EE confirms BT talks, industry opinion divided

Deutsche Telekom and Orange, the joint shareholders of EE, have confirmed initial discussions with BT over a possible sale of the UK mobile operator. In a statement the German and French giants said they are exploring the possibility as part of their regular market assessment to evaluate different strategic options.

“As one of these options, Deutsche Telekom and Orange are having highly preliminary exploratory discussions with British Telecom, although it is too early to state whether any transaction may occur.  Deutsche Telekom and Orange will make further announcements if and when appropriate.”

This confirmation follows the recent news BT is also in talks to possibly acquire O2 from Telefónica, a move that would take the UK incumbent back to consumer mobile for the first time in over a decade. O2 previously operated as Cellnet and was part of BT until 2002 when it was spun off. It was rebranded and then acquired by Telefónica as O2 in 2005.

BT’s re-entrance to the mobile market has been anticipated for some time, especially since its surprise winning bid in last year’s spectrum auctions. “The drivers for the increase in acquisition and disposal activity are numerous, but include telcos scaling up to remain competitive and struggling businesses having to refocus corporate strategy and sell divisions to realise cash or reduce debt,” Jonathan Snade, Partner & Technology M&A expert at law firm Thomas Eggar said.

“In addition, given the continued interconnectivity of mobile devices and increased consumer expectations on accessing media via smartphones, telcos are acutely aware that owning their own mobile infrastructure is going to be a key part of their future success.”

As traditional revenue streams from fixed and voice calls have dwindled  in recent years, focus has increasingly tilted towards having a multi-service strategy, first triple-play and now quad-play. In line with this, BT has confirmed it is planning to launch a consumer femtocell mobile service, which will offer voice-over-wifi. With this service in place, BT hopes to be able to entice customers with packages covering broadband, TV, mobile and fixed phone services.

Mark Windle, Head of Marketing at Opencloud, a telecom network software solutions firm, argues fixed-line operators are at an advantage in this convergence process. “They [fixed-line operators] have business networks and could offer coverage through wifi cells in the home, which is something I know BT has been talking about, and which Free Mobile in France has done, so to what extent do you need traditional cellular mobile coverage?” he said. “So the cost of the mobile player expanding out would appear to be greater than that of the fixed line player. In many countries launching an MVNO to get coverage is far cheaper than it is to roll out further LTE cells.”

But opinion seems divided. A study by RootMetrics has revealed that although almost no one (95%) would miss having a landline, almost a third of respondents (29%) still use their mobile network for data rather than wifi, even when they are at home and 13% said they never use wifi for mobile use. The report also claimed people actually use mobile phones more at home than anywhere else.

“Despite being called ‘mobiles’ it’s telling that we are now using them most when we are at home as landlines become the exception rather than the rule,” Bill Moore, CEO and President of RootMetrics said. “Our mobile phones have become the remote control for our lives, and we are using them for an ever-increasing range of tasks, from second screen viewing, to taking pictures, to doing our banking. Wi-fi is clearly not the answer to coverage problems, especially since we are using the basic functions of calling and texting most often.”

Either way, BT’s move back into the mobile market seems inevitable. It already has an MVNO agreement in place with EE but acquiring the MNO, which has about 33% of the UK market-share, could prove challenging in regulatory terms. With EE, BT would not only accumulate so much spectrum regulators at home and in Europe might have something to say about it, but it would also make it the biggest UK player in both fixed and mobile.

Even if BT agreed to divest some of the spectrum, it could still face some strong opposition to merge with EE. However, Telefónica may be keen to reach an agreement with BT over O2 rather than wait and see if the alternative BT-EE combo could somehow materialise, and with a smaller share of the UK market, that deal is likely to be more regulator-friendly too.