Barclays PLC (BARC) Earnings Call Transcript & Summary

Excellent. Well, I'd like to invite the panelists up on the stage. We've got a very focused audience to talk about opportunities and challenges. First up is Sophie Ahmad, who's Chief Commercial Officer at Sky. Then we've got Claire Gillies, CEO designate, BT Consumer; and Patricia Cobian, who's CFO of Virgin Media. I think this sits very nicely for this discussion because we have what I think is, in Sky, one of the largest but asset-light facilities like telcos. We've got BT, which is clearly, by definition, incumbent and very dominant. And we've got Patricia for VMED, which is the largest infrastructure-based challenger. So hopefully, we'll sort of explore 3 different perspectives on this big concept of opportunities and challenges.

I think one of the biggest issues in this topic is growth. Where do we get growth in telecom? Markets are generally mature. Data growth is slowing. I'd love to hear from each of you is, is there further growth to go in connectivity? Can you grow in mature markets? Can prices move up? One of the analogies I picked up at this conference that I thought was very pertinent was actually Mark Evans years ago at BT saying -- sorry, at O2 saying, "You pay GBP 4 for your Starbucks each day. And each year, it goes up by CPI. But you cannot price telecom services at CPI plus plus." So I guess the big question on the opportunities and challenges panel is, is there growth in core connectivity in the U.K. Sophie?

I think when we think -- at Sky, we think about all of the services that we can provide to customers' homes. Connectivity is, of course, the foundation of those services, particularly as we've moved over to be focused on products delivered over IP. So when we think about how do you monetize connectivity, how do you make sure that you've got the best connectivity experience, the best in-home WiFi experience and out-of-home experience that can enable all the other services that customers love, whether that be engaging in sport or movies or entertainment or some of our newer services like Sky Protect, we've moved into smart home equipment, we want to make sure that we have a brilliant foundation that enables us to provide even better services to the home.

I think just to build on that, I've used the Starbucks analogy a number of times with the team that says, on average today, many consumers are paying less than GBP 1 a day for their broadband service or their mobile service. And yet we go and get that morning coffee and spend GBP 3.50 or GBP 4. It's quite remarkable given the utility that the product actually offers. And if you ask a group of consumers what would it mean to you to have a service outage for a day, half a day, typically, I can get people to an outage of more than an hour is quite disruptive in their lives these days. And it impacts their ability to work. It impacts their ability to do school to view content, et cetera, et cetera. And so I think the single most important thing as we think about the future is how do we actually grow the quality of our products because it is so imperative to life. And I think we have to continue to do that each and every day, build on the application layer that we offer across all of our services. Build convergence, right, I think that's another big thing. And the impact and the benefit you get from having all of your services with one provider can be immense. And so I think there continues to be growth, of course, in the innovation that we do in this industry. And just think about the number of industries that telecoms has supported on a global basis, and so what is our fair share of some of those other industries as we look to our next wave of growth.

That's right. Patricia?

Yes, absolutely. And look, the GBP 1 a day has been around, I think, ever since that panel that you were referring to, Alex. So I think that, yes, traffic growth is slowing down. I think that the latest census report talks about 10% year-on-year. It used to be around 30%. So that is a potential room for some rebalancing in investment that may not be unwelcome. But clearly, it's not just about data traffic volume. It is about the speed. It is about reliability. It's about seamlessness. So you were talking about the broader quality. And look, when it comes to price rises, I think that many telcos have those embedded in their Ts and Cs, even those that don't continue to push them through. So are they going to go away? It's unlikely. But that doesn't negate the absolutely astounding value for money that the U.K. consumer gets for telco services if you compare it to any other market in Continental Europe or the U.K. a few years back. Does that negate growth? I don't think so. Look, it's a tough market, but we've talked about convergence. But even before we go into the breadth of services, I think our brand portfolio enables growth through being able to access and better serve additional segments. That is part of our strategy. Wholesale is a source of growth, and we have a relevant share in the MVNO market, and we serve competitors for our partners. And we're also wholesale-ready. In fixed, we have to the tune of 7 million full-fiber premises and a wholesale-ready fixed infrastructure that we are testing and demonstrated as we launch gift card in broadband. So that's another route for growth. I think that convergence is not just connectivity, it's not the breadth of the end-to-end connectivity services for a household, but there's potential to expand into other categories. We already include digital content subscriptions. That could be security, smart home, connected health, a number of other areas. For us, B2B is a source of growth, and we're very excited about the deal recently announced with Daisy Group to create a stand-alone company focused on the B2B segment, being able to serve customers across the range of segments there in a manner that perhaps gives them, as Lutz often says, the sunshine and the rain that needs to grow and to blossom, not embedded in a more consumer-focused environment. So there's no single bullet, and it is a tough market, but the growth is there, and we are definitely working on driving that forward.

