Microsperience

Earlier in September it was announced that the UK operations of T-Mobile and Orange would merge to create a jointly-owned subsidiary. Now that the excitement (and hysteria) has calmed down a little, Teresa Cottam looks at what this really means for the UK mobile industry.

We’ve known that something had to change in the UK mobile industry for some time, and the main player that needed that change was T-Mobile UK. Earlier this year there were rumours circulating that T-Mobile UK may try and buy market share, but when its parent made it clear it was not willing to pour in sufficient cash the rumour mill started speculating on potential buyers. At that time we pointed out that while 3 was partnered with T-Mobile it was an unlikely buyer.

Thus the tie up with Orange may not have been entirely unexpected, but it bears all the hallmarks of a marriage of convenience. How easy the union will turn out to be remains to be seen. The two companies will share ownership of the new entity (let’s call it T-Orange for want of a better name) and this in itself is somehow so much less satisfactory than a clean buy out. Will decision-making be by committee? Given that both firms haven’t really sparkled in the market for some time, is this really going to reinvigorate T-Orange?

A key concern in the general press has been about the effects on competition. It can’t be denied that the UK is currently a hugely competitive market and there is concern that eliminating one major player will result in reduced competition leading to higher prices. But is this really the case? The problem with this view is that there is a confusion between service provision and network ownership. There has always been some doubts about the wisdom of building out so many mobile networks in the UK. At the time of the 3G auctions, received wisdom was that the UK could probably sustain 4 networks but not 5.  Note: we are talking about physical network infrastructure not mobile service providers.

Reducing the number of network providers does not innevitably have to lead to higher prices. Why? Well firstly the cost of owning a network is substantial and includes the licence costs (the five 3G licence winners paid GBP22.5 billion back in 2000), the physical network build out, operational costs and the cost of customer support, sales and marketing. In the olden days back in 2000 mobile service providers believed it was essential to own and operate their own network to be a player. These costs form the basis of prices that can sustainably be charged. Faced with spiralling costs and sluggish returns, the same players who fought for licences back in 2000 are now reconsidering their position.

This brings us back to the idea of network sharing in one form or another. It is not new idea – either in the global telecoms market or in the UK. Virgin Mobile and 3 already network share (without the hysterical headlines) with T-Mobile. In the case of 3 this is via a joint venture called MBNL. T-Mobile carries traffic for Virgin on an MVNO basis. Network sharing makes a lot of sense in the UK as it might actually improve coverage as well as reduce costs. The fact is that no player has anywhere near complete 3G coverage of the UK and yet there is considerable, unfruitful duplication.

T-Mobile and Orange tell us they expect to realise savings of EUR445 million a year through the reduction of duplicated masts and stores, and by streamlining operations. Is this bad for the consumer? Not necessarily. It means that by rationalising and making network operations more efficient companies can compete at lower price points, or invest more in customer support, or use this cash to build out capacity where needed or add increased coverage.

Let’s return to the issue of low tariffs and the concern that reducing network competition will raise retail prices. Much emphasis is placed in the UK on low tariffs. UK consumers still appear to be under the illusion that they pay high charges for mobile services and competition has centered largely on price cutting. However, the connection is rarely made between poor network coverage/poor customer service and low prices. Since telecoms is a capital intensive industry it is essential that sufficient cash remains in the business to invest in the necessary infrastructure. Failure to do this results in a sub-optimal network and IT infrastructure, as well as slower innovation and modernisation cycles. The most toxic result of a slow innovation cycle is that companies remain trapped on an aging and usually less efficient, higher-cost infrastructure which, in turn, drives up costs and means they have less money to invest. This is bad for individual consumers, but also very bad for the country as a whole. Telecoms is now so embedded in the way we do business and the way we live our lives that countries that  fall behind in the telecoms innovation cycle handicap their ability to compete. Likewise, low prices lead to cost-cutting initiatives that manifest themselves as more automated responses (aka IVR), cheaper call centres and longer waiting times.

There is a line to walk between allowing monopoly profits and inefficiency, and on the other hand having prices that are so keen there is no money left for investment. Government also has a role to play too: does anyone really believe that ultimately it’s not the customers paying back the GBP22.5 billion the industry was forced to pay for 3G licences? Are we really to believe this wasn’t a telecoms stealth tax? By taking too much money out of the sector government runs the risk of making our economy less competitive by raising costs to business and denying businesses access to the latest technology and services because telcos don’t have the cash to invest in them.

Network rationalisation might therefore have some positive effects for the consumer. It doesn’t automatically reduce competition or raise prices, and in fact because less is being spent (at least theoretically) on operations and infrastructure the business can become stronger and more able to invest in new technologies and customer services.

The important factor is the wholesale price of telecoms, rather than retail pricing. If the regulator ensures there is adequate competition in the wholesale market then competition in the retail market shouldn’t be harmed. A healthy wholesale market means that MVNOs can operate successfully, which means that the market overall remains competitive. We have examples of regulation that has the aim of increasing competition. (In the fixed market, for example, BT was forced to separate out its local loop business and provide services on the same basis to its competitors as it provides to its own operations in order to encourage competition.) It is therefore possible that the regulator may take a “watch and see” approach and intervene with targetted regulation if it believes the wholesale mobile market is becoming less competitive.

However, as we are aware network capacity is a finite thing and network operators that are able to use excess capacity by selling it to a third party are making money rather than wasting money. Shareholders have a role to play here. If they believe the business is being tightly run to maximise a return on the capital invested in the network and IT infrastructure then they will continue to invest in a company; if not, then they may choose to move their funds elsewhere.

Another factor is the matter of licences. It is possible that the regulator, competition authority or government may require one of the 3G licences to be returned. This raises the possibility of a new entrant into the UK market. I would be a little surprised if this happened immediately. Two perfectly capable operators have shown us they could not make an adequate ROI in the UK market. Who then would fancy having a go? There are one or two candidates that spring to mind, and I’d welcome readers’ thoughts on this.

To my mind the single biggest challenge is going to be business integration. (Just ask Virgin Mobile UK how difficult this can be.) BSS/OSS consolidation is necessary to increase operational efficiency, as dictated by the need to make annual savings of EUR445 million. While T-Orange is consolidating though it will be inwardly focused -  an ideal time for rivals to innovate and try to steal back some market share. On the other hand, T-Orange could really shake up the market if it manages to deliver a fresh business model supported by a flexible, low-cost and scalable IT infrastructure.

So for me the story here is about the possibility of a reinvigoration of the UK market, a more realistic view of network ownership and a better mobile service for consumers. We need to understand that future competition will not be based on network ownership or capabilities, but instead on service provision (with the proviso that the wholesale telecoms market is healthy and competitive). It is to be hoped that rather than grossly cut costs, T-Orange takes the opportunity to step back to consider how it can deliver an enhanced telesperience in the form of a better commercial offering combined with a ‘killer’ customer experience. It’s strategic pruning and realignment, rather than a slash and burn, that’s needed to reinvigorate the business. By doing this T-Orange could raise the bar across the entire UK market and drive a much better offering to customers. Fingers crossed.

PS From the NEPs’ point of view, however, there is a little conundrum here, as Ericsson is the main service provider for MBNL, Vodafone and O2, while Orange recently signed with NSN… Be interesting to see how that plays out.