T-Mobile UK is in the balance

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Is T-Mobile UK about to be sold off by parent Deutsche Telekom? Speculation has grown about the future of the UK’s fourth-largest network operator after Deutsche Telekom chief executive Rene Obermann issued a profit warning in April, in no small part down to the performance of its UK business.

New T-Mobile UK managing director Richard Moat (pictured) joined from Orange Romania last month and regarded for his financial nous, certainly has a job on his hands. He takes over an operation that, under predecessor Jim Hyde, spent a shed-load in the first quarter to steal customers from rival networks as it attempted to make up for lower organic revenue than any of them in each quarter of 2008.

UK customer acquisition costs in the period were up significantly, and it made 53,000 net contract additions for its troubles (19,000 more than in the same period last year). At the same time,  revenues were down by around 21 per cent, and ARPU was down too.

Obermann moved to lower Deutsche Telekom’s 2009 EBITDA forecast by between two and four per cent, citing tough economic and trading environments in the UK most particularly. He also outlined significant cuts to UK operational expenditure in administration, advertising and technology. Moat is to focus on 3G services and customer service to drive out profitability in the UK.

The profit warning was Obermann’s first major slip since stepping up in late 2006 from T-Mobile to run Deutsche Telekom. Deutsche Telekom’s largest stakeholders clearly got jittery about the root causes: the UK business, as well as the US arm.

The German government and US private equity fund Blackstone, which own 32 per cent and five per cent of Deutsche Telekom’s shares respectively, have been pressuring Obermann and his board to make a rapid decision on whether to flog the under-performing T-Mobile UK unit.

It seems reasonable they are worried that, as number four in the most brutally competitive mobile market in Europe, T-Mobile UK is holding back the performance of the entire group.

The idea of selling was apparently mooted last year too. But because of the global financial crisis Berlin and Blackstone were worried about selling into a tumbling market and getting a fire sale price. That was partly reflected in the fact that Deutsce Telekom wrote down the value of the UK division on its books by a whopping €1.8 billion, to to £3.2billion.

Despite the continued economic gloom, however, press reports linked both Vodafone and Orange with potential bids for T-Mobile’s UK business early June, and T-Mobile’s ongoing network sharing agreement with Hutchison Whampoa’s challenger brand 3 in the UK put another likely bidder forward in the minds of market watchers.

Vodafone allegedly offered to swap its Turkish business for T-Mobile’s UK operation, a move that would expand significantly both parties existing interests in those respective markets. Orange parent France Telecom was also reported to have entered a bid with Berlin earlier this month, apparently rejected. (France Telecom later denied claims it had made any sort of enquiry for T-Mobile UK.)

Towards the end of May, Obermann declared he is still taking a “medium to long term” view on T-Mobile UK operations, which gives Moat time at least to either turn around T-Mobile UK or set it for sale.

Obermann told The Financial Times: “The question of UK market consolidation is bound to land on my desk again.” He also signalled he wanted to make another go of the existing UK operations before selling out or buying a rival.

For Moat, on paper, the network appears to be a sinking ship when comparing its market share against the competition. But financially there appears to be no immediate concern (though little cheer, also) with profits and ARPU level year-on-year.

Annually, T-Mobile UK’s customer base (including figures for the Virgin Mobile MVNO, which runs off its network) is marginally higher than in 2007, despite a drop in prepay numbers from 13.3 million to 12.789 million. Contract customers rose from 3.9 million at the beginning of 2008 to over four million by the end. Churn levels hovered around the 2.1 per cent.

But its customer market share slipped around four per cent in the year to 2009, as did its UK ranking – from third to fourth behind Orange. For its part, Orange lost some share. O2 and Vodafone won significant gains from their rivals.

Analysts called T-Mobile UK “stagnant” under Hyde, failing to cope with the extreme competitiveness of the UK market place – where the number one, O2, enjoys the smallest market share of any market- leading network operator in Europe.

“T-Mobile has lost significant share and is now way below Orange, despite being ahead of it in 2007,” says Global Insight analyst Peter Boyland.

“We have seen Vodafone and O2 increase significantly whilst T-Mobile is falling behind. It is the increased competition of the UK market that is hitting it hardest.”

Commentators struggle to define T-Mobile in the market. It appears caught between the straight voice/data value propositions offered by the likes of 3, and an assortment of new MVNOs, and the premium services publicised by O2, Vodafone and, to an extent, Orange.

Its device range is as expansive as the leading operators, but its airtime bundles are pitched for their voice and internet value. It has also steadfastly resisted the lure of parallel revenue streams, such as fixed line services, sticking hard with mobile.

Ovum analyst Steven Hartley comments: “The biggest issue with T-Mobile UK is it has been strategically pretty stagnant over the past couple of years – rather than that its performance has been collapsing. It just doesn’t have a clearly defined strategy. Vodafone, O2 and Orange are all heading down the fixed-mobile convergence path. T-Mobile looks like it is going to remain purely mobile. Even if that proved the best route in the longterm, what is its mobile strategy?

“It talks of mobilising the internet, but it’s not done anything the others haven’t done. It just doesn’t seem convinced by its own strategy. It wants to be a high-end player, but without the services or devices to do so; it ends up trying to be everything to everyone, while achieving nothing for anyone. New leadership could give it the direction it needs, and certainly Moat should be given the chance.”

Full article in Mobile News issue 441 (June 15, 2009).

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