Deutsche Telekom and France Telecom agree joint procurement venture

Deutsche Telekom and France Telecom/Orange have put months of rumours to rest with an announcement that they will combine procurement activities in an effort to save €400-900m over the next three years.

The non-binding agreement, which will form the basis for contracts to be signed in the coming weeks, is an extension of the “smart industry” partnership announced by the pair in February this year. Under that arrangement, Deutsche Telekom and France Telecom agreed to work together to identify common ground on wifi roaming, M2M services, and RAN sharing, among other things. In 2009, the pair agreed to merge their UK-based mobile phone units.

Following today’s announcement, four pilot projects will see the two telcos jointly-procuring handsets, network kit, service platforms and other IT infrastructure. The jointly-owned and operated project will have units in both Bonn and Paris.

Deautsche Telkom CTO, Edward Kozel, said that, with operators increasingly expected to invest more in networks and infrastructure, the venture was an opportunity to achieve “economies of scale as well as customer benefits in technology harmonisation.” As operators come under increased pressure to keep pace with changing technologies and a growth in demand for mobile data services, there has been an increased trend towards collaborative initiatives between them. Last year, Deutsche Telekom and France Telecom were among five European carriers that met to discuss collaboration possibilities to deal with increased challenges in the wireless network space.

Operator partnerships of this type are typically and justifiably met with some scepticism, but on the surface the deal appears well thought-out, clearly structured and highly focused. The greatest risk to the success of the joint venture lies in its execution, but with both partners highly committed to the partnership and sharing well-matched motivations, those risks appear to have been recognised and mitigated.

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“Nothing motivates like money and the goal of securing €1.3 billion in annualised savings by 2014 will certainly give strong impetus to the joint venture. What is more, the procurement plans announced today only cover the one-third of the two groups’ combined annual spend of around €40 billion that is deemed “immediately accessible”, a sure sign that there is scope for additional synergies further down the line,” said Thomas Wehmeier, principal analyst at Informa Telecoms & Media.

The deal is very much a sign of the times. Europe’s largest operators have been cosying up to one another more and more as they seek to strengthen their hands at a time when competitive pressures have emerged from an increasingly diverse range of players, most notably from players based out of Silicon Valley and China. As they roll out smart networks, distribute smartphones to the users, this type of smart industry cooperation can only help to strengthen the negotiating hand when dealing with suppliers that in many cases are also deemed competitive threats to their business.

With FT and DT now sharing networks in some markets, carrying out joint procurement across their entire footprint and constantly talking up the benefit of scale, the question of what’s next must be asked. As the industry grows up and as operators make the migration to LTE, it’s inevitable that further consolidation of operators will take place in Europe. Whilst huge corporate mergers are off the table for now, the prospect of rational consolidation on a market-by-market basis is likely to be very much on the table as discussions take place.