What's the long term goal?
Orange and T-Mobile have confirmed that they are in negotiations to create a 50:50 joint venture that would merge their UK operating arms into one player.
I have just taken a call from a consumer journalist who asked, quite validly, if this meant that with a reduced number of operators in the UK market, consumers might suffer from a lack of competition, and see prices rise.
Aside from regulatory issues, you'd have to be fairly cynical to think this is the long term goal of consolidation. Instead, I'd be inclined to think the opposite. Mobile operators know that as they increase HSPA speeds and then look at LTE, they will be offering mobile broadband services that will compete directly with the fixed line, DSL and cable operators.
But they cannot do that, and carry the kind of traffic that implies, with their current cost per bit on the radio network. They also carry discreet and heavy non-network cost bases of supporting services (marketing, billing, customer care etc etc).
The two operators have said that by spending up to £800 million in integration costs up to 2014, the will be able to reap cost savings per annum of £445 thereafter. The integration costs would "primarily relate to the decommissioning of mobile sites, the rationalisation of the network of retail stores and the streamlining of operations", the operators said.
It's clear that the operators want to operate one network. One supporting operation. And they want to do this to bring their cost base low enough to allow them to compete as a converged, broadband operator.
In short, the deal is about lowering prices to consumers, not raising them.
Culture and innovation
Another aspect that occurred to me is the culture of the two players. At first sight, you'd think Orange is the innovator, and T-Mobile the stuffy remnant of its incumbent owner. But FT has long deadened the sense of independence that first breathed life into the Orange brand. And in fact T-Mobile, aware of its number four position in the market, has been forced to be the innovator – on flat rate tariffs, open internet access, and open device platforms such as Android.
Will FT be willing to see its 50% stake in the joint venture be just that – and relinquish the central control it is used to exerting across the group? What happens to the Signature devices – with their whole realms of specifications now in development with manufacturers? What of the partner programmes, application and development platforms?
Network
Who will run it? What will it be? Who will supply it? Is this a threat to the network equipment vendors, reducing their possible market, or will they be eyeing that 600-800 million spend on integration and angling for a slice? We know that operators are looking for the lowest possible cost pre bit from their suppliers, but an integratio project like this is huge. There will be opportunities for those who can provide the sort of automated discovery, planning and then management tools that the operators will require. This can't, surely, be a manual operation.
Comment trail- to be updated – please send us yours to KeithD@mobileeurope.co.uk:
Abigail Browne – senior analyst at Informa Telecoms & Media
“T-Mobile UK has historically pursued a price-leader strategy, while Orange UK has positioned itself more in the high- to mid-end, but neither has been able to match O2’s and Vodafone’s exclusive handset deals.
“The scale of the new joint venture would give the new entity strong purchasing power but Informa believes the deal is actually good news for competitors Vodafone and O2, despite their own respective bids for T-Mobile UK being rejected.
“Vodafone and O2 will both benefit from a reduction in competition, and be able to assert their own brands over the next 18 months while the joint venture focuses on internal integration. Removing one player from the market will also help alleviate the intense price competition that has ravaged the UK market, which will be to the benefit of all players.
"The big question now is how the enlarged entity will position itself in the market. Informa believes the success of an enlarged T-Mobile/Orange is by no means guaranteed given the strength of the Vodafone and O2 brands, and the potentially conflicting strategies France Telecom and Deutsche Telekom may have for the UK operation."
Matt Hatton – Principal Analyst, Analysys Mason
"Both operators have been struggling in the competitive UK market. They clearly hope that, by combining their capabilities, they will gain the economies of scale necessary to challenge O2 and Vodafone. Consolidation is inevitable in a mature industry, but the recent rash of network-sharing deals seemed already to have gone a long way towards achieving the goal of reducing the cost of serving subscribers. Clearly, Orange and T-Mobile felt that the efficiency savings implicit in network sharing were insufficient, so they have opted to combine their entire operations."
Regulatory considerations
"A number of regulatory hurdles will need to be overcome before the merger is agreed, as it will reduce the amount of competition in the market. It is by no means guaranteed that UK competition authorities will approve the deal and, even if they do, they may attach some stringent requirements, such as obliging the operators to help to provide rural broadband coverage.
"Network sharing. T-Mobile has an established network-sharing arrangement with 3 UK, through its 50:50 joint venture Mobile Broadband Network Limited (MBNL). In future, in the interests of minimising costs in a mature market, European MNOs will be involved in an intricate web of network-sharing deals.
Vendor consolidation
"As Ericsson is the main supplier of network infrastructure to O2, Vodafone and MBNL, this merger makes it the substantial leader in the UK market.
