Mobile Merger Mania Mystery Tour 2: No Turkish Delight for T-Mobile?

Richard Moat: What's in store for the recently-appointed MD of T-Mobile UK?

We're going a bit off the usual 'emerging markets/developing countries' beat again today, I'm afraid. Bear with me. For a few reasons, this is a story I care about.

Having worried a little, however, about the possible effects of a Vodafone UK-T-Mobile UK merger on the area where I live (the northern bit of London's commuter belt), it now looks as if my fears are not to be realised.

Well, that's if I choose to believe my former colleagues at Informa Telecoms & Media. Informa's telecoms.com news site ran an article on Monday that seems to suggest any buyout of T-Mobile UK now looks unlikely. The article mentions a recent announcement by UK telecoms and media watchdog Ofcom which indicates that the regulator is satisfied with the level of competition in the country's mobile sector. According to analysts, the article contends, this means that the change caused to the UK mobile market by any consolidation would risk drawing regulator attention. One such analyst, Michael Kovacocy, of Daiwa Securities, is quoted: "Assuming rational operator behaviour, we would be inclined to believe that an already weak case for buying T-Mobile has been made weaker for the big three UK mobile players," says Kovacocy.

Although he also features a simular quote from Michael Kovacocy, the tone of an article written on the same day by Dominic White of Mobile News, however, is quite different. Two months ago, White asked whether recently appointed Richard Moat was about to become the shortest-serving MD ever of T-Mobile's UK operation. White feels now that this possibility "seems more likely after it emerged that Deutsche Telekom has hired investment bankers at JP Morgan to explore so-called 'strategic options' for the group." White argues that more often than not, language of this sort is code for putting the business up for sale.

As well as my fears for how a sale of T-Mobile UK might affect my local area (where the cellco has its HQ), I'd also be disappointed to learn of Richard Moat not being given the chance to get stuck into his new job, not least because I found him to be a friendly and helpful contact when I was working more actively in Europe than I am now.

For a long time, I took advantage of my familiarity with Central and Eastern Europe (having lived and worked there in the early-mid 1990s) to organise and host telco sector conferences and networking events in locations such as Prague, Budapest and Bucharest. In the latter, I met Richard Moat for the first time. Richard was then heading up Orange Romania, where, during his four year stint at the helm, revenues grew from from EUR 624 million in 2004 to EUR 1.31 billion in 2008. The cellco also retained its market-leading position, keeping just ahead of Vodafone Romania and dealing with a trading environment made more competitive by the arrival of new entrant in the mobile space RCS&RDS.

While speaking at the 2006 version of the Informa Telecoms & Media CEE region conference in Bucharest did not demand a major time commitment from Richard, I found he was happy to jump on a plane and take a day out of the office when the event moved to Prague the following year. As well as making a great presentation in Prague, Richard made himself available for a chat, during which he shared useful insights about the telecoms sector in Romania and the wider region. My impression is that Richard is the kind of CEO really appreciated by analysts and journalists as well as conference organisers because he is keen to find the time to share his views and contribute to discussions around issues facing the industry. During his stint in Romania, Richard seems to have been similarly generous with his time when talking to local telecoms sector magazine/news portal Comunicatii (which, by the way was always a useful media partner for my events). This interview with Comunicatii's Ion Vaciu, recorded in February, is an example of that:

Of course, Richard Moat - and Deutsche Telekom - may be able to stick rather than twist. As Dominic White of Mobile News notes, Germany's incumbent telco could hold onto its UK mobile business, but he contends that "what is known is that Vodafone has had a peek at the business and is considering making a bid that would prompt a massive shake-up of the UK mobile sector."

White discusses an issue previously raised here at DevelopingTelecomsWatch - that if Vodafone were to try and buy T-Mobile UK, or to merge their UK businesses into a 50:50 joint venture, it would command more than 40% of the UK market, which would be more than enough to attract the attention of the Competition Commission, which typically investigates any deal that gives a company more than 30% of a particular market. White notes, however, that analysts think a deal might get through the hoops, pointing out that in markets such as France and Germany there are operators with more than 40% market share. White also reminds us that the UK is the only major European market with five mobile networks, a throwback to the turn of the millennium when the government raised GBP 22.5 billion selling 3G licences, including one to the new entrant 3, which was mentioned by the telecoms.com article as the only contender for a deal with T-Mobile UK which would not attract a response from the regulators. This point is made, I assume, because of the late entrant having a significantly smaller share of UK mobile subs than any of the other four network operators.

