Technology Financials
Chris Green looks at the latest technology company financial results and examines what the companies are doing right and wrong in their efforts to maintain the bottom line.
Tuesday 8 September 2009, 1:17 PM
Untangling T-Mobile’s merger with Orange
This morning’s news that T-Mobile’s UK business (the former One2One network) has agreed to merge with the UK arm of Orange could bring to an end one of the more colourful and consumer-friendly corporate rivalries.
Deutsche Telekom bought One2One from British telephone network operator Cable & Wireless and US investor MediaOne in 1999 for a colossal £8.4 billion. Having received its GSM licence around the same time as Orange, the two companies launched in each other’s shadows as competitors to the established, cash rich and trusted Cellnet and Vodafone mobile services in the UK. At the time both upstarts launched, the incumbents were still operating both analogue and GSM networks in the UK, allowing them to compete on price using the older analogue network, while channelling premium business towards GSM.
Of course, in 1999 the mobile phone market was a simple place, focussed on phone calls and an emerging messaging service called SMS. Mobile data was still embryonic compared to where it is today and none of the networks considered it the cornerstone of their business. With fewer things to sell and thus differentiate on, the market proposition was clearer to buy and sell.
Over the last 10 years, Orange and One2One/T-Mobile have battled each other on price, on handsets and on added-value (bundled minutes and texts, or in the case of One2One, free calling periods). For the consumer, this competition has been great, with the two consumer-focussed networks regularly out-doing each other with innovative and good-value deals to win the hearts and minds of the masses. In its heyday, Orange focussed on the more affluent middle classes while One2One/T-Mobile attracted the lower end of the market, more so after it successfully launched the first pay-as-you-go service. Pre-pay enabled them to tap into the significant market for low-volume users and those unable to pass a credit check without having to subsidise handsets as heavily as it would for contract customers.
Between them, the two companies have a user base of 28 million users, some 37 percent of the overall UK mobile phone market. That will catapult Orange/T-Mobile ahead of O2 (formerly Cellnet) on 27 percent and Vodafone on 25 per cent.
In recent years both businesses have struggled to hit the numbers needed to appease their owners amid unprecedented competition and a lack of money. Orange went from a successful and profitable standalone business to becoming part of the heavily indebted France Telecom (via a brief period owned by Mannesmann and an even briefer period owned by Vodafone after it bought Mannesmann), which has significantly restricted Orange’s ability to invest in new products, services and acquisitions. One2One, which has always been smaller than Orange, suffered exactly the same financial restrictions when it was swallowed by the heavily indebted Deutsche Telekom, teamed with the fact that it was unable to generate the same levels of cashflow as its larger rivals. The rebranding from the established One2One brand to T-Mobile also failed to enliven the masses. Maybe it’s the German connection, or the pink logo, or simply that the T-Mobile brand lacks personality, whatever the issue the integration into Deutsche Telekom’s worldwide T-Mobile brand did the business no favours in terms of triggering additional growth.
Furthermore, the huge cost of 3G licences in the UK (at an average of £4.8 billion per network), coupled with the cost of a 3G infrastructure rollout weighed heavily on both companies, making it harder to generate a profit from 3G services. T-Mobile has already agreed an infrastructure sharing deal with 3, while Orange agreed to share 3G infrastructure with Vodafone. Those deals are going to be awkward to detangle once Orange and T-Mobile begin to merge their own infrastructure into a single network.
On the table in the last week were bids in the region of £3-3.5 billion (the latter from Vodafone) for an outright sale of the UK business. Deutsche Telekom has already sucked up a £1.6 billion write down on the value of the business as a result of poor trading, below-target ARPU (average revenue per user) and the intense competition in the UK, where five physical networks and multiple virtual network services compete for consumer and business customers.
The tie-up with Orange also raises several contractual and personnel problems. There is significant overlap in terms of network coverage, call centre capacity, administration functions, retail stores and handset supply deals. These are the areas that will produce savings of some £600-800 million annually once duplication is eliminated. Orange employs 12,500 people in the UK, while T-Mobile has UK workforce of 6,500. Sadly, the situation suggests significant job cuts are likely.
There are also so-called MVNO (mobile virtual network operator) deals that will need to be considered. For example, T-Mobile provides the network for Virgin Mobile and Ikea’s Family Mobile, while Orange provides the network for GlobalCell and Lycamobile. The merger represents issues for these virtual operators, who may or may not be happy sharing network capacity with each other. The merger may also trigger change of ownership clauses allowing these virtual operators to walk away into the waiting arms of Vodafone, O2 and even 3, or at the very least renegotiate their airtime deals....downwards. Overall, it risks a reduction in wholesale network revenue for the combined Orange/T-Mobile.
Assuming the competition authorities don’t jump all over this deal, which they surely will, the earliest the deal will complete is October 2009. After that, the two companies will continue to operate as separate brands for at least another 18 months while a complete root-and-branch analysis of the business takes place. For customers, it is likely to be at least two years before any major differences in coverage, customer service, billing and pricing begin to show.
Existing price plans will be ring-fenced for existing customers if they are subsequently withdrawn from sale, as they have been in the past at both companies. This means that current good deals such as T-Mobile’s Flext plans (almost certain to be chopped) will live on until those customers are tempted into moving to other plans. Full disclosure: I am a T-Mobile customer on a Flext plan.
As expected, Orange UK’s management team will lead the new business, but T-Mobile’s staff look set to take the lion’s share of the operational jobs. Such a move would suggest the combined business will retain much of the T-Mobile/One2One flavour to the pricing and services on offer.
