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Monday, December 18, 2006

Orange UK: Boringly Convergent

Bernard Ghillebaert, the head of Orange UK, made a presentation at last weeks France Telecom Investor Day. The following are my highlights and lowlights from the session.

In the UK market broadband churn (>25%) is rapidly catching up with mobile churn (>30%). Amazingly over £4bn in commission costs is spent among all operators with over 40% of mobile sales being made via the various indirect channels.

From the Orange supplied charts, I estimate their approximate UK market shares at the end of 3Q06 as: Broadband 9%, Narrowband 18%, Consumer Mobile 22%, Business Mobile 23%. In contract mobile, tariffs are segmented according to the animalistic behaviour of users wheras in prepay customer loyalty is rewarded via magic numbers and free calls. In broadband, Orange still have 700k narrowband customers remaining to up sell broadband into. Orange expect to have 500 unbundled exchanges by year end with 16% of base unbundled. New services for 2007 include a DTT/VOD TV service, presumably similar to BT Vision. Orange also plan a Fixed Line Rental and Calls from Home product which looks to me as if Orange will move into full unbundling. Orange expects to have 200k "converged" customers taking both broadband and mobile from them. In 2007 they will also launch converged products for both the Consumer (e.g. Unique) and the Business (e.g. virtual PBX) market segments.

The priorities for 2007 include: reducing churn in mobile and broadband; growth of ARPU and the shared base; and delivering cashflow targets. The vision for 2010 include: lowest churn in market; growth in new revenue stream driven by new & converged services; and transformed into a fully integrated operator.

In the Sanjiv Ahuja presentation, who is the head of the Orange Personal division, there were a few pointers for the UK Operation. Overall in the France Telecom Group commercial expenses (handset & equipment costs [52%], commissions & distribution subsidies [31%] and advertising & brand costs [17%]) were growing faster (€5bn [9M 2005] to €5.5bn [9M 2006]) than revenues and now represented 14.3% of revenues. 82% of the commercial expenses were made in the mobile arm of the business which now represented 22.7% of total revenues.

The strategy is “optimise” these expenses by: reducing device costs and optimising range; becoming a world class retailer and rebalancing acquisition and retention costs; and leveraging the benefits of a single Orange brand. In other words not to reduce them, but to spend on different areas.

In the UK, this translates to expanding controlled channels (stores, web & telesales) and “optimising efficiency” of indirect – rationalising non-performing dealers. They want to move to a longer term partnership with specialist retailers and enhance loyalty programme. This sounds remarkably like the exercise that Vodafone UK has been through this year looking at the life time profitability of each distribution partner.

My translation of all this is that the UK Operation in 2007 will be much more geared towards delivering cashflow targets rather than chasing market share: increasing revenue will be through selling more products to the base (e.g. broadband to mobile customers or fixed line to broadband customers); and decreasing costs will be driven by reducing churn and improving direct sales ratios.

On the product development side, I see nothing in the presentation and strategy which will frighten the other operators, whether broadband or mobile. On the distribution side, I see a lot that will scare the independent retailers; however it is one thing to say they will reduce churn and build a world class retailer and yet another to actually deliver. I have heard mobile operators since the beginning of time complain about the level of handset subsidies and dealer commissions. The reliance of Orange on the independent retailers means that Orange will have to be really careful not to shoot themselves in the foot in the no doubt fraught forthcoming contract negotiations with the independents.

Of course, nothing about pricing was revealed. Pricing has been the chosen weapon of competition for the last couple of years in both the broadband and mobile arenas and a lot of short term market share is derived from how aggressive the networks are in pricing. I guess the Pricing story will unfold over the year and I predict that Orange will continue to reactive to the price leaders (ie TalkTalk and 3UK) rather than proactive or will not develop especially innovative tariffs (e.g. Vodafone Family)

Also missing from the presentation is the Acquisition side of the coin and I definitely see Orange during the year being interested in bulking up the Broadband side of the business. Tiscali is available and a good fit. Although the price quoted at £600m is a fantasy land figure, especially given that AOL went for £370m and £120m of that was deferred. Beyond Tiscali, Orange might consider buying a SME specialist which will be far cheaper than a Tiscali buy. There also was an indication that Orange plan to play into the wholesale mobile market which may provide further competition especially to T-Mobile.

All in all, nothing of the old aspirational Orange and lots of dour old school incumbent strategies.