According to WCIS, the UK mobile market is currently split as follows in terms of market share:

1. O2 - 29.27%
2. Vodafone - 21.38%
3. Orange - 21.35%
4. T-Mobile - 21.31%
5. 3 - 6.69%

My feeling is that if 3 UK were somehow to tie-up with T-Mobile UK, it would surely be a case of the latter purchasing the former. I say this because of how much I've read lately about 3's parent company Hutchison Whampoa looking to raise cash rather than spend it. For example, the group has confirmed it is in talks to sell its stake in the Orange-branded Israeli MNO Partner. The group may also sell a stake in 3 Italia to investors from the Middle East, according to a Cellular News story earlier this month.

Dominic White believes that the UK 3G auction held earlier this decade, "and the way it was rigged to generate maximum value for the government" has hamstrung the mobile industry in this country ever since - too many networks and tremendous pressure on each player's profit margins. He notes that Deustche Telekom has already written down the value of T-Mobile UK after a year in which it underperformed the rest of the industry. According to White, Vodafone is considering a bid within the range of GBP 2.5-3.4 billion.

For Michael Kovacocy, these numbers do not look right. In the telecoms.com article, he warns any purchaser against overpaying and argues that only "a bargain basement price" of GBP 1-2 billion makes any sense.

Terry Sinclair of Citigroup, however, likes the idea of Vodafone picking up T-Mobile UK. In Dominic White's article, Sinclair is quoted as saying that the combination could boost Vodafone’s earnings by GBP 200-300 million within three to five years. Needless to say, continues White, that would mean a lot of cost cutting, which is the main reason for the tie-up: "if your revenues aren't growing enough the only way to boost profits is to squeeze your cost base." He feels that Vodafone would also be able to put more customers over one network and would have extra buying power and a greater footprint to roll out new products and services.

If it really is as hard for mobile operators to make good margins in the UK as has been suggested here today, this could provide a rationale for Deutsche Telekom seeking to get out of Britain and into somewhere which offers better prospects and/or a neater complement to the German telco's many operations in Central and Eastern Europe. DTW has previously noted suggestions that a favoured option could be some form of asset swap with Vodafone, whereby Deutsche Telekom would get its hands on Big Red's Turkish operation, which has struggled to compete effectively with market-leading Turkcell.

A fairly wide range of opinions, then, on whether the UK mobile market is about to consolidate. So it remains worth watching.

Mobile Merger Mania Mystery Tour 2: No Turkish Delight for T-Mobile?

Mobile Merger Mania Mystery Tour: calling in Africa, Turkey, the UK and points worldwide

T-Mobile UK campus, Hatfield, Hertfordshire: uncomfortably close to DTW HQ

Late last month, I turned the gaze of DevelopingTelecomsWatch away from the world's developing countries and emerging markets and focused my attention much closer to home.

Getting all self-indulgent, I described the possible effects of a rumoured T-Mobile UK-Vodafone UK merger on the area where I live. This is because I am personally acquainted with a few people who make the pleasantly short commute from here in St Albans to the T-Mobile campus in nearby Hatfield. Without any real numbers to hand, my sense, then, is that the Deutsche Telekom-owned cellco is a pretty significant employer in this part of the world. So, in a town where the unemployment figure has recently surged upwards, albeit from a very low base, a true merger of the two MNOs is unlikely to be warmly received. I think this is the first telecoms story that I've ever heard being discussed by parents waiting for their kids outside my son's nursery school.

Perhaps a more predictable setting for talk of telecoms M&A activity is Investor's Business Daily, whose writer Reinhardt Krause believes that "after slowing to a crawl in the first half of 2009, deal-making among phone companies is bouncing back, a shift that's playing out in developed and fast-growing emerging markets alike." Krause quotes a former colleague of mine, Thomas Wehmeier, an analyst at Informa Telecoms & Media, who says that "the talking that has been continuously ongoing is finally bubbling up to the surface in the form of actual bids and deals."

