Both Orange and T-Mobile have been struggling in the competitive UK market. They clearly hope that, by combining their capabilities, they will gain the economies of scale necessary to challenge O2 and Vodafone. Consolidation is inevitable in a mature industry, but the recent rash of network-sharing deals seemed already to have gone a long way towards achieving the goal of reducing the cost of serving subscribers. Clearly, Orange and T-Mobile felt that the efficiency savings implicit in network sharing were insufficient, so they have opted to combine their entire operations. This merger has a number of interesting aspects.
Regulatory considerations. A number of regulatory hurdles will need to be overcome before the merger is agreed, as it will reduce the amount of competition in the market. It is by no means guaranteed that UK competition authorities will approve the deal and, even if they do, they may attach some stringent requirements, such as obliging the operators to help to provide rural broadband coverage.
Network sharing. T-Mobile has an established network-sharing arrangement with 3 UK, through its 50:50 joint venture Mobile Broadband Network Limited (MBNL). In future, in the interests of minimising costs in a mature market, European MNOs will be involved in an intricate web of network-sharing deals.
Vendor consolidation. As Ericsson is the main supplier of network infrastructure to O2, Vodafone and MBNL, this merger makes it the substantial leader in the UK market.
Operating synergies. Orange and T-Mobile claim that they will save GBP445 million annually in operating costs by 2014, having invested GBP600–800 million in 2010–2014 to achieve this. It is often difficult to find the operating savings when merging such well-established operating businesses. It is hard to combine back offices and Orange and T-Mobile correctly acknowledge that it will take a few years.
Spectrum. The licensing of 2×70MHz of spectrum in the 2.6GHz band is imminent in the UK. The reduction in number of viable bidders from five to four means that the operators are more likely to gain more spectrum at a lower price. The merger of these two 1800MHz operators also has potential implications for 900MHz refarming, and there is also the question of whether the two might exceed their spectrum allocation, and how this might be treated by the regulator. Unfortunately, the merger process is likely to delay any agreement on refarming, rather than expedite it, although it will make an agreement simpler to negotiate.
Virgin Mobile. T-Mobile hosts the Virgin Mobile MVNO, which accounts for 5 million of its 17 million subscribers. Any change in the ownership of T-Mobile could have implications for the relationship with Virgin, depending on Virgin’s attitude to its new host.
Fixed–mobile convergence. T-Mobile and 3 UK were the only two UK mobile network operators that did not provide fixed-line services. Even the major MVNOs are able to provide fixed–mobile bundles and Virgin, in particular, has been aggressive in bundling mobile services with its cable offer. Although the business case for fixed–mobile convergence of voice is questionable, the boom in mobile broadband – and the associated network loading – makes it important for MNOs to offload traffic from mobile to fixed networks wherever possible. The ability to offer a full suite of fixed and mobile services is not essential, but it does reflect the fact that broadband provision will increasingly require both a fixed and a mobile element for most subscribers.
Implications for the other UK operators. If the competition authorities permit this merger between Orange and T-Mobile, it is unlikely that either Vodafone or O2 will be allowed to merge with another major player. However, that would not prevent either party from bidding for 3 UK. Further consolidation along those lines is probable as the UK MNOs battle for scale.
Implications for other markets. The UK is one of the most competitive markets in Europe, so it is unsurprising that there has been consolidation. There has been consolidation in other highly competitive European markets in recent years, including from five network operators to four in Austria and from five to three in the Netherlands. In both cases, T-Mobile and Orange were involved.