UK’s mobile sector consolidates as pressure on MNOS mounts.
Deutsche Telekom (DT) entered the UK mobile market in 1999 by buying the MNO One2One and rebranding it as T-Mobile UK. These were heady times, and operators were prepared to spend vast sums to tap into the promising mobile sector. DT paid £8.4 billion then, plus another £4 billion in the following year for its 3G licence.
In recent years, however, T-Mobile has become an albatross around DT’s neck. The unit’s revenue peaked in 2007, and has since fallen steadily: in the year to June 2009 the company reported a near 13% drop in revenue and a 22% drop in EBITDA. This can charitably be put down to regulatory measures which have lowered roaming and termination charges (another round of cuts came into force in July this year, which will further dampen revenue prospects), but the underlying worry is the continuing loss of customers – 206,000 in the same period. Indeed, T-Mobile has seen its share of subscribers dwindle annually since 2006. ARPU has also fallen considerably (15% in the year to June), despite efforts to migrate customers from prepay to contract plans and to push mobile data services.
Given that DT’s group debt has risen steadily (from €38.1 billion at the end of 2008 to €44.9 billion by June 2009), the company could ill-afford to shoulder this burden. So having announced a goodwill write-down amounting to €1.8 billion earlier this year, it appointed JPMorgan Chase to assess the unit’s stand-alone options and the viability of a sale.
What has emerged – the merger of T-Mobile UK and Orange UK in a new 50:50 joint venture company – has enormous implications for the UK’s mobile market. The joint venture will create a new market leader with over 34 million subscribers and a 43% market share, eclipsing Vodafone (18.5 million subscribers) and O2 (20.7 million). The scale of the new company will also help it to tap into the mobile and fixed broadband arena. Orange already has more than a million broadband subscribers in the UK, with a local loop network reaching about 60% of the population. T-Mobile extended its mobile Internet presence in the UK in 2005 with the launch of web’n'walk. It also has a wholly owned WiFi network. Yet for fixed-mobile convergence to work properly operators need to be able to exploit both the mobile and fixed-line platforms. Together, the joint venture can better develop its quad-play commercial propositions.
The merged entity will also have implications for Virgin Mobile: T-Mobile co-owned Virgin Mobile before selling out its share to the Virgin Group in early 2004 and providing a wholesale service. Since then Virgin Mobile has become the largest MVNO in the UK, with its more than four million subscribers representing about a quarter of T-Mobile’s customer base.
The merger is indeed a sign of the economic pressures which have befallen the UK’s mobile market. The intense competition between the five network operators, combined with less discretionary spending among consumers, has made them rationalise costs and consider more efficient ways to manage their businesses and networks. To this end, MNOs have signed a number of managed services contracts and arranged network sharing between them. Orange and T-Mobile envisage generating operating synergies of €4 billion (£3.5 billion), with annual operating cost savings of £445 million from 2014. After spending an additional £800 million between 2010 and 2014 (integrating networks, decommissioning redundant sites, rationalising retail stores and reducing the workforce), CAPEX savings are estimated to reach about £100 million annually. The joint venture will also absorb T-Mobile’s half-share in Mobile Broadband Network Ltd (MBNL), itself a joint venture signed with 3UK in late 2007, which at the time was the largest 3G network sharing agreement. MBNL was to set up 13,000 base stations (of which 7,000 are now operational), and the addition of Orange has brought a further 7,000 3G base stations to the operation. Orange and T-Mobile can also now rationalise their combined 23,000 2G base stations.
As for managed services, this sector is dominated by Ericsson, which operates and maintains MBNL, has a seven year deal (from March 2009) with Vodafone for its 2G and 3G access networks, and (since July 2009) provides field maintenance services for O2. It would have been far easier for the Orange/T-Mobile merger had Orange also contracted Ericsson, but instead it signed a five-year agreement with Nokia Siemens Networks. This deal may well be affected by the merger.
There remains the issue of approval by management boards and by competition authorities both in the UK and at the EC level. As for the UK, the authorities must consider the anticipated sale of 3UK, which can still be sold to any of the MNOs but which is now tied so closely to T-Mobile. The merger could also represent an opportunity to enforce conditions which oblige the new joint venture to widen its mobile broadband coverage in a bid to meet the government’s Digital Britain promises.
Lastly, there could be implications for Ofcom’s future spectrum awards. This issue has been taxing for the regulator, which initially proposed auctioning technology and service-neutral 20-year licences in the 2.6GHz band in December 2006. The auction has been placed on hold until 2010 following legal challenges by O2 and T-Mobile, which both claimed that without knowing whether re-farming of the 900MHz spectrum band would be allowed they could not calculate how much of the 2.6GHz and 2010MHz expansion band they would need. In June 2009 T-Mobile withdrew its legal challenge, leaving O2 to contest alone. Ofcom also proposed that existing holders of sub-1GHz frequencies would face a temporary cap, so in order to obtain 800MHz frequencies they must give up 900MHz holdings. The latter cap applies to Vodafone and O2, which each hold 2 x 17.2MHz in the 900MHz band. Orange and T-Mobile each have 2 x 30MHz at 1800MHz. While they could bid for 800MHz or 900MHz given up by the other two operators, to remain under the cap they could only bid for 2 x 10Mhz of the 2.6GHz frequencies. The Orange/T-Mobile merger would mean a re-evaluation of Ofcom’s capping strategy, and in all likelihood further delays before the 2.6GHz band becomes available for all manner of mobile services.
Henry Lancaster – Senior Analyst Europe, BuddeComm
See also:
United Kingdom – Mobile Market – Overview, Statistics & Forecasts;
United Kingdom – Mobile Market – 3G, Mobile Data & Forecasts;
France – Mobile Market – Overview, Statistics & Forecasts;
Germany – Mobile Market – Overview, Statistics & Forecasts;
Europe – Mobile Market – Overview & Statistics.