Krause cites a number of prospective deals:

• Hutchison Whampoa may seek a merger for some or all of its money-losing operations in Europe, including 3 UK
• The merger talks between Bharti Airtel of India and South Africa's MEA mobile group MTN
• China Mobile being "on the prowl for more deals in Asia"
  
• The much-discussed notion of Zain selling its African operations

When asked about the last of these, Wehmeier expressed surprise, but conceded that "Zain is seeing that operating in the African environment is not simply a way to print money, not matter how impressive the rate of subscription growth."

Tom Elliott, an analyst at Strategy Analytics, meanwhile, says that Zain may be tempted by the huge "one-time gain" it would realise by selling its African assets. As Krause's article states, in 2005, Zain acquired Celtel International's African operations for USD 3.4 billion and, if the current rumours are to be believed, is now looking to sell these (plus some other acquired later) for around USD 10 billion. The even larger sum of USD 12 billion has also been mentioned - and for a very interesting discussion on how that a 12 billion dollar valuation could be calculated, I'd heartily recommend a nice article written by Carlos Valdecantos of Spain-based management consulting and advisory firm mmC Group.

The Zain story is certainly the one to which most time has been dedicated here at DTW but, as discussed, the T-Mobile-Vodafone issue is the one whose impact I'd be most likely to feel in day-to-day life here in London's commuter belt.

The last time I looked at this, I briefly raised reasons why such a deal might not be plausible. These included the idea that UK authorities might be concerned about the market power of the merged operation in a consolidated mobile market and the question of why Deutsche Telkom would offload such a significant asset at the bottom of the market.

Paul Rasmussen of FierceWirelessEurope, writing late last week, has an interesting take on these two concerns. Rasmussen has listened to sources who believe that DT may prefer an asset swap to a sale, favouring the acquisition of a "comparable mobile operator in central or eastern Europe" from a group interested in T-Mobile UK.

Rasmussen cites "insiders" who claim that DT's CEO, René Obermann, is keen to avoid a sale of its UK subsidiary, not least because this would create doubts about the company's ambitions to remain a global player. "Early speculation has placed Vodafone Turkey as a possible candidate", writes Rasmussen.

Vodafone's Turkish operation must count among Big Red's least satisfactory acquisitions. No dent, for example, has been made on Turkcell's leading share of the market, currently estimated at 56.40% by WCIS, which is actually slightly higher than it was at the same time last year.

In March, another Informa Telecoms & Media analyst, Dario Talmesio, profiled the performance of Turkcell and, when analysing the competitive environment in the company's home country, asserted that the cellco's achievements were "facilitated by the exceptionally weak state of Vodafone Turkey."

Talmesio wrote that "Turkcell continued to hold a competitive advantage against its British-owned rival... with Vodafone Turkey scoring particularly low compared with Turkcell in key areas, such as quality of network, commercial distribution and customer satisfaction".

On a personal note, I've travelled to Turkey on business a several times and have had the pleasure of making the acquaintance of people working with just about every significant telecoms operator there, as well as many more in the mobile VAS space and with various consultancy firms. There does seem to be a very strong feeling in Istanbul that Turkcell's dominant position is unlikely to be threatened any time soon. I've even heard the suggestion that Turkish consumers can be quite resistant to foreign brands competing with ones perceived to originate from their home country. Even this seemingly quite intangible advantage might weigh heavily in Turkcell's favour. Personally, I have a fairly strong aversion to slugs and snails - almost a phobia - so, Turkcell's use of the latter in its branding does not float my boat. It doesn't seem to put off the majority of Turkish cell phone users, however.

Turkcell's snail: not to my taste, but works just fine for Turkey's mobile users

One can see, then, why Vodafone might look to retreat gracefully from Turkey. Why, though, would Deutsche Telekom be keen to have a crack at all these problems which Vodafone has seemingly failed to handle? Well, as Paul Rasmussen writes, "such a move would nicely complement Greece's OTE", in which DT has been growing its stake since last year and which has a SE Europe footprint, with mobile operations in a number of Balkan countries.

If we're going to ask what is attractive about Vodafone Turkey, we might equally ask why Vodafone would be interested in T-Mobile UK. Beyond the opportunity to jump instantly to a 40% share of the UK mobile market and into a clear leadership position by market share, does the Deutsche Telekom-owned cellco not come with considerable baggage?

