T-Mobile UK and Orange UK in joint venture

The following is a guest post by TC2 managing director Ben Fox, who is based in London.

Deutsche Telekom and France Telecom announced today that they intend to merge their UK mobile operations (T-Mobile and Orange respectively) into a 50:50 owned joint venture. The joint venture would combine the networks, operations and retail outlets of the two network providers, with the announcement touting significant expected cost savings and improvements to network coverage, quality and customer support.

The marketing strategy for the joint venture appears to be unclear with the announcement stating that the Orange and T-Mobile brands will co-exist whilst the joint venture's management spends its first 18 months developing a new branding strategy. (You can see where they might struggle -- "Orange-T" isn't going to sound very appetizing to the tea-drinking British public...)

It is no secret that Deutsche Telekom has been looking to off-load its struggling UK operation for some time -- all three of the UK's other main networks have been flaunted in the press as potential buyers over the last few months. Analysts seem to regard the planned joint venture (as opposed to an acquisition by France Telecom) as a good deal for both Deutsche Telekom and France Telecom -- Deutsche Telekom avoids the major write-downs that it looked to be facing from selling T-Mobile UK, and France Telecom ends up with a stronger mobile market position without significant cash investment or increase in debt. The joint venture is, of course, subject to regulatory approvals.

So what might this mean for business customers? T-Mobile seemed to enter the business market slightly later than O2, Vodafone and Orange, and hence was always playing catch-up. One result of this was that over the past few years T-Mobile led the UK mobile market in terms of driving down prices for business customers as it tried to grow its enterprise business. However, that pricing aggression did not necessarily result in winning new business, and often the incumbent supplier simply improved their pricing enough to retain their business. T-Mobile (probably unfairly) was also often regarded as the weakest of the four UK mobile network providers in terms of coverage and network quality, a hangover of its origin from the One2One network which telecom managers had difficulty forgetting.

On the pan-European stage, Orange and T-Mobile already collaborate as the main members of the FreeMove Alliance. When FreeMove participates in a pan-European procurement or negotiation, the UK divisions of Orange and T-Mobile do not compete with each other -- typically, whichever of Orange and T-Mobile has the closest relationship with the customer provides the UK component of the pan-European bid. So Orange and T-Mobile already have a track record of working together in the UK market which should stand them in good stead for the proposed joint venture. This also means that for pan-European procurements, these events will have little impact since users have typically only been receiving three bids for the UK market for some time (from FreeMove, Vodafone and Telefonica-O2).

However, there has to be a concern that the joint venture will damage ongoing price competition in the UK business mobile market, because there will no longer be a hungry and highly competitive T-Mobile looking to win business with its market leading pricing. We also anticipate the normal concerns with M&A-style events in terms of reduced customer focus whilst the parties work out how to merge their networks and operations -- and lay off staff in order to realise the announced cost saving synergies. However, medium and longer-term savings should also come from the new shared infrastructure where significant rationalization should be achievable.

But we could also see an analogy with the U.S. telecoms market, where AT&T and Verizon Business are still fiercely competing for national business even as they're creating an emerging duopoly via mega-mergers. Likewise, this joint venture could result in a re-energised Orange/T-Mobile in the UK with a burning desire to capitalise on now being the UK's largest mobile network provider by aggressively pursuing Vodafone and O2's business customers, just as T-Mobile has done in past years. Perhaps this could also invigorate Vodafone and O2 in responding more strongly to the "new" threat.

This is very much the early days of this story; Deutsche Telekom and France Telecom do not expect to finalise the joint venture until November, and much scrutiny from the regulatory and competition authorities will occur before then. I commented in April on the pricing pressures then that were pushing European mobile carriers to extend initiatives to share infrastructure with their competitors in order to reduce costs. Today's announcement is far more significant than those initiatives, but is driven by the same price pressure points.

Such pricing and cost pressures across the whole telecom industry, not just mobile, mean that today's news is also likely the first of a number of M&A-style events that will occur in the European and global telecom markets over the next one to two years. We will bring you updates as they unfold.