The Merger of T-Mobile and Orange - Case Study Example

The merger of T-Mobile and Orange: In September 2009, Orange and T-Mobile merged their UK operations. This merger created the biggest mobile operatorin United Kingdom. The merged entity has a market share of around 37% and approximately 28 million customers. The merger was expected to realize synergies worth GBP 3.5 billion. The merger also meant that the number of mobile masts needed for the operations of the combined entity would come down by more than 5000 (Simon Atkinson, 2009). In March 2010, the merger was approved by European Commission- the competition regulator of European Union. Initially, the Office of Fair trade had raised some concerns regarding the probable adverse impact on the competition in the UK telecom industry if the merger was allowed to proceed. The European commission gave its approval to the merger, in spite of the concerns raised by the Office of Fair Trade, on the condition that after the merger Orange and T-Mobile would stick to the network sharing agreement that T-Mobile had with 3, another UK mobile operator. With 4.5 million customers, 3, is the smallest mobile operator of UK and has a network sharing agreement with T-Mobile. On their part, T-Mobile and Orange also agreed to give up 25% of their valuable 18000 MHz spectrum. This spectrum is used for internet surfing on mobile phones. After the merger was given a go-ahead, the combined entity came to be called as Everything Everywhere. This merger has left Britain with four mobile operators: Everything Everywhere, Vodafone, O2 and 3. Expected Market share of the four operators after the merger of T-Mobile and Orange Source:OFCOM. This is a better competitive situation in comparison with some other major markets like the United States. For instance, in United States, if the proposed acquisition of AT&T with T-Mobile is given a go-ahead, it will lead to a duopolistic market. Five forces analysis of the British Telecom industry after the merger of T-Mobile and Orange: Intensity of competition: The merger between T-Mobile and Orange brought consolidation in the UK telecom industry and reduced the number of competitors to four. Bargaining power of consumers: The bargaining power of consumers came down slightly because of the consolidation in the industry. However, the bargaining power of customers is still very high because of negligible product differentiation between the competitors. Bargaining power of suppliers: The bargaining power of suppliers like the government (which auctions the spectrums) is reasonably high. Barriers to entry: The barriers to entry are high. They arise from it being a highly capital intensive industry. The holding of valuable assets like spectrums by existing players creates barriers against the new entrants. Threats of substitutes: The threat comes from substitutes like internet telephony and fixed phones. However this threat is not high. How the merger between T-Mobile and Orange increased the welfare of the consumers: The merger brought greater 3G coverage for the consumers of T-Mobile and Orange at no extra cost (Richard Wray, 2009). The customers after the merger enjoy greater network coverage because they have access to the mobile networks of both T-Mobile and Orange. This is especially beneficial for the British customers because network coverage in many parts of rural Britain is still patchy. If a customer of Everything Everywhere loses a signal from the T-Mobile network, he will immediately pick up signal from the network of Orange, if it is available there. This has led to a huge improvement in the service quality to the customers and has increased their welfare at no extra cost. The customers of the combined entity also enjoy automatic switching to whichever of the two networks has the strongest signal while they are mid-call, and enhanced data and internet coverage (Clark, Nick , 2010). The merger is also expected to realize cost savings of GBP 3.5 billion over time. If the merger succeeds in realizing these synergies, some of the cost savings are expected to be passed on to the customers in the form of lower rates and tariffs. How did the merger between T-Mobile and Orange affect the competitive landscape of the UK telecom industry : After the merger, the UK telecom industry was left with four competitors. As mentioned above, this competitive situation is still better than those in other markets like that of United States (Richard Wray, 2010). The merger led to consolidation in an industry where competition was causing rates and tariffs to be so low that some competitors would have to exit the industry in the medium and long term. With 37% market share, the combined entity Everything Everywhere will definitely not have monopolistic pricing power. It is also not unprecedented for a mobile phone operator to have one-third of the market share in a European market. There is consensus that ant-trust and pro-competition policies should have the twin objectives of low prices and high product quality. The merger between T-Mobile and Orange definitely improved the quality of service for the consumers in a country which is still plagued by patchy network in its rural and remote areas. The four firm concentration ratio is the percentage of the industry output that is supplied by the four largest firms(Paul Samuelson, William Nordhaus, 2006). After the merger between T-Mobile and Orange, the four firm concentration ratio of the UK mobile phone market became 100% because the four operators were providing to the whole market. Based on the concentration ratio, some may raise objections on the approval of the merger by European Commission. But the inefficiency and inadequacy of the market share data in predicting competition, economic behavior and performance in anti-trust cases has already been proved beyond doubt (Paul Samuelson, William Nordhaus, 2006). Competition commissions like the European Commission now use data on actual economic behavior to