As Paul Rasmussen notes, analysts are beginning to question the value of what T-Mobile UK has to offer. He writes that "while the company has around 16 million customers, it is largely made up of an unstable base of prepaid consumers who can switch carriers easily to chase the cheapest or best value plans" and notes that "T-Mobile also generates around 45 per cent of its cash flow from its MNVO deal with Virgin Mobile, a deal that could easily evaporate if a new owner ruffled Virgin's sensitive feathers."

Bearing all of this in mind, you'd have to ask why media speculation abounds about the UK's two other leading mobile operator, O2 and Orange being interested in T-Mobile UK.

One suggestion raised by Paul Rasmussen is that this stems from each operator seeking to "spoil the ambitions of the others", leading to "the winner overpaying while the losers then complain bitterly to the regulator in an effort to confuse and delay the acquisition." Rasmussen argues that "The 'losers' could then attack the unsettled T-Mobile subscriber base with attractive offers and packages. Why so cynical, Paul?

Scary stuff.

Let's keep watching.

Mobile Merger Mania Mystery Tour: calling in Africa, Turkey, the UK and points worldwide

News from islands large and small

More than once, reference has been made here to the idea that some developing countries may well be set to experience consolidation of the mobile sector in the near future. I've quoted luminaries from emerging markets players such as MTN and Zain who contend that in Africa, for example, there currently exists a larger number of mobile operators than the continent's markets should really be able to support. With this in mind, I have often turned the baleful gaze of DevelopingTelecomsWatch towards the hopes and struggles of smaller cellcos competing for a slice of often quite small markets in the face of competition from multinational telecoms groups with far more formidable assets.

This week, however, I've found my thoughts turning to the the prospect of market consolidation much closer to home because here in Britain, Vodafone has declined to comment on a report that it is considering buying the UK operation of T-Mobile International.

For me, this is very close to home. I've been a T-Mobile UK subscriber a number of years. Also, a number of people I know socially make the very short journey every day from St Albans to their jobs at the operator's HQ a few miles away.

I don't know how likely this deal really is. Local reports have made much of whether the UK authorities would welcome the creation of an operator with a market share of 40%. Press articles here have also featured questions about why Deutsche Telekom would offload such a significant asset at the bottom of the market, why Vodafone would take on extra operational costs during a recession and how such a deal would affect 3 UK, with which T-Mobile UK has a network sharing arrangement.

The same reports, however, do remind us that earlier this year, Vodafone CEO Vittorio Colao said that his company was prepared to play an active role in consolidation between operators and that this has already happened in Australia. There, in February, Vodafone and rival cellco 3 Australia announced their merger.

The good people of my home town here in the commuter belt to the north of London will certainly watch this with interest. This is a relatively prosperous place, even by UK standards, but we have certainly not escaped the effects of the recession. A growing amount of retail space stands empty and, albeit from a low base, we have seen a recent surge in the number of people who are unemployed. The T-Mobile campus in nearby Hatfield is one of the larger office complexes in the area and must be one of the more significant providers of decent jobs that do not involve taking the train into Central London. I am therefore struggling to think of how the prospect of a Vodafone-T-Mobile merger could be viewed with anything but apprehension in my neck of the woods.

It's much easier to write dispassionately and remain cool about the human impact of M&A activity when the action is a long way from home. So perhaps it's best if I stick to the emerging markets/developing countries brief of this blog and turn my gaze to distant shores. This will be a far more comfortable expercise than trying to avoid becoming maudlin about friends and neighbours employed by T-Mobile worrying about their jobs.

So I'll pick a really distant shore - about as far from home as I can possibly find. How about Nauru, a tiny island in the Micronesian South Pacific? According to Cellular News, the world's smallest independent republic is finally joining the mobile revolution.

With no existing mobile operator and a population of just 10,000 to serve, you might think that the Nauru might not need a Minister of Telecommunications. Such a post does exist, however, although I get the impression from telecoms research consultancy BuddeComm that the performance of past Ministers has been somewhat underwhelming. The synopsis of the BuddeComm Nauru market profile indicates that up to now the Government has been both regulator and the sole provider of all telecoms services. According to BuddeComm, "the state of telecommunications in Nauru resembles the country’s own economic chaos". Their Nauru profile notes that in 2003 the telephone system collapsed due to equipment failure leaving the island cut off from the rest of the world and that the Government could not afford to have the necessary repairs made. In 2004, apparently, satellite communications were to be shut down for non-payment of subscription fees.