Operating synergies
Orange and T-Mobile claim that they will save GBP445 million annually in operating costs by 2014, having invested GBP600–800 million in 2010–2014 to achieve this. It is often difficult to find the operating savings when merging such well-established operating businesses. It is hard to combine back offices and Orange and T-Mobile correctly acknowledge that it will take a few years.
Spectrum
The licensing of 2×70MHz of spectrum in the 2.6GHz band is imminent in the UK. The reduction in number of viable bidders from five to four means that the operators are more likely to gain more spectrum at a lower price. The merger of these two 1800MHz operators also has potential implications for 900MHz refarming, and there is also the question of whether the two might exceed their spectrum allocation, and how this might be treated by the regulator. Unfortunately, the merger process is likely to delay any agreement on refarming, rather than expedite it, although it will make an agreement simpler to negotiate.
Virgin Mobile
T-Mobile hosts the Virgin Mobile MVNO, which accounts for 5 million of its 17 million subscribers. Any change in the ownership of T-Mobile could have implications for the relationship with Virgin, depending on Virgin’s attitude to its new host.
Fixed–mobile convergence
T-Mobile and 3 UK were the only two UK mobile network operators that did not provide fixed-line services. Even the major MVNOs are able to provide fixed–mobile bundles and Virgin, in particular, has been aggressive in bundling mobile services with its cable offer. Although the business case for fixed–mobile convergence of voice is questionable, the boom in mobile broadband – and the associated network loading – makes it important for MNOs to offload traffic from mobile to fixed networks wherever possible. The ability to offer a full suite of fixed and mobile services is not essential, but it does reflect the fact that broadband provision will increasingly require both a fixed and a mobile element for most subscribers.
Implications for the other UK operators
If the competition authorities permit this merger between Orange and T-Mobile, it is unlikely that either Vodafone or O2 will be allowed to merge with another major player. However, that would not prevent either party from bidding for 3 UK. Further consolidation along those lines is probable as the UK MNOs battle for scale.
Implications for other markets
The UK is one of the most competitive markets in Europe, so it is unsurprising that there has been consolidation. There has been consolidation in other highly competitive European markets in recent years, including from five network operators to four in Austria and from five to three in the Netherlands. In both cases, T-Mobile and Orange were involved in the
Emeka Obiodu and Steven Hartley – Senior Analysts, Ovum:
"Assuming the deal goes through without a hitch, it does realign the UK competitive landscape. To date the two separate operators have struggled to close the gap on Vodafone and O2. The combined entity would not only become the clear market leader, but the synergies (through network integration, marketing and distribution, and other efficiencies) are promised to be £620 million by 2014, thereby improving profitability immensely.
"It is important to remember too that Orange’s fixed broadband assets are also included in the deal, so the combination would enable T-Mobile customers to receive integrated offerings. This should not be overstated, but for T-Mobile the lack of a fixed strategy was leaving it somewhat exposed to future trends in the UK."
Huge challenges for Vodafone and 3:
"The T-Mobile/Orange merger sets the stage for a total transformation of the UK mobile market and poses the question of the response from Vodafone, O2 and 3. Unsurprisingly, 3 will be the most affected as the merger cuts it adrift in the market. With a market share of less than 6% it would become too small to compete realistically and would have to reconsider its presence in the UK, either by becoming an MVNO or exiting the market.
"For Vodafone, this merger is a blow as it relegates it to third in its domestic market. This will dent the group’s ego, and Vodafone must take steps to ameliorate it. Even a takeover of 3 will not be sufficient. However, given the recent cosiness between Vodafone and BT, this might just become the prompt for Vodafone to tie-up with BT and take the initiative in its domestic market as an integrated telco.
"O2 and Virgin Mobile will be less impacted. O2 will lose its market leadership, but it has successfully challenged the market leader before, both in the UK and Germany. Therefore we do not see any drastic response from it. Virgin Mobile’s involvement will be limited to where its wholesale deal resides. If regulators compel T-Mobile/Orange to spin off the deal, then Virgin Mobile will get ready to work with a new partner.
Ovum expects regulators to approve the deal
"While the 37% market share of the combined Orange/T-Mobile business looks big, comparisons with Europe make it look reasonable. Market leaders in Belgium, France, Germany, Italy, the Netherlands, Spain and Portugal have similar shares. Indeed, regulators will look at a broader definition of dominance when approving the deal.
"Regulators will have to look at the Virgin Mobile wholesale deal with T-Mobile and T-Mobile’s network-sharing deal with 3. We expect the Virgin Mobile deal to be decoupled – Orange/T-Mobile tacitly suggested this by separating out Virgin Mobile’s customers in their subscriber data. Regulators will likely encourage the continuation of T-Mobile’s network-sharing deal with 3, unless 3 becomes a takeover target itself. Finally, negotiations about spectrum re-farming are unlikely to be solved with this merger and the expected government plan should still materialise.
