29 June 2009 | Published by Ovum
The news is awash yet again with rumours on another acquisition of T-Mobile UK’s business. This time, Vodafone is reported to be interested. However, while a takeover will boost Vodafone’s position in the UK market, completing the deal will be a nightmare. Ultimately, consumers willbe neither worse nor better off with a deal.
Vodafone will improve its market position
A takeover of T-Mobile will catapult Vodafone back to the top of the UK mobile market as the addition of T-Mobile’s customer base will give Vodafone a market share of about 40% – much higher than O2’s 27% market share.
Such market dominance should give Vodafone increased strategic benefits. It will bring economies of scale, an opportunity to share network resources, and a greater footprint to rollout new products & services. The increased revenue potential is fairly obvious and that may be why the financial markets seem to be excited about a potential deal.
Crucially too, and perhaps more egotistically, the UK is Vodafone’s domestic market, and in the absence of BT on the mobile scene, Vodafone is the de-facto incumbent mobile operator. Given that incumbents elsewhere lead their markets, it would be satisfying for Vodafone to lead the UK mobile market.
But Vodafone plus T-mobile is not a perfect fit
Despite the potential strategic advantages, this is not a case of a square peg in a square hole. Firstly, why should two seemingly underperforming businesses merge? In Q3 2008, Q4 2008 and Q1 2009, Vodafone and T-Mobile suffered revenue declines whereas O2 and Orange grew theirs. Would two businesses with declining revenues suddenly turn a corner?
In addition, while Vodafone is doing alright in adding new customers, T-Mobile is loosing customers. It has lost customers on a year-on-year basis in the three quarters since Q3 2008. So can Vodafone be certain that it will have T-Mobile’s entire customer base when a deal is completed? Or will it pay for a vanishing customer base?
Then there is the network sharing palaver. T-Mobile has a deal with 3 whereas Vodafone has a deal with O2. How will these unravel? And will these present an octopus due diligence scenario? In other words, would Vodafone be bogged down with integrating T-Mobile’s business?
Consumers have nothing to worry about
While the elimination of T-Mobile should in theory affect competition, in reality, Ovum does not see any major risks nor benefits to consumers. Even without 3, the UK will still have three large and viable operators, about the same as in many European markets. Besides, a Vodafone T-Mobile combination would not approach the Holy Grail 50% market share (which KPN has in the Netherlands) which is anathema to EU policy makers.
As such, while Ofcom – the UK regulator – may not be comfortable with a deal, Vodafone will not be breaking any record or setting any precedent. Three viable operators is generally enough to sustain competition in the market and we do not see any threat to consumer choice. In fact, we believe the fear of higher consumer prices is somewhat overblown– we have evenhad to turn down a media briefing because we would not parrot the ‘bad for consumer’ line.
A deal raises questions and a cascade of options
A potential deal begs the question – why is Deutsche Telekom selling T-Mobile UK few weeks after installing new management? Do they really expect to get a good price in a recession? Then the next question is – what happens to 3 UK? Surely they can not survive in direct competition to Vodafone, O2 and Orange.
Interestingly, the deal flags up issues about the future of network infrastructure in the mobile industry – a theme Ovum are currently developing. Given that T-Mobile and 3 share networks while Vodafone and O2 share theirs, how would a deal affect Ericsson which is running almost 80% of the UK mobile network?If that were to happen, how much longer will it take for the mobile industry to coalesce on a single network – akin to the electricity and gas networks?
- Ends -
Emeka Obiodu, mobile senior analyst at advisory and consulting firm Ovum, is available for comment.
More information is available from the Datamonitor Group Media Team. Please contact Maria Di Martino on +44 20 7675 7529 or maria.dimartino@ovum.com.
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