All this looks set to change rather dramatically - the current Minister, Sprent Dabwido announced this week that Government of Nauru has awarded Digicel a license to operate a GSM network.

Can any company make a profit from operating in such a tiny market? Well, while Nauru might be an extreme case, Digicel does have a track record of establishing operations in very small territories and is therefore probably better suited than any other company to a challenge of this kind. Digicel provides mobile services in 26 countries and territories throughout the Caribbean, Central America and the South Pacific. In the latter region, operations have been set up in markets including Vanuatu (pop. 216,000) Samoa (pop. 189,000), Tonga (pop 112,000). Small territories, then, seem to hold no fear for Digicel.

The company will presumably have been buoyed by being able to report its first net profit since its launch in 2001. According to a TeleGeography report earlier this month, Digicel recorded a net profit of USD 41 million in the twelve months to 31 March 2009, compared to a loss of USD 74 million in the previous year. EBITDA reached USD 680 million, a 34% increase year-on-year. Revenues rose by 11% to USD 1.73 billion, while the company's subscriber base was up 34% to 9.2 million. The company’s net debt at the end of March was USD 2.7 billion.

Digicel said that the subscriber growth in subscribers was helped by successful rollouts in El Salvador (where it now has about a million customers), Trinidad & Tobago and Suriname. Other new additions to the footprint are Honduras and Panama, both added in late 2008. According to Digicel, 1.1 million new subscribers were signed up across these two new operations in their first five months of operation. According to a Cellular News article the month, the operator is now planning to extend its reach to Costa Rica, breaking the monopoly currently enjoyed by that country's incumbent telco Instituto Costarricense de Electricidad (ICE).

Meanwhile, across the sun-drenched Caribbean islands where Digicel first established operations (before expanding into Central America and the Pacific), the company faces a potentially interesting new competitor.

According to a TeleGeography report, Lycamobile is looking to make the transition from its prepaid MVNO model to becoming a full MNO in the Caribbean, starting in St Kitts and Nevis and following on across six other islands. Since 2006 Lycamobile has launched its prepaid brand in eight European countries, where it offers very low tariffs and claims to have around four million customers. My understanding is that the focus of its market efforts tends to be the diaspora populations of African and Asian countries who are working in Europe and looking for good deals on calls home:

Quite what has prompted the company to look to the Caribbean and to setting up physical networks I don't yet know, but given that we started with worries about job losses in the satellite towns around London, St Kitts and Nevis just seems like a pleasant place to end this meandering tour through the world's island markets large and small.

News from islands large and small

Ad-driven MVNO concept ailing in Europe but set to succeed in India?

In March, I chewed over the question of whether India or one or more markets in Africa would be the most likely setting for genuinely successful MVNOs to gain traction. I came down on the side of India, notwithstanding the fact that earlier the same month I had commented briefly on regulatory wrangles which looked set to frustrate certain business models for prospective MVNOs in the country.

One possible new entrant in India, according to a Cellular News story today, could be Blyk. For anyone not familiar with this company, Blyk, positioned by its developers as a "totally new proposition", has been making headlines (in Europe at least) and, as I have observed, stimulating debate at telecoms industry conferences since its inception in 2007.

The Blyk business model has been built on a belief that young people (the offering has been targeted exclusively at 16-24 year olds) love to communicate, would like to do so without eating into their disposable income and can thus be persuaded to accept a certain amount of advertising being sent to their mobile devices in exchange for a free service.

The Finnish founders of Blyk, Pekka Ala-Pietilä and Antti Öhrling, contend that their offering to advertisers is also very compelling: "Blyk allows advertisers to reach young people using the only channel that they carry with them everywhere," says the blurb on Blyk's corporate website. Advertisers, runs the blurb, "can engage them in a dialogue, one that they are uniquely ready for, because they’ve opted in." The ad-driven MVNO says its advertising products are "based on the most dominant pattern of mobile behaviour among young consumers: getting a message and responding to it" so that "its offerings create awareness, build relationships and drive sales.

