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Closer cooperation between Deutsche Telekom, France Telecom makes sense

Tuesday 15 February 2011 | 15:51 CET | Market Commentary

Deutsche Telekom and France Telecom are intensifying their cooperation. In the UK, they have already merged their mobile operations in a joint venture, and a number of other joint projects are underway:

◦Network sharing: both the RAN (radio access network), as well as cross-platform networks such as Wi-Fi, M2M (machine-to-machine) and e-Health.
◦Product development: the connected car and in-car infotainment, media servers, content and video services.

One can wonder why a merger hasn't already been announced. The overlap is limited, as they are not active on each other's home markets, and the geographic focus is reasonably divided:

◦DT: Germany, US, West Europe (UK, Netherlands, Austira), East Europe (Czech Republic, Poland, Hungary, Croatia, Greece, Macedonia, Montenegro, Romania, Slovakia, Albania, Bulgaria).
◦FT: France, West Europe (Spain, UK, Switzerland, Austria, Belgium, Luxembuorg), East Europe (Poland, Romania, Slovakia, Moldova, Armenia), Africa/Middle East and the Dominican Republic.

However, the limited geographic overlap also means a merger would not deliver many synergies, excluding the cooperative efforts already underway. The question is whether the potential economies of scale are big enough, without creating a gigantic organisation. Still, there are a number of reasons for further cooperation, adding to the above:

◦There is overlap in Austria, Poland, Romania and Slovakia, where they are already looking at network sharing. The joint venture in the UK is going well and should set an example fnor possible cooperation in other countries. They may also choose for a solution similar to the Netherlands, where Orange was sold to T-Mobile. Poland has six mobile operators, Austria and Romania five each and Slovakia four, so there is room for consolidation.
◦Wi-Fi is increasingly important in the mobile sector. Subscribers can be offered a simple and cheap roaming solution with a large combined footprint.

◦ For acquiring content, such as German-language content, increased scale is probably a good idea. This is especially true as demand for TV and video services, alongside mobile broadband, increases.
◦ In the international business sector, Orange Business Services (focus on multinationals and maximum network reach) and T-Systems (focus on ICT services) complement each other well and offer opportunities for synergies (cross-selling, expanded portfolio).
This is not the first speculation of a merger of DT and FT; the story is repeated almost as much as Telefonica acquiring KPN. But the logic is clearly there.



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