judge whether a proposed merger or acquisition will give way to monopolistic behavior. A case in point illustrates this and the inadequacy of market share data in predicting economic behavior. In, the year 1997 , a merger was proposed in United States between Staples and Office Depot, two office-supply retail chains. This proposed merger was expected to be approved very easily because the office supply retail industry was a not a highly concentrated one. But the competition regulator on closed scrutiny discovered an important pattern: Staples’ prices were significantly lower in cities where Office depot also had a store than in cities where only Staples was present. This gave strong evidence that the merger would allow Staples to raise prices. The merger was therefore disallowed by the competition regulator. Because of the barriers to entry due to the high capital requirements, the telecom industry cannot become a perfectly competitive one. The British telecom industry is no different. The merger between T-Mobile and Orange may have actually brought a much needed consolidation in the industry. To what extent is Williamson’s efficiency thesis relevant in the case of this merger: Williamson’s efficiency thesis has more relevance for vertical mergers. A vertical merger is a merger between two companies or organizations that are in different stages of the same value chain i.e. they produce different goods and services that end up creating the same final product or service (A.Koutsyannis, 2010). Williamsons’ in his efficiency thesis stated that firms pursue vertical mergers because they intend to increase their efficiency by reducing the transaction costs through vertical integration (A.Koutsyannis, 2010). The merger between T-Mobile and Orange is not a vertical merger but a horizontal one. A horizontal merger is a merger between two companies that produce similar goods or services i.e. they operate at the same stages of the value chain. A horizontal merger can therefore be said to be a merger between competitors. Horizontal mergers like the one between T-Mobile and Orange also attempt to create efficiency be achieving economies of scale or through cost savings by elimination of overlapping processes. For instance, after the merger between T-Mobile and Orange was completed, the combined entity was more efficient because it was able to cut down the workforce by around 1000, the number of mobile masts was brought down by 5000 because of the sharing of networks and the number of retail stores was also cut down. So it can be said that one of the reasons that the merger between T-Mobile and Orange was pursued was to increase efficiency. Therefore, in this sense of pursuit of efficiency as being the reason behind the merger, Williamsons’ efficiency hypothesis has some relevance in the case of the merger of T-Mobile and Orange. Conclusion: From a competitive point of view, whether the merger between T-Mobile and Orange should have been allowed: Yes, the merger between T-Mobile and Orange should have been allowed. Therefore, the European Commission took the right decision by giving the go-ahead to the merger with certain conditions attached. The merger between T-Mobile and Orange created the new entity ‘Everything Everywhere’. This company has a 37% share of the British mobile market. It doesn’t create a monopoly nor does it give the combined entity a monopolistic pricing power. In the figure below, DD’ is the demand curve for the firms (T-Mobile and Orange) before the merger. SS’ is the supply curve of the individual, separate firms before the merger. The equilibrium price occurs at the intersection of DD’ and SS’ which is C. After the merger the demand curve of the combined entity shifts upwards and to the right. The supply curve too shifts downwards and to the right. The new equilibrium price occurs at C’ which is slightly up i.e. the new equilibrium price is higher than the old equilibrium price. In spite of the higher pricing power of the merged entity, the welfare brought to the consumers because of this merger, far outweighs the probable increase in pricing power and decrease in competition due to consolidation. The service quality for the customers increased after the merger of T-Mobile and Orange. This fulfilled one of the main objectives of the European commission which is to promote improvement of product and service quality for the customers. The fear that the merged entity has a stranglehold over the country’s mobile phone spectrum has also no ground after T-Mobile and Orange agreed to give up 25% of their 18000 MHz spectrum. And since the combined entity has only 37% of the UK market share, its pricing power too is very limited. Therefore, the fear of some consumer groups that tariffs and rates for consumers will rise by too much is also unfounded. Such a steep price increase is not possible in the current competitive scenario of the UK telecom industry without the collusion of the four operators. The merged entity “Everything Everywhere” has achieved a kind of product leadership in the UK telecom in this industry with its higher and better network penetration and its spectrum assets. This product leadership will encourage O3 and Vodafone to improve their services. Thus the merger may actually end up increasing competition instead of decreasing it. References: Paul Samuelson, William Nordhaus, 2006, Economics, Prentice Hall. Richard Wray, 2010, Orange/T-Mobile merger threatened with UK enquiry, The Guardian. Richard Wray, 2009, Orange and T-Mobile to create UK’s largest mobile phone company, The Guardian. Simon Atkinson, 2009, T-Mobile and Orange in UK merger, BBC news. Clark, Nick , 2010,. "Mobile giants promise Everything Everywhere”. The Independent A.Koutsyannis, 2010, Modern Microeconomics, Macmillan. www.bloomberg.com (accessed on 19th May, 2011). www.everythingeverywhere.com (accessed on 20th May, 2011) www.ofcom.org.uk (accessed on 20th May, 2011). www.ec.europa.eu (accessed on 19th May, 2011) Read More