I want to go straight on convergence next, but I want to sort of just push on this beyond connectivity. And as a telco, you own the customer. You have a billing relationship. You have a brand. You have a strong relationship. But there's an argument, have you actually been able to upsell into that relationship? Can you go beyond connectivity? Can you sell other products, financial services, energy? Are there other scopes for growth? Or do you see those as distractions away from your core purpose?

Maybe I'll jump in on that first because I think you raised an interesting point. It's about what are you selling to that converged customer. And the first thing is you have to start with we are selling connectivity, like that is the first piece, and serving the activity that a customer wants across all of our various different platforms. Do they want to -- as we said, do they want to game? Do they want to watch? Do they want to work? What are the types of things that they're doing? And it's not so much about convergence as what you're really talking about, it's using your customer base as a distribution channel. In many ways, that's what you're actually affording. And you've seen this industry evolve across the globe to be a content distribution channel. And you've seen large players in the market start to build their content into our services. And so that's less about convergence and more about what we see as our assets. And earlier, on some of the panels, you heard people speak about leverage. And scale can provide you leverage. It can provide you access or appeal to some of these organizations who look to you to do those things. On the topic of can you use that customer base to sell other things, the answer is yes. We're very fortunate. Our product is in the pockets, in the hands of consumers many, many, many hours a day. They're a highly engaged audience, in fact, an addictive product, if you will. And so how we use that to sell other adjacent products and services, I think, is up to each one of us independently in our business to say what makes the most sense for the consumer base we serve. At EE, we've chosen to move into some of those new categories. You've seen us over the last number of years do things like gaming and tech. Well, it's because it's adjacent, and we feel we can be experts in that category and speak to it in an intelligent way. Who better to sell you products and services for home security than the people who provide the broadband that connects those services reliably for those who have that need? So I think there's lots of different things, but it's less about is it about converging your networks and it's more about using your customer base as a distribution channel, if you will, selling adjacent products that you have credibility to do.

I would agree. I think the key is that you have to live up to your brand. What does the customer expect for your brand? The Sky customer expects that we'll live up to believe in better, that we'll give them an innovative service that's making their home life better at a good value. So when we think about the additional value-add services that we can provide, they've got to live up to the Sky brand, and they've got to make sense to the consumers that they think, "Of course, I would take that from Sky."

Can I just come back to this concept of convergence? What does it actually mean to all of you though? I think of convergence as just selling fixed and mobile products into a customer base to reduce churn, to try and grow it. A lot of people argue that's unproven. In fact, you're discounting into your own customer base. A lot of people would challenge you in that the purchasing decision is different between the mobile and the broadband. Can you just -- and then I talk very narrowly between fixed and mobile, so you probably think more broadly about it. Can we just get a quick synopsis from each of you of how do you think about this concept of convergence and how do you use it in your businesses?

Yes. If I may start, I think in the U.K., we're still in the early stages of convergence. I look at other markets. So for instance, Spain, I think it's levels of 70% to 80% of converged households in the market. You look at France, Portugal, the Netherlands, it's around 50% penetration of convergence. If you look at the U.K. market as a whole, we're around the 20-something percent. So there's a lot of room for growth. And I don't believe that it's not real. I think that there's different market structures and different paths to growth. But ultimately, being able to serve the breadth of connectivity services in a household, it's a valuable proposition and not having to worry about whether it's mobile or it's fixed, it's 1 or it's 3, there's a value wrapped around it that I think we've started to exploit when we launched Volt 4 months into [ Liberty ] joint venture. And it was not necessarily about discounting. It's about more value for our converged customers, right? So they get double data or they have a higher speed, they get priority perks. And you can then further evolve into different levels and options of connectivity or, as Claire said, you can then expand. And if you earn the trust and you have the credibility as a brand or a portfolio of brands, you can then further develop the relationship with those customers that our experience tells us that they are more valuable and more loyal and they're more satisfied.

