IHS Global Insight Perspective | |
Significance | Intense competition and price wars continue to squeeze margins in the U.K. mobile market, exacerbated by the recent recession. |
Implications | Although the joint venture has gained valuable synergies from the merger, it has been hit hard by recent cut in termination rates in the United Kingdom because of its large market share. |
Outlook | As synergies from the merger continue to filter through, Everything Everywhere should emerge as a strong leader in the ultra-competitive U.K. market. |
Everything Everywhere (EE), the newly formed joint venture (JV) of T-Mobile and Orange in the United Kingdom, has revealed its overall customer base grew by 3.4% year-on-year (y/y) to 27.9 million users in the second quarter of 2010, as its continued commitment to retaining customers paid off.
The JV, 50:50 owned by European giants France Telecom and Deutsche Telekom, also announced its second-quarter earnings before interest, taxes, depreciation, and amortisation (EBITDA) fell 18% y/y to £305 million (US$483 million), which it blamed chiefly on cuts in mobile termination rates, while revenue fell 4.8% y/y to £1.72 billion. However, EE said underlying revenue excluding the effect of regulation rose 1% y/y, and it improved its rate of retaining customers in the second quarter, with average monthly churn falling to 2.2% from 2.5% while contract customer churn fell to 1.4%. However, ARPU fell 7.7% y/y to £19.2 per month.
Tom Alexander, chief executive of the newly formed mobile operator, also confirmed the company's synergy target of annual savings of at least £3.5 billion pounds, with further synergies identified in networks and IT. The company also provided an updated merger plan, which includes expanding its retail footprint and increasing the number of network sites from some 16,000 to more than 18,000 and ambitions for double-digit cash-flow growth from 2010 to 2014.
Outlook and Implications
- Intense Competition in the U.K. Mobile Sector: Deutsche Telecom and France Telecom agreed in 2009 to merge their U.K. mobile units to compete better in Britain's cutthroat market, with the merger taking full effect in July. EE has become the country's biggest mobile operator ahead of Telefónica's O2, Vodafone, and Hutchison Whampoa's 3 UK, with more than 30 million customers and an estimated market share of 37%. Although the JV will keep the Orange and T-Mobile brands until at least 2012, the operators recently announced that customers will be able to roam freely between both networks as of next month (see United Kingdom: 6 September 2010: Everything Everywhere One Step Closer As Orange UK and T-Mobile UK Form Roaming Pact). France Telecom and Deutsche Telekom agreed on the merger as a preferable solution to exiting the market altogether, as intense competition and price wars continue to squeeze margins, exacerbated by the recent recession in the United Kingdom. However, France Telecom recently quashed rumours of further mergers or synergies with German rival Deutsche Telekom, adding that the two operators have only met to discuss specific topics as the need has arisen, such as the U.K. merger (see France: 7 September 2010: France Telecom Quashes Deutsche Telekom Merger Rumours After Deutsche Bank Increases Stake).
- Impact of Regulation: EE said both its revenues and EBITDA had been hurt by lower regulatory caps on mobile termination rates—the charges operators pay each other to connect call traffic across rival networks (see United Kingdom: 1 April 2010: U.K. Regulator Outlines Plans to Slash Mobile Termination Rates)—saying the impact on its revenue was £101 million in the second quarter alone. Although the JV has gained valuable synergies from the merger, it has been hit hard by recent cut in termination rates in the United Kingdom because of its large market share. Meanwhile, recent reports have suggested that EE may launch legal proceedings against the U.K. government if it goes ahead with revised plans for the auction of the 800-MHz "digital dividend" spectrum, which is due to happen in 2011 (see United Kingdom: 30 August 2010: Orange and T-Mobile May Go to Court over 800-MHz Auction).
- European Margins Continue to Fall: France Telecom has recently set out a strategy to offset sluggish demand and tough competition in European markets by focusing on growth in emerging regions, aiming to grow its client base by 50% to 300 million by 2015 (see France: 6 July 2010: France Telecom Aims for 50% Customer Growth by 2015 with New Five-Year Plan). However, the French incumbent recently revealed that its second-quarter earnings dropped 2.6% y/y, while Deutsche Telekom announced that second-quarter net revenue was down 4.4% y/y, which it chiefly blamed on the deconsolidation of T-Mobile UK (see Germany: 5 August 2010: Deutsche Telekom's Q2 EBITDA Margin Stable at 32.3%, Sees Improvement in U.S.). Nevertheless, as the synergies from the merger continue to filter through, EE should emerge as a strong leader in the ultra-competitive U.K. market.