T-Mobile and Orange Plan 50:50 Joint Venture in the UK

| Sep 8, 2009 | Wireless Services - Europe | Competitive Intelligence Report

| Analyst: Emma Mohr-McClune

Current Perspective: Slightly Positive
Vendor Importance: Moderate
Market Impact: High

Event Summary

September 8, 2009 -- Deutsche Telekom and France Telecom announced the planned merger of T-Mobile UK and Orange UK, for a 50:50 joint venture company with a combined customer base of around 28.4 million and a 37% share in the UK mobile market (based on end-2008 figures). The two brands will co-exist for 18 months, after which time the JV management will make a recommendation on a re-branding strategy, which will be decided by shareholders. The JV is estimated to create synergies with a net present value in excess of GBP 3.5 billion, with OpEx-based synergies at an annual run rate of over GBP 445 million from 2014. Around GBP 600 to 800 million in integration costs are anticipated over the period from 2010 to 2014.

Analytical Summary

• Current Perspective: Slightly positive on the planned joint venture between T-Mobile and Orange in the UK, as this could allow two weak players to join forces for a leading 37% mobile market position, with comparatively little up-front investment. However, any asset synergy creation must first secure regulatory clearance, not expected until H1 2010, and the entire JV branding decision is on hold until sometime in H2 2011, for implementation in H1 2012. From a sales and marketing perspective, this plan will have zero impact on the players’ respective competitive positioning in the short-to-mid term, and it could even drain development and competitive response resources as restructuring gives way to corporate distraction throughout both camps.

• Vendor Importance: Moderate to both T-Mobile and Orange; this JV allows Deutsche Telekom to keep a foothold in the strategically important UK market (as opposed to an anticipated straightforward sell), and it is set to create considerable cost-savings through network, IT, distribution and marketing asset sharing for both parties. However, this JV is unable to create a well-rounded, integrated competitor – notably, it cannot provide an instant fix to capability gaps within the operators’ joint enterprise-facing portfolio, nor boost Orange UK’s weak profile for broadband. The would-be partners’ talk of convergence innovation is difficult to justify.

• Market Impact: High on the UK mobile market in the long term, as this JV plan looks set to oust Telefonica O2 and Vodafone from their number one and two positions in the mobile market, respectively, in terms of customer numbers, and it could challenge the market with a new integrated brand. However, this JV will never be anything more than a ‘special case’ within the UK, a market which has proved difficult for both players. There are no other areas of co-operation planned between the European incumbents, outside the existing FreeMove Alliance collaboration for MNC customers.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

| Client access - Full report in Wireless Services - Europe

Recommended Competitor Actions

• Competitors should understand that the short-term impact of this JV plan on the respective operators’ competitive positioning is very low. After regulatory approval, the first ‘phase’ of the plan will revolve around cost-cutting synergy creation at the network and departmental level. This will make the merged entity leaner, and more effective, but not necessarily more competitive. The plans for the second phase (a potential re-branding and new marketing strategy) are longer-term (nothing will happen until 2012) and undecided at this point.

• Despite talks of a re-branding implementation somewhere in H1 2012, competitors should consider that this may never happen; the partners may decide to retain the separate brands, working from a multi-brand marketing basis that two brands can reach more distinct segments than one. When KPN acquired Telfort in 2005 (arguably the closest precedent Europe has for this planned JV), it retained the Telfort brand, successfully using it to court a distinct prepaid segment, refining a ‘quality’ profile of its core KPN brand.

• Telefonica O2 UK and Vodafone UK should accelerate their marketing strategies to bring fixed-mobile products to market and underline their more mature ‘integrated operator’ capabilities – before the planned JV has the same idea. It seems likely that the JV will seek to invest further in broadband on securing regulatory approval for this merger.

• 3UK should consider the critical role it can play in this JV’s future, given its existing 3G network sharing JV with T-Mobile UK. 3UK is certainly within its legal rights to make life hard for the would-be partners in effecting their network integration plans, and it could even negotiate for a new agreement. Orange UK and T-Mobile UK will be keen to cut a quick deal; indeed, they must clear this issue up, before moving on to the second regulatory approval phase.

• Vodafone UK and Telefonica UK should be ready to offset the planned JV’s arguments for promised network coverage supremacy, pointing to their own network sharing plans as a counterpoint. The competitors should make sure its business customers understand that this advantage is a myth, but it appears to be the only end-user advantage the would-be partners can point to right now.

Recommended End User / Customer Actions

• There is no short-term impact for consumers and, therefore, no recommended actions. Both the T-Mobile UK and Orange UK brand and service portfolios will co-exist independently into 2012.

• Neither T-Mobile UK nor Orange UK is particularly strong in the SME sector, and this planned JV is unlikely to change that situation much in the coming 18 months. Although Orange UK has been the stronger of the two in the small business space, the huge amount of asset realignment and corporate distraction this planned JV is set to create means it is unlikely that either will evolve its respective propositions significantly in the short-term.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

| Client access - Full report in Wireless Services - Europe

Top