Converged is an interesting word, too, because if we actually look at the definition of converged, it's integration, right? And truly, when we look across the platform of telecoms, convergence has been at the level of having one bill for a customer in your line. You have both services, ergo, you get a discount. What I think we see next is you start to move into converged applications and products and services, one set of controls across broadband and mobile, one set of networks moving from your wireless network to your WiFi networks. What are the various different actual practical converged applications that we'll see in the future. In telecoms today, it's largely bills and discounting. I think we move into more advanced, deeper consumer benefits as we go forward into the future. I think that's going to be key. Right now, it's largely a source of multiproduct bundling discounts or value-adds, if you will. But I think that evolves as we think more deeply because consumers ultimately, I say this a lot, they don't care what network they're on. What they care about is the activity that they're doing. And we, we think about selling broadband and we think about selling mobile. What that consumer mostly cares about is what application it is that they're going to do and how we're serving it up in the most credible and reliable way to them. So convergence moves forward. Does it provide value-adds, to your point, stronger customer lifetime value. You've seen different cases of it around the world. I absolutely think if we collectively do convergence right, then it can add tremendous benefit.

It's got to bring some joy to customers. They've got to be using the products that they're taking from you and thinking, "I love taking these products. I love this brand. I love having this brand in my home." And discounting is not necessarily going to do that. It might be a good rational decision when you're thinking about who your next provider is going to be. But if the actual experience isn't converged and if you're not getting a product benefit, then I don't think it works.

So ultimately, we're talking about broadening the role that we play in customers' lives and being able to deliver to a broader set of their needs. And convergence could be connectivity, could be content. For our partners in Tesco Mobile, it's supermarket needs. So convergence can take many different dimensions, but it's about that service to a broader set of needs in our customers.

Okay. So let me move to infrastructure. I mean, because you need that infrastructure to deliver that service. Is infrastructure ownership a source of competitive differentiation? Can you serve your customers better by owning your infrastructure?

I'll start. I think you described us as asset-light. That's the strangest introduction I've ever had. So thank you for that. I think we don't think that you have to own the network to offer a really differentiated customer experience. When we launched Sky Mobile on what was the O2 network a few years ago, we created some really differentiated propositions such as being able to roll your data or just having unlimited data to watch as much Sky content as you wanted. You don't need to be a network owner to find the issues that customers are having and create a proposition that's going to make a difference for them. I think the challenge is you've got to also keep providing great value for money. And so ensuring that you can build these unique and innovative propositions whilst also providing great value, I think, is the key.

Yes. I think if you look at it from the customer perspective, right, does it drive customer differentiation, infrastructure ownership? I think that the answer is no. I think that to drive customer differentiation, you need to have quality of service. You need to have scale and then you need to have the credibility and trust of customers in your brands. And we see the power of scale in the market, I think in the prior panel, there was a lot of references to it, and subscale players struggling and behaving in an irrational way. So I think that from a customer perspective, that doesn't really exist as a source of differentiation. In fact, there's a lot of customers that get confused about the relationship between retail ISPs and the networks. So therefore, it's that service quality, it's the credibility, the trust in the brand and the quality of service. Now for us as Virgin Media, to drive the quality of service, the experience that our customers deserve, we do need to invest quite significantly in our networks, in our mobile network and our fixed network and in customer service and then in building additional capabilities. So it's not that it doesn't matter, but it's not necessarily the driver of differentiation in customer markets.

Clearly, I believe in infrastructure, right? I believe that someone who's been able to afford 11 years of mobile network leadership at BT and the EE brands, infrastructure ownership makes a difference, right? It allows you to think about the most critical elements of the customer experience and how you integrate that into your product. When you read customer surveys over and over again, I'm yet to read one in 25 years in this industry that doesn't say network performance and quality is the single most important thing. We can look at reliability, we can look at coverage, we can look at speed. And more importantly, we can look these days on security and the applications we put, and I think that close relationship between the products and services and the network infrastructure ownership makes a meaningful difference. And the surveys show it time and again. And I think customers choose what they can afford. And if they want to have the very best quality, they're willing to spend a little bit more to do that. So I think it's a huge benefit to us and something that I strongly believe in.

Let me come back to Sophie just because you're the biggest customer is possibly here. When you look at how you buy your mobile and your MVNO or how you buy your wholesale broadband fiber, do you have similar methods or the different ways you look at the mobile market versus the fixed? How do you make that decision over which wholesale provider to pick?

