Connected Research

Union policy research in the 21st century

T-Mobile and Orange announce merger plans

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Following heightened, and continuing, speculation about the future of T-Mobile, T-Mobile and Orange have announced this morning that they plan to merge their UK interests into a joint venture.

Initial speculation appeared to question the extent to which this was a genuine venture plan or an attempt to flush out further cash bidders, with both Telefonica (owners of O2) and Vodafone reported as having offered around £3.5bn for T-Mobile – bids apparently rejected by Deutsche Telekom (owner of T-Mobile) as insufficient and ranking behind the joint venture initiative. Telefonica is reported in the above link as not ruling out stepping up its bid although Vodafone is refusing to comment.

As far as Connect is concerned, we have issued a statement to say that details are unclear at this very early stage but we will continue to engage with T-Mobile on behalf of Connect members in the company. Whatever happens, we will continue to seek to protect the interests of our members and to secure the best possible outcome on their behalf.

From a regulatory perspective, however, The Times is right that this may well herald a period of upheaval in the industry. Leaving aside the question of whether this heralds any closer working between T-Mobile and Orange on other fronts in Europe, which would obviously also be a matter for the European Commission’s competition directorate, three issues are immediately paramount to these plans, one of them a little more parochial than the other two.

Firstly, the joint venture, if it goes ahead, would have some 33.2m customers (including subscribers to Virgin Mobile, which use the T-Mobile network). This would represent a share of the market – in subscriber terms – of some 43% on the basis of the most recent Ofcom Competitions Market report. This is much higher than the 37% reported in the press (which is bad enough).

It is utterly inconceivable that competition authorities would allow the creation of such an industry dominant company without demanding extensive concessions to prevent distortions of the market. This is surely likely to be the position of both Ofcom and the Competition Commission, which are likely to work closely together on this issue. Commentators friendly to the issue of the plan might point to equivalent-sized operators being allowed elsewhere on the continent but, as we have pointed out before, market dominance as a result of the way the mobile segment has emerged (and which competition-focused regulatory regimes are seeking to tackle) is an entirely different issue from the creation of an operator with such a level of dominance, and where much more established competition rules come into play.

Gervais Pellisier, Orange’s Chief Financial Officer, is quoted in the Press Release that: ‘…[C]ombining our operations in the UK… will reinforce fair competition’. This is utter spin – it won’t: the creation of such a large operator from the merger of the 3rd and 4th placed operators in the market cannot be said to assist competition when all four (excluding Three) are, actually, of a fairly similar size. The competition authorities will examine the plans and they are certain to demand concessions which will have the effect of reducing the market dominance of the joint venture. Sensitivity to this situation is likely to explain why the supposed benefits to consumers appear so high up in the companies’ press release announcing the plans.

Secondly, there are interesting questions over what happens to competition policy when industry analysts (other than trade unions!) and the major players in the industry are united – as they seem to be here – behind a belief that the industry is somehow ‘ripe for consolidation’. Competition policy might well be striving for a more or less perfect balance between operators such as we have in the UK mobile market – but this is an expensive situation for the operators and it is always likely that they will seek to disrupt it, or to withdraw from it. Competition policy needs, in such cases, not only to stay strong but also to maintain the principle of balance between the operators. Balancing the needs of the market and those of the players in it is, in pragmatic terms, likely to be incredibly difficult.

Thirdly, and this is the more parochial point, many of the operators have engaged in network-sharing arrangements as a means of saving costs (Three has such an arrangement with T-Mobile, for instance), while mobile virtual network operators (MVNOs) have also emerged on the scene (such as Tesco Mobile, which has an arrangement with O2, and we have already mentioned Virgin Mobile, which accounts for around one-quarter of the users of T-Mobile’s network). Any such joint venture may well threaten network sharing deals, leading to some being unstitched, while the position of MVNOs may also be jeopardised.

Divestment of assets is usually the response of competition authorities when such a large operator is mooted – an interesting question in the light of the credit crunch and the recession. More to the point, such divestments always lead to more uncertainty for workers in the affected businesses – sale to one, followed by sale to another, unknown, party just around the corner. Frequently, aside of the anxiety caused to individual workers, this leads to a loss of morale which, in turn, frequently undermines many of the supposed synergies which such ventures are supposed to create.

For the sake of everyone, these joint venture plans need an early comment from the competition authorities as to their stance should Orange and T-Mobile seek to proceed with it.

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Written by Calvin

08/09/2009 at 12:37 pm

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