Mergers of European Mobile Carriers Expected to Grow

European mobile telephone operators are primed to enter a long-awaited phase of consolidation, the New York Times reports.

Source: Square

As growth slows, and as the need to cut costs and pay out millions for new, faster networks grows, longtime rivals are joining forces in markets across Europe to reap the benefits of economies of scale.

“You are going to see this happen more and more,” said John Delaney, an analyst in London at the International Data Corporation. “Fundamentally, there are too many network operators. Revenues are declining in the core services of voice and text, and the rise in data revenue is not making up for the shortfall.”

European policy makers are supportive. Neelie Kroes, the European commissioner for telecommunications, said that consolidation would help the Continent’s industry maintain its competitive position with rivals in the United States and Asia, where greater consolidation has allowed for faster adoption of new technologies.

“Having a few pan-European operators that are strong in the cross-border market would not necessarily be bad for competition,” Ms. Kroes said.

The advantages of merging among carriers go beyond bigger customer bases and revenues and superior coverage of wireless network grids. Operators also stand to save millions building the next generation of wireless data networks based on Long Term Evolution, or LTE, technology.

In Britain, O2 U.K., a unit of Telefónica of Spain, and Vodafone said this month that they would place their network grids, but not their businesses, into a joint venture to save operating costs and reduce the expense of building an LTE network.

The move comes partly as a response to the merger in 2010 of Orange and T-Mobile, the British mobile units of France Télécom and Deutsche Telekom, which created Everything Everywhere, now the largest mobile operator in Britain.

Others may soon join the trend. In Germany, the No. 3 and No. 4 mobile operators — O2 Germany, a unit of Telefónica, and E-Plus, owned by KPN of the Netherlands — are investigating merger or sale options for their carriers, which for years have failed to make significant inroads against their larger rivals, T-Mobile and Vodafone.

Whether such combinations have the desired effect is still unknown.

Everything Everywhere was created in Europe’s most competitive mobile market, with five network operators. Deutsche Telekom and France Télécom’s mobile units had both been overtaken by O2 U.K., which surged to the top of the British market by selling custom calling and data plans with generous texting and messaging allowances, and by getting exclusive rights to sell the iPhone in Britain from 2007 to 2009.

When the alliance was announced in September 2009, executives from the two companies highlighted the £3.5 billion, or $5.4 billion, in efficiencies expected by 2014.

Neal Milsom, the chief financial officer of Everything Everywhere, said the merger was on track to meet its cost-saving goals. The two operators have merged warehouses and suppliers and have reduced the amount of office space in the London headquarters by 38 percent.

Everything Everywhere cut 1,800 jobs, or 11 percent of its work force, in 2011 and is on track to cut its operating expenses by £278 million this year. This spring, the company began to trim some of its 18,000 third-generation network cell sites in Britain.

The company is investing £1.5 million a day in its network, a commitment of about £1.5 billion over the next three years, he said.

“Since our inception, Everything Everywhere has succeeded in a highly competitive environment,” Mr. Milsom said.

While Everything Everywhere retains the largest share of the British market, with 33.7 percent as of the end of 2011, its share has declined from about 37 percent when the merger was announced, according to International Data Corporation. It has also struggled financially, losing £188 million through the end of 2011.

Part of the reason, according to some analysts, has been the challenge of defining its brand. At the time of the merger, Everything Everywhere was the name chosen by the venture partners as the overarching corporate brand, but T-Mobile and Orange have continued to sell their services to consumers under their old brands. In late 2011, the company started opening Everything Everywhere stores that sell both Orange and T-Mobile services.

“That is one area where Everything Everywhere remains confused,” said Pete Cunningham, an analyst at Canalys in Reading, England. “They operate under the T-Mobile brand, the Orange brand and Everything Everywhere. It is a bit odd, as if they cannot agree on a strategy.”
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There has been some internal turbulence as well. Last September, Olaf Swantee, the France Télécom head for Europe who was named Everything Everywhere’s chief executive in July, shrank the layer of top executives from 26 to 10; the company said six executives had left voluntarily, including the former managing director of T-Mobile U.K., Richard Moat, who had been Everything Everywhere’s deputy chief executive.

Through the transition, the company has been steadily improving its profitability, even as it loses market share, by focusing on higher-value smartphone contract customers. Revenue from data and messaging plans rose 17 percent in the first quarter of 2012, to 45 percent of the total average monthly revenue from each Everything Everywhere customer, up from 37.5 percent a year earlier.

But significant challenges remain. Everything Everywhere is battling O2 U.K. and Vodafone over whether it can repurpose part of the broadcast spectrum it owns for a fourth-generation LTE network. British regulators will decide whether that would place Everything Everywhere’s rivals at a disadvantage.

The regulator, Ofcom, said it was disposed to look favorably on Everything Everywhere’s request, but it has so far not granted the company permission to rededicate the spectrum.

For the time being, Deutsche Telekom and France Télécom say they are pleased with the progress of their venture.

“Everything Everywhere has established itself as a market leader in the British market and is successful in a rapidly changing telecommunications industry and within the current difficult economic climate,” said Claudia Nemat, the Deutsche Telekom board member for Europe and technology.