Analysts on Orange/T-Mobile JV

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Ovum senior analysts Emeka Obiodu and Steven Hartley

“This will dent the group’s ego, and Vodafone must take steps to ameliorate it. Even a takeover of 3 will not be sufficient”

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 six per cent 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 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.

 

IHS Global Insight reserach analyst Peter Boyland

“I would expect that it won’t remain a joint venture indefinitely”

It’s very difficult to see the advantages from Orange’s point of view, except for a larger customer base. Clearly for Deutsche Telekom, which was rumoured to have received bids over the weekend from O2 and Vodafone, this is the best outcome.

The two companies will run seperately of one another for the next 18 months. Neither has a dominant share, but from what T-Mobile has said, I would expect that it won’t remain a joint venture indefinitely.

The UK market is so ridiculously volatile at the moment, with the level of competition. Really from the point of view of Vodafone and O2, they will carry on as they were, and attempt to take market share of rivals.

 

Strand Consultanting chief executive John Strand,

“The big question now is who will be the next one. Long term there is only space for three maximum in the UK”

This will put a pressure on Vodafone and O2. This consolidating should have happened a long time before. The big question now is who will be the next one. Long term, there is only space for three maximum in the UK.

3 could see value in merging its company with one of the other players or the two companies that are merging together now. The reality is everyone is thinking about it and what impact it would have.

The two brands will run separately. To say to Orange it has to give up the Orange brand would be like asking the Queen she must speak French. It won’t happen. The same with T-Mobile, Deutsche Telekom will not give up its brand in the UK. 

The number of stores will be reduced. T-Mobile will be the value brand, and Orange will be the premium brand. There will be changes.

Vodafone and O2 need to decide what to do. There is only one way they can react in the short term and that is to create an aggressive cost-cutting programme. And an aggressive MVNO strategy.

 

IDC director of consulting Dan Bieler

“T-Mobile is pitching to many large European clients and most companies with that kind of footprint have activities in the UK, and fort that pitch to be credible it needs to have a UK operation”

It wasn’t the consolidation people had spoken about, so it is a bit of a surprise. It does make sense for two reasons, primarily because it keeps both Orange and T-Mobile in the UK market. It would have been very dangerous for T-Mobile to exit the UK market completely, not least because it has an enterprise strategy going, which is not related to the consumer pitch, which T-Mobile seems to be known for.

It’s pitching to many large European clients and most companies with that kind of footprint have activities in the UK, and for that pitch to be credible it needs to have a UK operation.

Secondly, there is a good chance for T-Mobile to address the cost issue and maintain its client base through this joint venture. The most important part is to save money. The problems have become so big for T-Mobile UK, a fairly drastic step forward was needed. One step was to sell, but there would have been many downsides associated with that, in particular the price. The joint venture is a very sensible way forward.

But mergers are very rarely struck between equals. Orange will gain the upper hand, and its UK chief has taken the role of CEO in the new venture. But, still, T-Mobile gets access to a UK network and that is a very important point for the future.

 

Other commentary:

International Telecommunications Union secretary-general Dr H. Touré:

“Emerging markets will also benefit from the R&D investment being made in new technologies”

This merger shows a shift in the global telecoms market, indicating the first steps of recovery in our industry. The streamlining of the business will put the new operator in good stead to meet current economic challenges.

Both T-Mobile and Orange have strong R&D departments, so I see the newly formed operator as one to watch in terms of innovation in the products and services it brings to market.

Becoming the largest operator in the UK will benefit customers by allowing the new corporation to offer more choice in mobile services and flexibility in pricing. Emerging markets will also benefit from the R&D investment being made in new technologies.

 

Watchdog Consumer Focus chair Audrey Gallacher

“Less genuine choice for consumers”

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.

 

Merger and integration specialist PIPC partner for telecoms, media and technology Kevin Beard

“T-Mobile was suffering from ferocious competition from the more dominant players, mainly down to price pressure”

The reason Orange was successful as opposed to O2 and Vodafone sealing a deal was because they were offering a buy-out, rather than a joint venture, which wasn’t in T-Mobile’s interest.

The deal is beneficial for both companies, financially. This is primarily down to the rationalisation of its assets. They don’t require two offices, two sets of retail stores with staff, billing systems, IT infrastructure and call centres. It will be a massive cost saving for them.

In 18 months time, it is likely that one brand will remain, or a new brand is created. The announcement of who the chief executive will be may be an indication of what will happen.

Consolidation is happening in the telecoms market because share holders are expecting their investment to go further. They want higher profits at a lower cost.

Vodafone’s share price went up on September 8 when the merger was announced. This may mean that the other networks will be able to put their prices up a little bit and still be competitive.

Fifty per cent of mergers fail because they don’t consider key factors such as the need for a strong leadership structure, if T-Mobile and Orange manage the merger efficiently, it will be successful.

 

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