The ghastly pink T-Mobile branding will likely be ditched long term in favour of the more popular Orange brand or an entirely new name for the business.
Deutsche Telekom bought One2One from British telephone network operator Cable & Wireless and US investor MediaOne in 1999 for a colossal £8.4 billion. Having received its GSM licence around the same time as Orange, the two companies launched in each other’s shadows as competitors to the established, cash rich and trusted Cellnet and Vodafone mobile services in the UK. At the time both upstarts launched, the incumbents were still operating both analogue and GSM networks in the UK, allowing them to compete on price using the older analogue network, while channelling premium business towards GSM.
Of course, in 1999 the mobile phone market was a simple place, focussed on phone calls and an emerging messaging service called SMS. Mobile data was still embryonic compared to where it is today and none of the networks considered it the cornerstone of their business. With fewer things to sell and thus differentiate on, the market proposition was clearer to buy and sell.
Over the last 10 years, Orange and One2One/T-Mobile have battled each other on price, on handsets and on added-value (bundled minutes and texts, or in the case of One2One, free calling periods). For the consumer, this competition has been great, with the two consumer-focussed networks regularly out-doing each other with innovative and good-value deals to win the hearts and minds of the masses. In its heyday, Orange focussed on the more affluent middle classes while One2One/T-Mobile attracted the lower end of the market, more so after it successfully launched the first pay-as-you-go service. Pre-pay enabled them to tap into the significant market for low-volume users and those unable to pass a credit check without having to subsidise handsets as heavily as it would for contract customers.
Between them, the two companies have a user base of 28 million users, some 37 percent of the overall UK mobile phone market. That will catapult Orange/T-Mobile ahead of O2 (formerly Cellnet) on 27 percent and Vodafone on 25 per cent.
In recent years both businesses have struggled to hit the numbers needed to appease their owners amid unprecedented competition and a lack of money. Orange went from a successful and profitable standalone business to becoming part of the heavily indebted France Telecom (via a brief period owned by Mannesmann and an even briefer period owned by Vodafone after it bought Mannesmann), which has significantly restricted Orange’s ability to invest in new products, services and acquisitions. One2One, which has always been smaller than Orange, suffered exactly the same financial restrictions when it was swallowed by the heavily indebted Deutsche Telekom, teamed with the fact that it was unable to generate the same levels of cashflow as its larger rivals. The rebranding from the established One2One brand to T-Mobile also failed to enliven the masses. Maybe it’s the German connection, or the pink logo, or simply that the T-Mobile brand lacks personality, whatever the issue the integration into Deutsche Telekom’s worldwide T-Mobile brand did the business no favours in terms of triggering additional growth.
Furthermore, the huge cost of 3G licences in the UK (at an average of £4.8 billion per network), coupled with the cost of a 3G infrastructure rollout weighed heavily on both companies, making it harder to generate a profit from 3G services. T-Mobile has already agreed an infrastructure sharing deal with 3, while Orange agreed to share 3G infrastructure with Vodafone. Those deals are going to be awkward to detangle once Orange and T-Mobile begin to merge their own infrastructure into a single network.
On the table in the last week were bids in the region of £3-3.5 billion (the latter from Vodafone) for an outright sale of the UK business. Deutsche Telekom has already sucked up a £1.6 billion write down on the value of the business as a result of poor trading, below-target ARPU (average revenue per user) and the intense competition in the UK, where five physical networks and multiple virtual network services compete for consumer and business customers.
The tie-up with Orange also raises several contractual and personnel problems. There is significant overlap in terms of network coverage, call centre capacity, administration functions, retail stores and handset supply deals. These are the areas that will produce savings of some £600-800 million annually once duplication is eliminated. Orange employs 12,500 people in the UK, while T-Mobile has UK workforce of 6,500. Sadly, the situation suggests significant job cuts are likely.
There are also so-called MVNO (mobile virtual network operator) deals that will need to be considered. For example, T-Mobile provides the network for Virgin Mobile and Ikea’s Family Mobile, while Orange provides the network for GlobalCell and Lycamobile. The merger represents issues for these virtual operators, who may or may not be happy sharing network capacity with each other. The merger may also trigger change of ownership clauses allowing these virtual operators to walk away into the waiting arms of Vodafone, O2 and even 3, or at the very least renegotiate their airtime deals....downwards. Overall, it risks a reduction in wholesale network revenue for the combined Orange/T-Mobile.
Assuming the competition authorities don’t jump all over this deal, which they surely will, the earliest the deal will complete is October 2009. After that, the two companies will continue to operate as separate brands for at least another 18 months while a complete root-and-branch analysis of the business takes place. For customers, it is likely to be at least two years before any major differences in coverage, customer service, billing and pricing begin to show.
Existing price plans will be ring-fenced for existing customers if they are subsequently withdrawn from sale, as they have been in the past at both companies. This means that current good deals such as T-Mobile’s Flext plans (almost certain to be chopped) will live on until those customers are tempted into moving to other plans. Full disclosure: I am a T-Mobile customer on a Flext plan.
As expected, Orange UK’s management team will lead the new business, but T-Mobile’s staff look set to take the lion’s share of the operational jobs. Such a move would suggest the combined business will retain much of the T-Mobile/One2One flavour to the pricing and services on offer.
The ghastly pink T-Mobile branding will likely be ditched long term in favour of the more popular Orange brand or an entirely new name for the business.
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