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Orange–T-Mobile merger brings UK competition levels into line with other European markets

On the 8 September 2009, following months of speculation about the future of T-Mobile UK, France Telecom and Deutsche Telekom announced a deal to merge the company with Orange UK. This move will create the largest UK MNO, with a 43% market share, based on 1Q 2009 subscriber numbers and including MVNOs. By doing this, they hope to gain economies of scale that will enable them to compete more effectively with O2 and Vodafone. This consolidation has been driven by two main factors: market maturity and level of competition.

MNOs in mature mobile markets like the UK are struggling for revenue growth and in order to increase profit, they must focus on reducing costs. The best way to do so is to gain scale. Some strides had already been made in this direction by network sharing, but Orange and T-Mobile are taking the next step of pooling costs in other areas, such as retail, back-office systems, support functions and device purchasing.

The amount of competition in the UK has also hindered MNOs’ ability to increase margins. Based on the number of major players, the UK is the most competitive mobile market in Europe. There are five network operators and several large MVNOs, including Virgin Mobile, with around 5 million customers, and the increasingly successful Tesco Mobile. In most other European markets, there are four, or only three, network operators and significantly fewer MVNOs. As of the end of March 2009, the UK was the only market in Western Europe in which no operator had a market share greater than 35% (the largest UK operator, O2, had a 29% market share). In eleven of the fifteen other major European mobile markets, there is an operator with a market share greater than the 42.9% that will result from the T-Mobile–Orange merged operation. Other highly competitive five-MNO markets in Europe have recently experienced consolidation (Austria now has four major players and the Netherlands has three).

It is by no means guaranteed that the UK competition authorities will approve this merger as it represents a reduction in competition in the market. Alternatively, it can simply be seen as a response to the economic realities of the UK market. Certainly, the shape of the post-merger UK market would more-closely resemble that of other comparable markets in Europe. Based on the Herfindahl-Hirschman index of MNO competition (which excludes MVNOs from the calculations), the UK was the most competitive market in Europe prior to the merger; consolidation brings it into line with other markets. The merger does not signal a flurry of consolidation in other European markets, but it does not rule out further consolidation in the UK market: O2 or Vodafone may seize the chance to increase its scale by acquiring 3 UK.

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