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O2 and the UK Mobile Market
O2 is the leading mobile phone provider in the UK with 28 % of the market. But the balance of power is changing. T Mobile and Orange have decided to form a joint venture. Approval has been granted by the UK regulatory body and the new company will be launched in 18 months time. This change poses problems for all the other mobile phone operators but especially for O2 who are at the moment the leading provider. Revenue is likely to fall over the next 5 years while at the same time major shifts are likely in the future technology which need investment. What should O2 do next?
You are a strategy consultant. You have been asked to provide advice for the next Board meeting of O2. We attach some notes to assist in the analysis. You should refer to relevant theory in your answers. They should be in the form of an essay not a business report. The Board have asked you to carry out a critical analysis of O2 in the UK and to make recommendations for their future strategy with reasons. When you make use of theory you do not need to restate actual standard theory as the Board are familiar with the concepts.
Notes from the May Board Meeting of 02.
It was agreed to commission a report on the proposed merger of T Mobile and Orange so that we can consider our strategic response. The board agreed that more consolidation of the UK industry would be unlikely to receive regulatory approval either by national authorities or the European Union. But we need to outline a response. This will be the main issue at the June Board. Marketing will also summarise the current analysis on the UK market while Operations will consider our own situation.
Bedford Consultants' Report
“You can be sure in succeeding in your attacks if you only attack places which are undefended. You can ensure the safety of your defence if you only hold positions that cannot be attacked.” Sun Tzu
The UK mobile phone market is one of the most competitive in Europe. There are 6 competitors: Virgin, Vodafone, T Mobile, Orange, 3 and O2. O2 is currently the market leader. But O2 faces a new situation now that the proposed joint venture will go ahead between T Mobile and Orange in 18 months time: this will give the joint venture 37% of the mobile subscribers in the UK compared to O2's 28%. A bigger competitor for example could do a better deal with equipment suppliers for new phones. This report will summarise the issues facing the new merged firm. Compared to the rest of Europe the UK share by value in 2008 was 13%. The other countries' shares were: Germany (20%), Italy (18%), France(13%) Spain (10%), and the rest of Europe (25%).
Markets in Europe are regulated by national governments who are the sole suppliers of bandwidth and who allocate licences. However Europe has managed a technology standard for its mobile phones which has meant in practice that the European standard is the global standard for mobile phones. This has benefitted the large manufacturers such as Erikson and Nokia. The UK industry regulator Office of Telecommunications (OFCOM) can make rulings on what firms are allowed to do. There are no plans in the near future to change the present arrangements.
There are two types of mobile operators: those who provide their own facilities in the form of masts and those such as Virgin in the UK who rent the facilities of others- these are called Mobile Virtual Network Operators (MVNO). A big trend is the sharing of facilities so that firms compete on price and the range of services: indeed 3 also shares its network with T Mobile. The main growth area in what is a mature market is content such as TV on mobiles. The mobile is becoming a general purpose business or consumer tool with many functions as well as communication. There are two segments by customer: the business user who demands a high standard such as those who use Blackberries and the leisure user who is either a heavy user or a casual user. Business users are of two types: large companies who need a reliable large supplier or; Small and Medium Sized Enterprises (SMEs) who are more price-sensitive. Public sector users also need mobile phones. Payment can either be by a fixed- normally 12 month contract- or by pay as you go. Some mobile operators attract customers by subsidising access to the new handsets provide they take out a contract. The trend is for the market to segment with different mobiles for different users. Blackberry is the market leader for the business user while the iPhone by Apple is the leader for the leisure user. The market for mobiles is effectively saturated in the UK growth coming from replacement rather than first use. Growth of subscribers has slowed from 9.7% in 2004 to 4.8% inn 2008: indeed there are more subscribers than the current population.
Broadly the UK market is in relative decline with revenues falling. This contrasts with the explosive growth in the emerging economies of China and India. The sector also faces the threat of new entrants from equipment manufacturers and internet providers. For example both Apple and Google are or have launched new mobile phones such as the iPhone which offer significant usability on current handsets. Nokia and Samsung are also launching new phones whose capabilities are closer to those of a tablet PC with numerous Aps. The UK Government is also interested in extending the benefits of broadband for the whole UK Population although the current financial situation may limit their ambition whichever government is elected. Some areas such as the City of London are proposing WI FI hot spots with constant internet access. This would make it possible to replace a mobile phone with a free Skype handset on a laptop. Users are segmented by their revenue generation opportunity.
The market value of the UK wireless telecommunication services market grew by 3.4% in 2008. It is forecast to have a value of $31.4 billion by 2013 which is an increase of 5.6%. The Office of National Statistics (ONS) predicts that the population of England would increase by 8% by 2016 while Scotland will only increase by 3%. There has been a huge growth in the use of the internet in the UK. Currently 63% of the UK population has access. It was 20% in 2000. Young people use the internet much more. There are tremendous opportunities in new media such as access to mobile TV. OFCOM has also told SKY to cut their rates for access to premium football content so that it can be made available to other suppliers.
Globally Telecommunication Companies- or as they are termed TELCOs- are becoming larger as the technology is becoming more reliable. Alliance and joint ventures are becoming more common as the market matures in developed economies. But there is always the danger that new technologies could radically change the nature on the sector so investment is essential. But historically technology has not always delivered shareholder value. There was the earlier tech stocks crash as well as such failed business ventures as the merger of AOL and Time Warner.
