The Telecom Industry of the United Kingdom - Term Paper Example

Analysis of competition in the telecommunication industry in the United Kingdom Introduction and rationale of industry The telecom industry of the United Kingdom (UK) is considered to be one of the largest in the Europe. Consequently, it is characterised by strong competition in broadband and mobile sectors and an innovative broadcast sector that is known for pioneering business models associated with digital content distribution. Studies suggest that broadband and mobile penetration in the UK alone is relatively ahead of Europe’s average. Telecommunications is one of the growing and significantly important sectors of the UK economy. The growth in the industry was around 10% and 4% in 2006 and 2007 which however declined in by about 6% in 2008 and 2009. It has been observed that the business sector in the UK is heavily dependent on telecommunication sector for conducting transactions. Besides business sector, the social life of the UK is also significantly dependent on the telecommunication sector as purchase of television, tablets and smartphones have increased significantly. Additionally, the ecommerce of the UK is also growing rapidly which has further contributed in growth of the telecommunication sector. In 1984, the UK telecommunication sector became free from government monopoly and since then a number of private companies has entered in the industry. Study by Marketline suggests that in 2012 the net worth of the telecom industry was $52.8 billion with about 116.2 million subscribers. It was also ascertained that wireless telecommunication comprises 57.3% of the total market and forms the largest segment in the UK telecommunication industry. The telecommunication sector of UK consists of about 14.1% of the total European telecommunication sector (International Trade Administration, 2011; MDB, 2011; Marketline, 2012). In the following sections of the paper, the competition in the UK telecommunication industry has been discussed with special mention of its major competitors from financial as well as non-financial perspective. Introduction and rationale of chosen companies Studies suggest that a number of companies are vying for occupying even that smallest space in the telecom industry of the UK. The telecom industry of the UK has been experiencing declining trend is recent years due to a number of reasons yet it is considered as the most lucrative market among France, Spain, Italy and Germany. It was further observed that not only the UK telecommunication is facing slow growth but this trend has been observed in all over Europe. The UK telecommunication sector provides a variety of services because of which it is not possible to compare performance of different operators on a group basis. In the mobile phone based service sectors, the primary competitors include O2, Vodafone and Orange. In the fixed line telecommunication sector of UK, one of the primary operators is KCOM group. On the other hand, British Telecommunications (BT) is one of the oldest companies in the telecommunication industry of the UK and provides services associated with telephony, broadband and television subscription (ECRRG, 1997). In this paper, three companies will be assessed in terms of their services namely, Vodafone Group PLC, KCOM Group PLC and BT Group PLC. BT Group PLC BT Group was established in 1980 and is one of the earliest companies in the telecommunication sector of the UK. The company presently deliver services such as telephony, television subscription and broadband facilities in more than 100 countries all over the world. It was observed that even though the mobile subscribers of BT Group have decreased over the time, the company holds one of the highest positions in the broadband service providing sector. According to the Ofcom (2014), the company has highest market share of 31% in the broadband sector followed by Virgin media at 20%. According to the Guardian (2011), BT had highest number of subscribers at around 5.83 million and a market share of 29% in 2011. The facts clearly suggest that the company is growing even if the growth rate is relatively slow. Vodafone Group PLC Vodafone Group PLC is another important British multinational telecommunication company and was founded in 1991. Vodafone delivers mobile and other telecom services in almost all countries across the global. Vodafone has significant market share in the UK telecom industry. According to Statista (2013), Vodafone was ranked as the second most preferred mobile phone operator as it occupied about 17% total market share while the highest position was held by O2 at 24%. According to the Wall Street Journal (2014), Vodafone has more than 19 million subscribers in the UK but the company is facing stiff competition from companies such as EE (joint venture between deutsche Telecom and Orange) (Vodafone, 2014a; Statista, 2014). KCOM Group PLC KCOM Group was established in 1982 and presently it delivers communication and information based services to various organisations and business sectors in the UK. The company serves various public and private sector companies such as Dorset Public Sector network, East Midlands Public Sector Network, Dominos, British Airways, Virgin Group and Morrisons. The primary difference between KCOM and other two companies is that KCOM provide services across various locations within the UK while Vodafone and BT are globally omnipresent multinational companies (KCOM, 2014). Financial and non-financial ratio analysis Financial Ratio Current ratio: Current ratio depicts and establishes relationship between current asset and current liabilities of a firm and along with quick ratio, these ratios represent the short term liquidity position of an organisation. The current ratio is calculated as current assets/current liabilities. The generally notion in this regard is that the ratio should range between 1:1 and 2:1 and should be neither higher (extremely liquid) nor lower (illiquid). Current ratio is very useful for working capital management. Financial gearing ratio: Financial gearing ratios are closely related to solvency ratios and reflect long term solvency position of a firm. In this paper, interest coverage ratio and debt equity ratio have been taken in consideration so as to determine solvency position of the three firms. The interest ratio is calculated by dividing