"Ultimately, as long as regulators impose the necessary safeguards, we do not believe the deal is bad for consumers. Competition is good for consumers, but with five major players the UK operators were competing themselves to death and badly needed to consolidate. The UK’s operators face many challenges, including recouping the billions invested in 3G; expanding and upgrading network coverage; and getting ready for 4G – and all this without seeking any government subsidy. Therefore, something needed to be done."
Bengt Nordstrom – Co-founder and CEO of wireless consultancy Northstream:
"This type of merger is inevitable – and we should expect more in the future. Operator consolidation is set to be the biggest and more important trend in the mobile space over the next few years – and arguably should have started eight years ago, after 3G failed to deliver the increase in revenue that operators expected when they first invested in it.
"The name of the game nowadays for operators is to have the lowest possible production costs to handle the bits and minutes across their network. What’s triggered this renewed interest in streamlining costs is the uptake of Mobile Broadband among subscribers and also the imminent arrival of LTE.
"Operators desperately want to be serious broadband players but to succeed at this, they need to overhaul their networks – in particular, the backhaul element – by rolling out fibre to each base station. This represents a major investment for operators, so it makes sense that they should want to lower their cost structures by consolidating existing network assets through the M&A route.
"The T-Mobile / Orange UK merger has the potential to work beautifully, and all the ingredients are in place for the joint venture to be successful. The potential is there for the merger to deliver a massive network opex saving for the two partners, and it also puts new pressure on UK competitors such as Vodafone and O2, who may now be stuck with a high cost structure than their new rival – which be reflected in their tariffs to customers.
"What is key however, is how quickly and skilfully Orange and T-Mobile can execute on their consolidation in the UK, to establish this new, lower cost base."
John Delaney – Research Director, European Consumer Mobile at IDC:
"There's an awful lot to be worked out at the retail level. To start with, what brand will the new operator use? A new brand could succeed (as O2 has shown), but is risky and would incur heavy short-term marketing costs. Or they could keep one of the current brands – but then the "merger of equals" line immediately comes into question. And will the new operator retain Orange's heavy emphasis on multimedia content/services and handset branding, or will it adopt T-Mobile's more telecoms-centric marketing approach? What about T-Mobile's strong focus on wholesale business? These questions, and many more, are doubtless already the subject of vigorous discussion between the two executive teams.
"One of the questions debated over the past months has been whether the RAN sharing deal between 3 and T-Mobile might stand in the way of any consolidation. From that point of view, today's outcome is a fairly clean one. Although some of the deal's terms are confidential, we do not believe that either party would have agreed terms that blocked or seriously impaired future M&A transactions. And following Vodafone's move to O2 as its RAN-sharing partner, Orange became the only UK operator not to be active in RAN sharing. Thus, it's even possible that the current 3/T-Mobile deal could be continued into the new joint venture.
"Another big question has been whether any UK consolidation will be blocked by regulators on competition grounds. We think that's unlikely; there is plenty of recent European precedent for in-country mobile consolidation. However, it is more likely that Ofcom will apply some conditions to the merger, in order to remedy the reduction of competition in the UK market. In particular, we may see steps to boost the position of 3, in order to compensate for the removal of the other UK operator that has behaved as a "maverick" competitor on pricing in recent years (ie, T-Mobile). Possible areas in which remedies might be applied include divesting the merged operator's wholesale business – although that would be problematic in the long term. Another possibility might be compensation through asymmetrical termination rates. That would be politically contentious, but it has the advantage of enabling differential adjustment of the other three operators' competitive position with respect to the new merged JV."
Audrey Gallacher of Consumer Focus:
"Creating a new mobile phone giant could mean less genuine choice for consumers and a market less eager to compete on price and service. The deal must focus on the interests of mobile users if the future is to be bright for them.
‘We will be watching developments closely for customers of Orange and T-Mobile (as well as those of 3 and Virgin Mobile who share the T-Mobile network) to ensure their consumer rights are protected after merging their UK businesses’.
Ernest Doku of mobile phone price comparison site, Omio.com:
"While O2 and Vodafone have the money and industry clout to lure consumers with must-have handsets such as the iPhone, BlackBerry Storm and forthcoming Palm Pre, T-Mobile UK and Orange were both struggling to offer alternatives and lacked the muscle to secure headline-grabbing mobile deals.
"In a market where consumers are extremely cost conscious, T-Mobile UK pulled in a lot of customers through competitive tariffs but just didn't have the spending power to secure the exclusive mobile phones that appeal to so many of us.
"For these two networks to merge makes simple business sense, bringing operating costs down and turning them into the largest carrier in the UK. They instantly turn from a bit-part into a big player.
"A merger will give both companies a healthy market share and offer serious competition to O2 and Vodafone moving forward, placing them in a strong position to drive contract prices down for consumers and offer unrivalled handset choice."