Will this resonate in India? Possibly, but there might be a number of questions asked. The Cellular News story quotes Sanjay Behl, head of branding and marketing operations at cellco Reliance Communications, who has expressed concerns about whether consumers would find the adverts too intrusive, while declining to confirm or deny if the company is in talks with the MVNO.

This kind of response is not new for Blyk. When the UK press covered the launch of the new service back in 2007, the main talking point seemed to be to what degree consumers might find mobile advertising irritating. The Guardian newspaper, for example, warned that advertisers would "have to be careful not to annoy their new users with the mobile equivalent of spam email."

Pekka Ala-Pietilä, once President of Nokia, responded to this challenge in the same article: "We will collect the profiles of the young consumers, or members as we call them, who use the service to find out their areas of interest," he said, adding that "by understanding the preferences of our customers, advertisers will be able to create very relevant campaigns."

It now seems that this model is indeed set to be brought to the Indian market. According to a recent MocoNews article, senior level recruitment is already underway and Blyk spokesperson Ann Sarimo has confirmed that the MVNO does indeed plan on doing business in the country.

How successful, then, has Blyk been in Europe? Well, while the company can claim to have had some impact in the UK markets, recent reports have focused on a scaling down of its ambitions to offer similar services on the same basis elsewhere.

Caroline Gabriel, for example, writing for Rethink Wireless, suggests that the Blyk variation on more standard MVNO business models "is now showing signs of strain", with the company "reported to be scaling back its efforts."

Gabriel talks in terms of Blyk's UK operation "only" having acquired about 200,000 subscribers, which, in her view, "suggests the model may be proving too limited to support Blyk's ambitions and those of its backers, especially at a time of advertising downturn." In Gabriel's article, Pekka Ala-Pietilä is said to have admitted that the economic crisis has forced the company to cut costs and streamline its operation, despite having raised an additional USD 51 million to support a planned expansion into the European mainland. Gabriel reports that even when these funds were raised, Blyk was indicating that it favoured a switch away from running full-blown MVNOs of its own, in favour of a new marketing strategy based on partnering with major MNOs and media companies. Gabriel suggests that the most likely route forward now is for Blyk to work with larger cellcos, perhaps to run an ad-supported strand of their business under the MNOs' brands rather than Blyk's own.

Around the same time, Mobile Today echoed Caroline Gabriel's thoughts, contending that Blyk "has declared it will freeze its expansion plans into Europe." This article, too, insists that "modest consumer take-up" and "investor reluctance" are the factors which have "grounded" the project. Blyk co-founder Antti Öhrling, now the CEO of the UK operation, is quoted as saying that the UK would be used as a 'proof of concept', i.e. a case study for selling the mobile advertising concept to other markets.

I had to smile when this article brought up comments made by John Strand of Strand Consult. Strand admits in his own bio that "being honest - and giving his honest opinion on current issues in the mobile industry has become [his] trademark - even when it means being controversial or treading on some toes." I have seen this at first hand at one or two conferences and remember sharing a joke with a colleague who is still in the telecoms conference production business, as I was for a good few years. We agreed that nothing was surer to rattle an august line-up of big name speakers from major telecoms businesses than a few particularly piercing questions from Mr. Strand. We couldn't decide if this was a good or bad thing for a conference organiser - good in terms of livening things up a bit, or bad in terms of scaring top-name speakers away from future iterations of an event.

The Mobile Today article reminded me of the comments Strand made when Blyk was first launched. Adopting his trademark style, Strand remarked then that he "would rather put his money on a lottery ticket." Last month, commenting on the reported scaling back of Blyk's ambitions, he said "it is a difficult proposition because you need a hell of a lot of advertising revenue to mae it work." Tell it like it is, John.

In the context of what can hardly be construed as good news about Blyk in its native Europe, it will be interesting to see how the mooted move into India plays out. Perhaps the sheer scale of the market there will enable the business model to prevail more successfully. That said, I have noted here before that while India's low overall mobile penetration and vast population appear to offer rich opportunities, the market is already so competitive that players such as BSNL and Bharti Airtel are increasingly looking to foreign adventures for further growth prospects, the latter having gained much recent coverage concerning a hoped-for link up with giant pan-African cellco MTN. So let's see if this competitive market does indeed offer a decent opportunity for Blyk and for any other innovative MVNO propositions.

Ad-driven MVNO concept ailing in Europe but set to succeed in India?