earning before tax and interest by interest payable while the debt equity ratio is calculate as total debt/total equity. Efficiency ratio: Efficiency ratio denotes the effectiveness of the firm in terms of resource utilisation and conversion of the same in profit. In context of the given companies of UK, asset turnover ratio and revenue to capital employed ratio has been applied. The asset turnover ratio reflects the ability of a firm to utilise its assets appropriately to earn revenue and calculated as net revenue/total asset. Ratio of revenue to capital employed is calculated as net revenue/ capital employed and it reveals if the total capital has been employed properly to earn maximum revenue. Profitability ratio: The profitability position of a firm is generally reflected with the help of ratios such as gross profit margin, net Profit margin and return on asset. The net profit and gross profit margins are calculated by dividing each by sales and converting the same in percentage form. These values suggest the level of profit has been earned n revenue after meeting all costs. Additionally, return on asset reflects the level of profit a firm was able to earn by investing in various assets and it is calculated as net income/total asset. Investment portfolio: Investment portfolio reflects the prospects of an organisation to draw investment from existing, former and potential shareholders. Investment profile of a company is evaluated on the basis of a firm’s dividend payout ratio and earnings per share. Higher dividend payout ratio and earnings per share are considered attractive. Earnings per share increases with rise in share price and share price rise indicates better profit and future prospects for the company (Will, Subramanyam and Robert, 2001). Nonfinancial ratio Goodwill: Goodwill is one of the essential intangible assets of a firm. Except for Vodafone, none of other companies had issue with goodwill. Vodafone faced issues related to goodwill impairment in Portugal and a few other countries in 2014 which resulted in operational loss for the company. Employee turnover ratio: Studies suggest that none of the three companies have high employee turnover ratio which suggest that employees of these companies are satisfied with the management and its organisational performance (Vodafone, 2014b; Yahoo Finance, 2014a; 2014b; 2014c; Reuters, 2014). Aim and objectives The primary aim of this paper is to understand the telecommunication industry of the UK elaborately and represent the gathered information in a holistic manner. For this purpose, geographical ratio will be analysed, rationale behind selection of specific companies will be discussed and the overall industrial environment of the telecommunication sector will be evaluated. In this regards, Porter’s five force model will be used to evaluate the competitiveness of the industry in the UK and other relevant factors. However, the PESTLE analysis has been considered appropriate for environmental assessment and will be implemented in the paper. Assessing geography ratio Geography ratio will be primarily used to establish that the telecommunication industry occupies a significant position in the UK economy. Despite declining trend in the telecommunication revenue, it was observed that demand of telecom services is increasing at a rapid rate. Selection of companies Any developed economy is significantly driven by the telecommunication sector and companies such as Vodafone, BT and KCOM represent the telecom industry of UK in an appropriate manner. These three companies were considered ideal because they together represent local as well as international companies in the British telecom sector. Environment analysis Porter’s five force model and PEST analysis have been considered as appropriate methods of environment analysis regarding the telecommunication industry in the UK. Porter’s five force model The various forces with respect to Porter’s model in context of the telecommunication industry are discussed as follows: The threat of new entry The telecommunication sector of the UK is a relatively mature market and the current slow growth rate of the sector will act as a deterring factor for new entrants in the market. Additionally, the switching cost to consumers among various service providers is relatively low and services provided by most fixed-line telecom firms are highly undifferentiated resulting to saturation in the sector. A noteworthy factor in this regard is that entry in the telecommunication sector requires heavy capital outlay which may not be a feasible choice for new entrants. Hence, it can be suggested that threat of new entrant is relatively low (Marketline, 2012). The threat of substitutes It has been observed that the primary substitute of the telecommunication services is internet based communication facilities such as email, instant messaging, internet calling and social networking. Internet based services are considered as cheap alternatives of telecommunication. Alongside, growth of smartphones and tablets has resulted in heavy dependency on internet services. However, it has been observed that telecom service providers are diversifying their arena by offering internet based services as well such as broadband and mobile internet. Consequently, the threat from substitute was considered to be weak (Marketline, 2012). Buyers’ power The telecommunication market of the UK is characterised by oligopolistic behaviour where relative less number of large companies are operating with large number of individual and commercial buyers. Consequently, the power of buyers is weakened as loss of one consumer will not have significant impact on the business of any of the market players. However, low level of product differentiation and switching cost hampers consumer loyalty and strengthens buyer’s power. Additionally, due to weak economic conditions, consumers are exhibiting strong preference towards prepaid services over post-paid services resulting to greater choices and strong negotiation position of buyers. Overall, the power of buyers is moderate in the UK telecom industry (Marketline, 2012). Suppliers’ power Despite large number of telecommunication operators, the number of suppliers who deliver complex yet reliable networking services in geographically extensive areas is very limited. It has also been observed that a number of large scale suppliers are