcom Telecoms 2007

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Ofcom Telecoms 2007

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The Communications Market 2007

4.1.1 UK telecoms industry key metrics

4.2 The telecoms industry

4.3 The Telecoms User

4.1 The year in telecoms

Total telecoms retail revenue (bn)

Telecoms service revenues (bn)

Average weekly household spend on

Fixed access and call revenues (bn)

BT share of fixed revenues (%)

Total telecoms wholesale revenue (bn)

Proportion of unbundled exchanges (%)

Active 3G mobile connections per 100

4.1.2 Overall costs for residential consumers fell by 13% in 2006

Monthly cost (s 2006 prices)

Real cost of a basket of residential telecoms services

4.1.3 Local loop unbundling accelerates

Proportion of unbundled exchanges and connected premises

Source: Ofcom / operators

Map of unbundled BT exchanges

Source: Ofcom / BT data; December 2006

Proportion of premises in unbundled areas taking LLU services

Source: Ofcom / operators

Carrier pre-selection, wholesale line rental and LLU lines

Source: Ofcom / operators

4.1.4 BTs share of voice call volumes falls below 50%

Market share of fixed voice call volumes

Share of voice call minutes

Source: Ofcom / operators

4.1.5 Majority of UK households have broadband

UK residential internet connections

Source: Ofcom / operators

Ofcom, Broadband Migrations: Enabling Customer Choice (December 2006),

4.1.6 Broadband headline speeds double in 2006

UK broadband connections by headline connection speed

Faster than 8Mbit/s+

Faster than 1Mbit/s and up

Less than or equal to

Data not available

Source: Ofcom / operators

Theoretical time taken to perform online activities

Headline connection speed

Download 250kB webpage

Download 5MB music track

Download 25MB video clip

Download low quality movie

1 second 0.3 seconds 0.1 seconds

Maximum DSL speeds by distance from BT exchange

Distance from exchange (km)

Ofcom Communications Market: Broadband 2006 Digital Progress report:

Share of residential and SME broadband connections

Source: Ofcom / operators

4.1.8 Service bundling proliferates as LLU availability increases

Bundled service offers from major suppliers, June 2007

Broadband and mobile

Broadband, mobile and TV

Broadband, fixed and mobile

Fixed, TV and mobile