UK cellco merger in doubt, Vodafone outlook improves

By Caroline Gabriel, Rethink Wireless

Doubts are rising over the planned merger of the UK’s third and fourth cellcos, Orange and T-Mobile. The transaction – which is also a factor in the delay of spectrum auctions – “threatens significantly to affect competition in mobile telecommunications”, according to a preliminary review by the country’s competition authority.
When it was first proposed, it seemed that the Office of Fair Trading might wave it through, because the country would still have four cellcos (more than many European markets) and because several other territories already have a leading mobile carrier with more than 40% share.

However, these are all former incumbents, with their dominant position being eroded, and it seems the authorities will now take a tougher line on actively creating a player with a combined 37% stake. If MVNO Virgin Mobile, which uses T-Mobile’s network, is taken into consideration, the market share exceeds 40% by subscribers. The new entity would also burst UK spectrum caps, holding twice as much bandwidth as Vodafone and O2, and more than five times as much as 3.

The OFT now wants to carry out a full scale investigation into possible detrimental impact on competition in the mobile sector, under pressure from consumer groups. The OFT is also concerned about the effects on the smallest of the UK’s 3G network owners, 3 UK, which would struggle if its RAN sharing deal with T-Mobile UK, MVNL, were to be ended as a result of the Orange merger. (This venture has outsourced operations to Ericsson.) 3 UK CEO Kevin Russell recently said any exit would not be triggered quickly, but he expressed concern that the new entity would have over 80MHz of spectrum, given that capacity will be a crucial advantage in the data-hungry networks of HSPA+ and LTE.

3 has been putting significant efforts into improving the quality of experience – the cellcos’ new key metric – of its network, which started life with 7,000 cell sites in 2003, and should reach 12,855 by the end of this year, all supporting 7.2Mbps HSPA with better indoor penetration. UK CTO Graham Baxter says the cellco carries 75Tb of data per day, up 100% in just a year, and with dongles carrying 7.5 times the data traffic of its smartphones (3 has been a major trailblazer in well priced dongles, but its network is bearing the brunt of that).

All these efforts could be put at risk by the TMo-Orange merger, especially if the merged carrier does not have to divest any spectrum. Opponents of the merger have written formally to the EU’s Competition Commissioner, Neelie Kroes, requesting that any investigation should be under the auspices of the UK rather than the European Union. A probe would normally be an EU responsibility because more than 66% of the turnovers of T-Mobile’s and Orange’s parents come from outside the UK.

However, consumer lobbyists argue the effects would only be felt by UK users.
In a statement issued yesterday, the OFT said: “Our initial view, following consultation, is that the joint venture threatens significantly to affect competition in mobile telecommunications in the UK. Thus we have requested that we carry out an investigation. If the request is granted, the OFT intends to examine the proposed joint venture with a view to deciding whether it should be referred to the Competition Commission for an in-depth investigation.”

This could delay the merger by at least six months and even impose sufficiently stringent conditions that parents Deutsche Telekom and France Telecom would back away.

While the arguments drag on, Vodafone and O2 will be building up their own arsenals to create a strong pre-emptive strike against the potential enlarged player. O2 has just signed a managed services deal with BT for its fixed and mobile core networks, to improve the quality of its networks and converged services significantly.

Vodafone, which is under pressure from shareholders to improve its market value significantly, did today report an improved outlook for its fiscal year to March 2010. It now expects full year adjusted operating profit of £11.4 billion to 11.8 billion, up from a November guidance of £11 billion to 11.8 billion. This was because of a “small improvement in underlying trading and the contribution from associates, and lower depreciation and amortisation”, the company said. The outlook for free cashflow was increased to £6.5 billion to £7 billion from £6 billion £6.5 billion.

For its third quarter to December, Vodafone posted revenues up 10.3% to £11.5 billion ($18.2 billion) and service revenues up 11% percent to £10.7 billion. Organic service revenue was down 1.2%, an improvement of 1.8 percentage points on the previous quarter, on gains across all regions. Organic service revenue fell 3.2% in western Europe and 0.5% in Africa and central Europe, but grew 10.4% in Asia-Pacific and Middle East thanks to the strong Indian market. The mobile operator had 332.985 million customers at the end of 2009, based on proportionate ownership of subsidiaries, up from 323.03 million at the end of September 2009.

Vodafone exceeded £1 billion in quarterly data revenues for the first time, an increase of 17.7% year-on-year on an organic basis. In Europe active data users now exceed 30m, and data makes up 11% of service revenue.

Revenue trends in Germany and the UK improved, but were still down 2.8% and 4.9%, while Spain was stable, down 6.8%. Voice growth was similar to the previous two quarters, with overall price declines continuing at similar double-digit rates. Fixed line revenue increased by 10% percent to £862 million, led by Germany, Spain and Italy. Fixed broadband customers reached 5.2 million after 267,000 net additions in the quarter.
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