themselves telecom service providers. Due to less number of suppliers, the switching cost is relatively high. Therefore, it can be ascertained that the suppliers’ power is relatively strong in the industry (Marketline, 2012). Degree of rivalry Rivalry in the UK telecommunication industry is growing due to present of large multinational companies that are enjoying benefits of diversification and economies of scale. Due to undifferentiated services rivalry among players is escalated, who try to stabilise their market position through grater quality measures, functionality, brand awareness and pricing strategies. Presently, companies are trying to differentiate their services with the help of various internet based services and positioning it as an additional service. Overall, it can be suggested that the degree of rivalry is fairly high in the UK communication industry (Marketline, 2012). PEST analysis Political environment The UK is increasingly becoming a lucrative business destination for various national and international firms. It has been also observed that a number of companies besides its sole operations also operating in joint venture with other companies in the telecommunication sector for acquiring greater market share. The political environment of the telecommunication sector of the UK is significantly affected by regulations related to internet based services and communications act 2003. The Communications Act 2003 replaced the previous regulation, the Telecommunications Act 1984 (The Guardian, 2003). This act also introduced Office of Communications (Ofcom) as the new telecommunication and broadcast industry regulator. Additionally, a number of amendments have been made in the act so that malpractices on behalf of consumers as well as companies in the telecommunication sector are minimised (Government of UK, 2003; Ofcom, 2003). In this context, it is noteworthy that the industry is subject to anti monopoly legislation so that consumers are protected. The UK is a member of various international organisations such as UN and WTO which further strengthen the position of the country as a business creator and nurturer from national and international perspective (US Commercial Service, 2014). Economic environment Since the financial crisis of 2008, the economy of the UK has weakened significantly and markets are maturing at a rapid rate. The communication sector has significant contribution in the economic growth of the country because presently every organisation need telecommunication services such as wireless networking, internet, intranet, fixed landline and mobile services for conducting and growing their business and contribute to the economy. Consequently, it is being considered as an essential sector thereof. It was also ascertained that the country risk profile of the UK in terms of economic, political and financial position of the country is relatively low; as a result, there is significant scope of business expansion in the form of foreign investment (US Commercial Service, 2014). According to various research organisations, the revenue of telecommunication sector in the UK and the Europe is expected to witness gradual decline due to increase in demand of internet based services instead of fixed line telephone and mobile services. Growth of internet based services will have negative impact on revenue of telecom companies because these services are relatively less expensive compared to fixed or mobile calling services. However, the subscribers of telecommunication services are growing at a rapid rate which can be considered as a positive development (BA Resources, 2014). Socio-cultural environment The socio-cultural environment was observed to be significantly influenced by the recent developments in the telecommunication industry of the UK. The increasing number of Smartphone and tablet owners has resulted in significant rise in demand for internet based services for instant messaging, voice and video calls and social networking. Consequently, it can be suggested that the developments in the telecommunication industry is making necessary contribution in enriching the social lives of consumers. Additionally, with strict regulations by Ofcom, consumers are feeling relatively more secure while communicating with each other. Relatively low services charges have resulted in increased communication and other online activities between families and friends (BA Resources, 2014). Technological environment The UK is considered as one of the technologically advanced countries across the world as studies suggest the consumers are heavily dependent on various gadgets such tablets and smartphones for performing and keeping track of their activities. The scope of telecommunication services is high as smartphones and tablets require internet and telecommunication services for being completely functionally (BA Resources, 2014). The technological environment of the UK telecommunication industry is evolving as the hard technologies are rapidly changing. From basic internet services, companies are engaged in providing better internet services such as 3G and 4G. With relatively less scope of differentiation, services such as voice and video message, supportive applications and service and others can be considered as major breakthrough in the technological environment of the telecommunication industry (BA Resources, 2014). Impact on environment The telecommunication technologies are generally considered as clean technologies as the traditional telecommunication measures had negligible amount of environmental impact. However, wireless technologies emit electromagnetic radiations which have significant negative impact on the components of the environmental landscape (Morais and Siqueira, 2009). Reference list BA Resources, 2014. PESTLE. [online] Available at: [Accessed 25 October 2014]. ECRRG, 1997. Telecommunications Networks– a vital part of the Critical National Infrastructure. [pdf] UK Government. Available at: [Accessed 25 October 2014]. Government of UK, 2003. Communications Act 2003. [online] Available at: [Accessed 25 October 2014]. International Trade Administration, 2011. Telecommunications Market Snapshot: United Kingdom. [pdf] ITA. Available at: [Accessed 25 October 2014]. KCOM, 2014. About us. [online] Available at: [Accessed 25 October 2014]. Marketline, 2012. 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