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BT back to where it started from?

Alex Yau
December 5, 2014

BT has been in and out of mobile since 1985 starting with Cellnet. As demand for landlines drops it’s no surprise it now wants to again be a mobile network operator

BT’s move to re-enter the UK mobile mobile market for the first time since 2005 makes “perfect sense” and could rock the British mobile landscape.

BT last week confirmed it had been approached by O2 and EE with a view to acquiring their mobile connection bases. If a deal goes through it will create a UK telecoms giant holding more than a quarter of the total mobile, fixed and broadband market. BT has also spent more than £1 billion on football rights to shore up its broadband business from competitors.

BT plus a mobile operator would have revenues far in excess of £20 billion according to the latest full-year results of the three companies involved. BT posted revenues of £18.3 billion for the year ending March 31, with O2 posting revenues of £6.7 billion and EE £6.5 billion for the whole of 2013. O2 currently has 24 million customers and EE 27 million.

Confirmation of talks with EE’s follows comments by Orange chief executive officer Stephane Richard that the current ownership structure of its joint venture with German operator Deutsche Telekom was not sustainable.

BT recently signed a five year MVNO agreement that will see BT launch a consumer mobile division in the first half of next year.

A deal for either operator could lead to a domino effect of further consolidation of the UK telecoms sector with speculation that Vodafone, which announced plans to relaunch consumer broadband, may be forged into stronger alliances with fixed and TV players. The same goes in reverse for the likes of Sky which doesn’t currently have a mobile offering.

BT originally sold its mobile business to pay down debt it incurred bidding for 3G spectrum at the turn of the millennium. The business was de-merged in 2001 before being sold to Telefonica for £18 billion in 2005. However convergence of fixed, mobile, TV and broadband services into ‘quad-play’ offerings is seeing BT turn to mobile once again.

According to analysts, O2 seems the most likely target due to Telefonica’s ongoing European review of its assets.

It has recently sold O2 Ireland to Three, merged its operations in Germany and sold its Czech business to PPF. Despite this restructuring Telefonica still had a net debt of £32.6 billion at the end of September.

Synergies could also play a part. Data from Kantar Worldpanel ComTech states that 32 per cent of O2 customers currently subscribe to BT Broadband, against just 24 per cent of EE subscribers.

However, the overarching concern for BT is that it needs a mobile offering to offer its customers.

“It make perfect sense for them to come in and come in large,” said Kantar consumer insight director Imran Choudhary.

“The mobile market has to consolidate at some point in the next couple of years so it’s a very good idea to do buy in, buy big, give them instant access to millions of customers that they can lock into quad play offers that will bolster that as well.”

Ovum practice leader Steven Hartley says there are further synergies with O2 and BT winning different types of frequency in the 4G spectrum auction which would complement each other in a combined offering. It will also help the former state-owned telco take the battle to Sky and Virgin Media.

“BT has made no secret of wanting to get back into mobile and Telefonica has made no secret of the fact that it is struggling.

“In terms of a fit, it does make some sense, BT is very strong on the fixed broadband side and O2 is very strong on the mobile side,” said Hartley.

“It’s fairly clear, if you look at the actions of the other players, that quad-play is going to pick up from the middle of next year.

“BT is in an unusual position globally, I can’t think of another incumbent operator that only has the wireline side.

“On the broadband front, it takes the battle to Virgin Media and in TV it takes the battle to Sky. It will be interesting to see Sky’s response because they’ve stayed out of all things mobile.”

Gartner research director Charlotte Patrick says that buying an operator is the “only viable option” for BT as it couldn’t drive the necessary economies of scale to make its MVNO with EE work.

This was echoed by Canalys’ Matt Ball who said that BT was being forced into it by acquisitions such as Vodafone taking on fixed-line assets.

“To compete against firms like Vodafone, BT needs mobility,” said Canalys’ Matt Ball.

A note of caution on BT’s strategy was sounded by his analyst Ian Fogg who says that the UK mobile market is saturated.

“Were BT to make a move for any of the mobile operators it would be a very expensive and high risk strategy and a very aggressive strategy,” he said.

“The big question is why BT would want to be involved in the mobile market today when 10 years ago, it chose to withdraw from it and really it’s around how fundamental mobile is as a growth opportunity for the business?

“I would say that the challenge now for BT is that the mobile market is now much more mature. A lot of the rationale is around being part of an adjacent market where there is more potential for revenue and growth.

“In the UK mobile is a very mature market and a very competitive market, so that fit isn’t as strong as it would be in many countries.”

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