Orange squeezes the UK’s mobile competition

September 8, 2009

Merging T-Mobile UK with Orange will bring 3.5 billion pounds of value to shareholders, and “substantial benefits to UK customers.” Goodness, why on earth didn’t they get together years ago? A merger that simultaneously enriches shareholders and customers is rare indeed, and one to be treasured – if this really is one of those seldom-seen beasts.

While the 3.5 billion pound figure is credible, the second claim, from Timotheus Hottges, the finance director of Deutsche Telecom, T-Mobile’s parent, is harder to believe. The immediate reaction from other shares in the sector rather gave the game away, with retailer Carphone Warehouse down on the prospect of fewer suppliers, and Vodafone up on the hope of less competition in Britain’s mobile phone market.

Mixing Orange with T-Mobile’s garish purple would create a business with 37 percent of that market, rising to 42 percent if Virgin Media, which piggy-backs on T-Mobile, is included. Britain’s Competition Commission, fresh from being bludgeoned into accepting a bank merger which breaks all the rules, will be itching for a look. It’s only one thicket in the regulatory maze which Deutsche and France Telecom, the owner of Orange, will have to negotiate. The deal will go to the European Commission, and Britain’s Office of Fair Trading can ask for it back (to send it to the CC) while Ofcom, Britain’s telecoms regulator,  is also on the line.

It’s not immediately obvious why this deal should be allowed. There are currently four substantial UK mobile operators, with the awkwardly-named 3 a distant fifth. It hasn’t a hope of making money, but it has dictated lower prices to the others. The worry for UK consumers is that if T-Orange is allowed, 3 will fold, and that five would become three.

Aside from the standard boiler-plate about investing more to make Britain a more communicative place, the new venture can offer one significant sop to the regulators. The sale of the next slice of radio spectrum is overdue, and an undertaking not to ask for more would allow the other two to promise more investment in “digital Britain” in return for a lower purchase price.

If the regulators can somehow be persuaded, the future’s bright. The merger is presented as a genuine 50-50 affair, but Orange is the stronger brand, thanks to the legacy of its inspired marketing a decade ago. A joint venture also spares Deutsche from being forced to recognise T-Mobile’s market value on its books; from initial hopes of a 4 billion pound sale, it’s become clear that neither Vodafone nor O2, Telefonica’s British arm, was prepared to pay more than a fire sale price.

As they sketched out their route to the broad sunlit uplands, the new partners were keen on Tuesday to emphasise improved network coverage, better use of the combined spectrum, and the lovely savings from closing overlapping shops, marketing and radio sites. It all sounds wonderful, but the history of joint ventures is not a happy one. Besides, it’s one thing for consumers to pay up voluntarily for the delights of evolving technology and quite another to be forced to pay more because competition is cut.

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