Analysis: Future Orange for channel

Last week's merger of Britain's third and fourth largest mobile phone networks, Orange and T-Mobile, has raised eyebrows across the industry. The merger creates a 50:50 joint venture.

Last week's merger of Britain's third and fourth largest mobile phone networks, Orange and T-Mobile, has raised eyebrows across the industry.

The merger creates a 50:50 joint venture. It is expected to hold 37% of the market and roughly 28 million subscribers, pushing leader O2 and second-placed Vodafone into second and third place respectively.

The venture will be led by Orange UK CEO Tom Alexander and T-Mobile UK CEO Richard Moat, who become CEO and COO respectively.

Timotheus Höttges, CFO at T-Mobile parent Deutsche Telekom, says the deal guarantees T-Mobile UK a "clear and strong" future in one of the toughest European markets. T-Mobile has been haemorrhaging subscribers in the UK and, like competitor Vodafone, is under pressure to consider its future.

Channel strategy
Hints of a future channel programme have begun to emerge, according to Tom Alexander and Richard Moat, who, speaking on a conference call outlined their commitment to an indirect strategy.

"We will be optimising and enhancing our network of shops, deepening the relationship with our indirect distribution partners as well as leveraging our online sales capabilities," said Moat.

Alexander said Orange and T-Mobile hoped to take out around £35m of expenses by rationalising their high street stores and hinted that a rebalancing of the direct versus indirect distribution strategy - presumably in favour of the channel - would save the venture up to £50m annually. He added: "We also aim to attract and retain MVNOs such as Virgin Mobile."

Will the regulators approve?
Some commentators suggested the competition authorities will take an interest in the deal, which would hold close to 40% of the market.

However, there are several other European countries where one operator holds more than 40% of the market, according to Ovum analyst Steven Hartley. "Comparisons with Europe make it look reasonable," he says.

Gervais Pellissier, CFO of Orange owner France Télécom, says he believes the merged venture will reinforce fair competition.

It is widely thought consolidation in the UK market will be positive for shareholders, as the major players will gain greater pricing power and higher profit margins.

Others claim T-Mobile's MVNO agreement with Virgin Mobile is a possible stumbling block. T-Mobile effectively owns Virgin customers through the service, which piggybacks on its facilities, but Steve Hartley of analyst house Ovum says this is unlikely.

Hartley points out that the two networks have tacitly suggested Virgin customers will be spun out, adding that regulators are more likely to examine T-Mobile's network-sharing deal with Hutchinson-owned minnow 3.

"As long as regulators impose the necessary safeguards we do not believe the deal is bad for consumers. Competition is good for consumers, but with five major players the UK operators were competing themselves to death and badly needed to consolidate," says Hartley.

But while consumers are set to benefit from the merger, the future might be decidedly blue for many employees of the joint venture. Orange and T-Mobile plan to cut costs through the merger.

The venture is targeting net capital and operating expenditure in excess of £3.5bn, and T-Mobile's Richard Moat has said there will be job losses.

Cosmetic questions
One further consideration that will be noticeable to end-users is the branding of the venture. Both parties remain committed to maintaining separate brands until 2012, but over the next 18 months there will be serious negotiations behind the scenes.

France Télécom CFO Gervais Pellissier said he fully expected disagreements, adding: "Shareholders will decide the branding strategy for the joint venture on the basis of management recommendations."

Orange holds the best hand here; it first drew breath as a British-owned network in 1994, before being sold to France Télécom in 2000.

Deutsche Telekom-owned T-Mobile, on the other hand, entered the market in 1998, buying Mercury Communications' One2One and rebranding it in 2002.

Orange is seen as unlikely to want to ditch its stronger brand and heritage in the UK, but for now, Alexander treads the middle ground.

"We both have huge brand loyalty in the UK and spent a lot of money to build that up," he told Reuters. "That won't be thrown away lightly."

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