Well, I think you have to be strategically aligned with the partner. And so for us, it's about making sure that we can work with the partner to launch the services and to provide the services to customers that they want. So we've been good partners on Sky Mobile since launch. That was an important moment for us to make sure that we had a partner that we could grow with. And so I think you have to take each experience or customer need one by one and find the right partner to support you there. I would just say one other thing, which is we're not a network owner, but we have access to an incredible global product road map with Comcast, and they produce the best WiFi hardware and have the best network management and reliability team in the U.S. And so I believe that the broadband experience and the WiFi experience that we can offer customers is second to none because we have the benefit of having access to brilliant global partners that do that day in, day out. And I think that, that means that we're in violent agreement because I think that -- look, that network quality, does it matter? Of course, it does. It does to BT, to Sky, to Virgin Media. Absolutely fundamentally, it makes a difference to our customers. It's whether, in their minds, is the ownership that makes the difference or are there other considerations. I think that that's where we have a different nuances.

And I agree with that. And I also think it's important to recognize that not all consumers value the precisely same thing. So Sophie may decide that the network that they participate and they partner with to provide that access doesn't have the same quality because it's not as important to their customers. They're willing to trade off quality for price. This happens in the market all of the time. So I think you have to remember, each of us respectfully look at the market and decide which customer base we want to serve to determine what price we put in the market, what margins we're delivering. We have differentiated customer opportunities.

You can't have a panel like this without going into AI. One of the fine features of telco is you feel like you've -- I think the sector has enabled digitalization across society, but hasn't really monetized it. The big value has been created away from the networks. AI is now clearly transforming society. How much of that value can be captured by -- if I classify you broadly as telcos, can you capture, will you capture a lot more revenue traffic? How do you see that being monetized in your businesses?

I think look, it's early days, and there's a lot of uncertainty around how it will evolve. But at Virgin Media O2, we have AI increasingly embedded in our operations and we see increasingly becoming core in our ability to deliver value, not necessarily just cost savings, but also a differential customer experience. So let me give you an example. So when it comes to protecting customers against fraud, for instance, we flag over 50 million calls as spam or scam per month, 50 million calls, to support and protect our customers against fraud. And in the last 2 years, we've intercepted around 170 million scam or spam messages for our customers. It's absolutely fundamental, and it's a topic that is going to continue to increase in relevance and drive broader impact in our operation and in the service that we deliver for our customers. AI is making a meaningful difference in our customer service. We ask our customers what they're calling us about, and we use that information with AI-enabled tools to direct the customer to the right team to reduce call times and to drive first-time resolution higher. Now that drives shorter calls and therefore, potential efficiencies, but it also improves NPS. So there is very clear customer-related applications to AI already. And then if we go back to the network, for instance, clearly, AI-enabled tools help us identify better and target where we build and proactively manage and fix across network management and operations. So I think that AI is already a reality and will continue to evolve. And you're right, there's no AI without telco. So clearly, AI will drive traffic growth, and we are fundamental to the development of a supercharged AI leadership position that the U.K. government is trying to achieve. But that requires that telcos, as enablers of AI, their position is well understood and appropriately positioned.

It's a really exciting area for the telcos. And to your point, I completely agree that whether you're talking about customer experience, whether you're talking about efficiencies in support and care, whether you're talking about where you put inventory or where you roll your trucks and how they get to locations to do repairs in a more timely manner, there's not a single part of our businesses that can't leverage AI. And what's also exciting about it is we have an incredible amount of data, all right? When you think about knowing what customers are doing, how the network is performing, et cetera, how we leverage that data, again, how we leverage that data to feed each of those respective areas, I think it drives cost savings. I think it drives customer experience benefit. I think it impacts our ability to grow revenue, as we spoke about earlier. I think every part of the business starts to evolve as AI develops and we get deeper learning and more comfort with the technologies.

We've got 1 minute left. And so I want to get the last -- because we've got Qualcomm coming later. Just to wrap up, if you had one single regulatory change that would really positively impact your business, what would that be? I can ask each of you, really starting with you, Sophie, what would that be?

I think you want to operate a connectivity business in a regulatory environment that encourages competition, that enables us to keep giving customers an offering at a great price, but also encourages network investment and build.

I think they've generally done a good job. I mean we have a vibrant, highly competitive market here. Light touch is going to be better. Let us each work respectfully across our own businesses to differentiate, to win customers.

Yes. And what I would say is we're not a problems sector. We're a solutions sector, right? We enable growth across so many areas of the economy. And to do so, we need to continue to invest in new generation digital infrastructures. So the ask would be to create the environment for that investment to be incentivized. And hopefully, we can continue to make progress because the direction of travel, as you say, Claire, I think, is positive.

Excellent. Now that's us out of time. Can I have a round of applause for Sophie, Claire and Patricia.