Customers have high power and switching is easy. The manufacturers of the handsets can control who can sell their product and tend to use the biggest local supplier. There is little loyalty to the network and leisure customers tend to be most concerned about the quality of the content. Business customers are less price-sensitive but need high quality data systems to support their business. Most contracts are for fixed 12 month periods.
We believe that there are a number of unresolved issues facing the merger. The main strategic issue is the attitude of the two parents- Deutsche Telecomm (DT) who own T Mobile and France Telecomm (FT) who own Orange- to the merger. Could one of them walk away and abandon their child? Might the parents prefer to focus on more profitable markets in other areas? A critical issue is how to integrate the two operations with separate brands as well as separate marketing strategies. It always takes time to integrate a merger however friendly it is- and we are not convinced that this is. The third factor is the leadership of the new venture which on paper looks on track but this could change as tensions rise. Let us now look at the two companies.
Launched in 1994 Orange has been a customer-focused company with a vision for people to be able to communicate freely and easily across the UK. First CEO Hans Snook, whose desire was to meet customers' demands, allowed the brand to strengthen market position. After it became part of France Telecom in 2001 and Snook left, the company lost to the fierce competition in the UK. There was also a misfit with French management culture. A need for change in terms of leadership was needed and that came with the appointment of the unconventional Tom Alexander from Virgin Mobile whose vision fitted the strategy of the company. His vision is to be the biggest mobile phone operator by 2012 by improving customer service, investing in new networks and to be the ‘best-loved' communications brand. Their target market is a variety of customers from the youth market to specialised business groups. They use an innovative marketing approach such as the Orange Wednesday deal where you can get two cinema tickets for the price of one. Tom Alexander will be the CEO of the new joint venture. Orange used to have an alliance for network sharing with Vodafone until 02 replaced them as a network partner. Tom used to the first CEO of Virgin Mobile and is independently wealthy.
Owned by German Company Deutsche Telekom, T-Mobile is a very innovative and user orientated company within the UK telecommunications industry. T-Mobile have gained market share through differentiating themselves by focusing on technology and value. This has allowed them to target and become successful amongst a younger audience. Between 2007 -2009 reports show that T-Mobile had become the largest subscribed operator in Europe, with 17 million UK customers, more than any other UK network. However, financial reports tell a different story and suggest that regardless of their customer base the low return on each contract and investments made have put the company in a vulnerable position. This was demonstrated when they had to write off £1.8bn worth of assets in 2009. Access to customers and technological innovations whilst being financially unstable could be a significant factor in the decision to work with Orange. T Mobile also has an alliance with Virgin Mobile to carry their traffic and shares its network with 3.
Current managing director Richard Moat has an extensive history with Orange having spent 17 years holding leading roles within their organisation, giving him much more familiarity with Orange working culture than that of T-Mobile, where he has been involved since 2009.
Post merger integration.
The new venture will operate under one name by 2012. They will need fewer phone masts. Orange has 13,000 current generation or 2G masts and 7,000 that carry mobile broadband - or 3G. T Mobile has 10,000 2 G mast and 7,000 3g. T Mobile also provides coverage for 3's 2 G service (owned by Hong Kong based conglomerate Hutchinson Whampoa). 3 only has 4.5% of UK market.
They will also need fewer staff. Currently they together employ 19,000 in call centres, high street retail stores and various Headquarters departments such as HRM and Marketing. They could lose up to 10%.
Their dilemma is how to continue to offer the two brands. Should Orange be for business and T Mobile for young people? Can they be rebranded TORANGE? This is a current joke around the industry. Do customers really have any brand loyalty or is it just a question of the latest technology or the best prices? The next thing is 4th generation which is currently being rolled out in Germany but which would be very expensive. It might be better if the whole UK sector bid together rather than separately as competition would be very expensive. But would the stakeholders accept this approach? They didn't last time and it nearly bankrupted the winner 3. How important for the new firm are managing long term corporate relationships in terms not of mobile phones but technology solutions where every communications system is integrated into one system? Could for example BT offer a credible solution here or even Google? The role of Government here is critical for any reshaping of the market. We do know that both parties want to expand broadband coverage.
O2 is owned by Telefonica the former Spanish State Owned Telephone Company who are the fifth largest TELCO globally. In the UK O2 also owns 50% of Tesco Mobile JV as well as O2 money as well as music venues such as the O2 arena in London and Birmingham. O2's strategy is to create value for the parent company becoming the fastest growing integrated communications provider in the UK in terms of revenue and profitability. O2 was started by British Telecomm (BT) the former state owned utility but was acquired by Telefonica in 2005. They have 21 million customers in the UK over half of whom are on contract. As part of Telefonica they have relationships and partnerships globally including China Telecomm. They provide a full business service. 02 is fully supported by their parent. O2 is the market leader in terms of offers and marketing. They sponsor events and are excellent at managing their customers. They are slow to use new technology however. Their leadership is good and there are no plans for any changes. The current head of Telefonica was previously the head of O2.
There are some key events in the year of the merger in 2012. Specifically there will be the usual sporting activities such as football, Wimbledon and the London Olympics. All mobile phone networks will want to get access to such high quality content. Indeed Google is looking at a 3D option for use on a mobile. It is also likely that the Olympics will be a WI-FI zone. Concern still remains about the health of mobile phones- especially for young children. Perhaps marketing should be age limited?
 Aps is industry shorthand for applications that can be added to an iPhone or similar handset