Company Trend Analysis - Brexit To Weigh On FreedomPop's New 'Freemium' Model - MAY 2017
BMI View : FreedomPop ' s new low-cost, Wi-Fi centric own-brand phone will help it stand out in the UK ' s crowded MVNO market and win budget-conscious customers. While its freemium model is not new, it does place additional downside risks on margins as the threat of higher roaming costs with EU states becomes more tangible.
Mobile virtual network operator (MVNO) FreedomPop has launched an own-brand handset, the V7, which prioritises automatic Wi-Fi calling over cellular connectivity and provides monthly free voice, data and messaging for users. A one-off fee of GBP59 applies, although additional data or voice usage can be paid for, if needed. The UK is one of the most diverse MVNO markets in Europe, and the move to own-brand devices is a logical next step for smaller players and new entrants. However, the emphasis on free Wi-Fi calling means FreedomPop will need to offer users greater incentives to spend more on additional services and the threat of higher international roaming charges post-Brexit would weigh on its ability to do so.
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Although the V7 is underpowered relative to entry-level devices offered by rival MVNOs and full network operators, it is a dual-SIM handset, giving the user the opportunity to add a connection from another low-cost supplier and potentially giving the user little reason to commit to FreedomPop or to pay for additional call minutes or data. And even if the V7 attracts many new customers onto FreedomPop's service platform, we do not believe this is a sustainable business model, even allowing for the fact that MVNOs' operating margins are usually high enough to permit very low prices.
The UK MVNO market is thriving as a result of low international roaming rates that appeal to the millions of expatriates living and working in the UK; international brands such as Lycamobile and Lebara lead the way and account for a large proportion of the 15% of the UK mobile subscription market served by independent players in 2016. MVNOs' overall share of the market is still growing and it is natural that newcomers such as FreedomPop should consider how best to exploit demand in this crowded market. It should do well in Spain, the second market where the V7 and freemium service plan will be launched.
However, in its latest Budget Plan, the UK government proposes to introduce value-added tax (VAT) to calls roaming to non-European Union (EU) destinations, potentially leading to a 20% increase in prices. With the UK set to leave the EU within the next two years, it seems highly likely that VAT on roaming will also be applied to EU-bound calls post-'Brexit'. This would be a major challenge for existing operators, but their greater scale and direct control over data-centric services means they would be less affected than MVNOs. Those that rely on 'freemium' business models and the expatriate market are likely to be hit hardest and FreedomPop's new strategy could turn out to be short-lived.