It’s not a full-out merger, but another example of how operators trying to cope with the huge rise in data usage and the pressure of price competition: France Telecom-Orange and T-Mobile’s parent Deutsche Telekom (NYSE: DT) this morning formally announced one more step in their continuing and ever-closer relationship. The two operators have formed a new joint venture to cover four areas of investment: customer equipment, network equipment, service platforms and IT infrastructure.
The JV, in which each operator will have a 50-percent stake, is one more step in the growing collaboration between the two operators: in the UK they have combined their mobile assets, Orange and T-Mobile UK, to form a single entity, Everything Everywhere — although it is continuing to operate two separate brands in the market, for now.
In February, on the back of a positive progress report on Everything Everywhere, the two announced they would look at how to further that cooperation across the rest of their footprint. Today’s news is the culmination of those discussions.
It could also be a stepping stone to working more closely in other areas like services and spectrum. According to the release, the operators are projecting a €1.3 billion annual savings collectively as a result of the JV. At this morning’s press conference, they emphasised time and again that the JV will be focussed on physical assets such as handset terminals and network equipment. But the two operators are also leaving the door open for further collaboration in other, non-physical areas such as the area of services — where all operators are trying to get a better position for more sustainable margins — and the very costly but essential area of spectrum.
“The incentive is for us to add more into this JV, but we want to see the results of what we have now before we consider adding more,” said Edward Kozel, CTO, Deutsche Telekom, at this morning’s announcement.
The news comes as Deutsche Telekom continues to look at ways of reducing its nearly €43 billion in debt and focus more on core operations where it has a stronger market position. The most notable sell-off under this strategy has been the proposed sale of DT’s U.S. business, T-Mobile USA, to AT&T (NYSE: T) for $39 billion. The two operators are currently awaiting regulatory and shareholder approval for the deal, and until then spending for T-Mobile USA will also fall into this JV, although those numbers are expected to disappear pending approval of the AT&T deal, so they have not been included in the calculations.
In terms of mobile services, the area where this new JV will perhaps be most keenly felt by consumers will be in the area of handsets, and potentially tariffs.
In handsets, both companies — as with other big mobile operators — have been looking to gain an edge on their rivals by launching distinctive and unique handsets, rather than simply offering the same models as everyone else for a lower price that cuts into margins. Together the two buy some 45 million handsets annually at the moment.
Of course the two operators are spinning the deal as a win for vendors: they are projecting that the JV will cover an annual purchasing budget of €13 billion per year — collectively they spend about €40 billion on operations today: “[we can bring] a more proactive and in depth relationship to market,” noted Olaf Swantee, EVP Europe and sourcing at France Telecom-Orange. And on buying mobile handsets: “We believe that over time there is a real benefit for suppliers, to have potential access to 35 markets.”
But the reality is that a bigger operator will mean a much stronger negotiating position for the operators, and a much weaker one for vendors, be it in the area of handsets, or network equipment.
On tariffs, both DT and FT were fairly vague about how this deal will actually impact tariffs: the trend is for in data tariffs, especially in broadband, to keep going down due to competition from other operators, and that doesn’t look like it is going away soon; securing the JV deal might just simply mean that Orange and T-Mobile will be able to continue to ride that wave with less financial pain.
Is this the mobile equivalent of a newly married couple having separate bedrooms? Maybe not the best way to start out working together, the JV will operate out of two different offices, in Paris and Bonn, and will be staffed by existing employees of the two operators. Operations are expected to start in the fourth quarter of 2011, pending shareholder and regulatory approval.
Teething pains and questions for the future: DT and FT are ostensibly pleased with the results for Everything Everywhere, that initial JV has not been without its problems: in its latest results in February, Everything Everywhere reported a net loss of 191,000 customers. Data revenues also declined — although that is more likely the result of price competition rather than usage.
“It’s a fact that data is growing but tariffs are compressed,” said Kozel of current market trends in mobile. The jury is still out on whether DT and FT — and any other mobile operators considering these kinds of partnerships — will really see longer term benefits out of their collaborations, rather than just trying to keep from getting completely crushed by that compression.