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The announcement this week of the merger between Deutsche Telekom’s T-Mobile and France Telecom’s Orange in the UK will unite two struggling mobile networks to create a powerful new market leader in one of Europe’s leading cellular markets.
New Wireless Intelligence analysis for pro forma 2Q09 (assuming the so-called ‘T-Orange’ merger was completed during this quarter), reveals that the deal would create a mobile heavyweight with 32.4 million connections (retail and wholesale) and a 43 percent market share. This would push current market-leader O2 UK into second place (a 27 percent share), Vodafone UK into third (24 percent) and would leave 3 UK a very distant fourth with less than a 6 percent share of the market (3 UK’s market share is roughly the same as Virgin Mobile UK, an MVNO on T-Mobile UK’s network).
However, our analysis also shows that T-Orange’s dominant market position is likely to be limited to the GSM (2G) market as both T-Mobile and Orange currently trail rivals in WCDMA and WCDMA-HSPA (3G) connections. Based on 2Q09 data, T-Orange would control 50 percent of the country’s 2G market but would have only a 27 percent market share in 3G. Telefonica’s O2 would continue to lead the market in this segment with an estimated 29 percent share, while both Vodafone and 3 (the latter a 3G specialist) are also proportionately stronger.
According to our figures, 3G connections at T-Orange would account for 21 percent of total connections, the lowest proportion of all the UK mobile network operators. This reflects how Orange and, particularly, T-Mobile have lost ground to their UK rivals in recent years in terms of network advancement and 3G services. Indeed, the merger was triggered by Deutsche Telekom earlier this year after it was forced to write down the value of its UK unit to the tune of EUR1.8 billion due to declining revenue and customers.
Deutsche Telekom reportedly rejected separate takeover offers valued at around EUR4 billion for T-Mobile UK from both O2 and Vodafone in favour of the 50/50 joint-venture with Orange. A merger between T-Mobile and Orange – currently the third- and fourth-largest operators in the UK, respectively – is also the only form of consolidation among the big four UK operators that anti-trust regulators are likely to allow. While UK regulators have recently expressed contentment with the current situation, the reduction in the number of mobile network operators in the market from five to four would bring the UK into line with most other comparable European markets.
Once regulatory approvals are in place T-Orange will face a lengthy period of integration, which will involve combining network and IT resources, distribution and marketing and other areas where cost savings can be made. The merger is forecast to create net opex and capex savings in excess of £3.5 billion. Headcount reductions are also expected.
On the network side, T-Orange is planning annual opex savings of £145 million (from 2014) and capex savings of £100 million a year (from 2015) as it combines the two networks. The single network is expected to require 20 percent fewer basestations and 35 percent fewer sites. These reductions will primarily affect their existing GSM networks. Today, the two operators have a combined 23,000 GSM basestations, which they plan to reduce to around 15,000 in the shared network. Some are to be decommissioned and some will be upgraded to 3G. T-Mobile UK’s existing 3G network-sharing joint venture with 3 UK – Mobile Broadband Network Limited (MBNL) – is to remain in place.
Further synergies will be exploited by combining the two operators’ significant retail distribution networks. The merged operator will have a retail network of 733 own-branded stores (based on 2009 figures), though 120 of these are earmarked for closure due to overlap. Total distribution and marketing cost savings (opex) are forecast to reach £145 million a year from 2014. Both operators’ brands will be maintained during the integration period with a new brand strategy scheduled to be introduced in the first half of 2012.
Matt Ablott, Analyst, Wireless Intelligence
T-Orange is an ambitious play by two of the UK’s underperforming operators to revitalise their businesses and one that has the wide-ranging implications for the UK market. It instantly weakens the positions of two of the country’s traditionally strong players, O2 and Vodafone, and could force these two to deepen their collaboration in areas such as network-sharing to match the efficiencies being targeted by T-Orange on the network side. T-Orange will also benefit from greater clout in handset procurement, which could see them land some exclusive handset deals that will help spice up a currently rather uninspiring devices portfolio and ramp-up activity in areas such as 3G and VAS. But the cost savings and other benefits made possible by the merger are unlikely to be realised for at least three years and – even assuming the deal is passed by the UK regulators – T-Orange faces a number of challenges in the meantime. Firstly, the joint-venture will be a leap into the unknown for France Telecom and Deutsche Telekom (fierce rivals elsewhere in Europe) and tensions between Paris and Bonn could lead to one partner buying the other out before integration is complete. In order to succeed, the newly-merged operator will also need to quickly develop new strategies around devices, pricing and services that will help set it apart in a market that is already highly advanced and penetrated. Alongside the fact that a new branding and marketing strategy is not expected to be phased in until 2012, it could be many years before T-Orange begins to feel the benefits of its new dominant position in the market.