Paradox regained in French mobile market

The "turmoil" in France, far from weakening its incumbent has only strengthened the hand of Orange's management. Could Orange's senior management have planned a less disruptive disruption?

There has been a paradox in the French market which has confused me for a while.

The government that encouraged market conditions in favour of a fourth operator was Sarkozy’s. Put broadly, this was a government that was more economically liberal than Hollande’s. Therefore competition was taken as an axiomatic good, and would lead to a better deal for consumers as well as, in time, more innovation in the market as operators were forced to up their game to compete for customers.

It looked odd, then, that the incumbent operator that stood to lose from this introduction of a new competitor was led by a man who had worked in the Sarkozy government and was seen as an ally of Sarkozy. When Stephane Richard’s executives complained about the impact Free was having on the market (and they did complain) they were in effect complaining about the effects of a policy fostered and encouraged by their CEO’s political allies.

Could it be that Sarko’s man, and Orange, stood to gain all along from the desire of his former government to take action that, on the face of it, would only damage Orange?

If Orange was so opposed to Free’s entry, why was it was Orange that signed a national roaming deal with Free that Bouygues and SFR both said was way below market rate. Bouygues even described it as mad. (As an aside, Free responded that Bouygues itself had offered it terms at a lower rate than Orange but Free had rejected the deal as it though Orange offered better coverage. Those in glass houses.)

And although Orange talked tough on Free, for example slating it for poor network performance that resulted in Free’s customers camping on Orange’s network, it became clear that the biggest losers in comparative terms were Bouygues and SFR, who lost a higher proportion of their customers to Free and were forced to make more price concessions to their existing customers than Orange to stay relevant. Now both are seeking some way out or major structural change – possibly a merger.

And Orange? In the interim it has embarked on a large cost-cutting programme that has seen the loss of “headcount” and other “items” on the balance sheet, as well as a restructuring of job and working practices to boost productivity. The process has been traumatic for many. But Orange’s justification has been that cost-cutting was necessary because of the new environment. Top line expansion is difficult – near impossible – in the current market, therefore a cost reduction programme was essential to generate enough money to keep shareholders happy and have some left over to invest in the network.

Orange’s CEO Richard described its last set of results (where revenues fell) as “beautiful” because of the huge cost reductions the operator had achieved. In fact the operator had even over-delivered on its cost reduction programme. Asked what he was most proud of in the last year, it wasn’t 4G or any service or innovation he pointed to – but the efficiency programme.

Could Orange and Richard have made the same cuts without the justification of the new market dynamic without incurring a lot more grief from its unions, and from a new government that was much further to the Left, and therefore protective of labour rights, than the previous regime? It seems unlikely.

Those who run Orange have lost little market share and now have a scaled down more “efficient” operational structure, and better profit margin. Its competition? Granted, a combined SFR-Bouygues would, at current numbers, have a leading 50% share, with Orange about 40% and the rest mostly with Free. Yet if a deal goes ahead the terms the competition authorities would impose on (Bouygues) are likely to severely dent that power. Bouygues has already said it may end up selling its network to Free to gain regulatory clearance for the merger.

When the Austrian market went from four to three, there was a porting of customers, not just of spectrum. It seems likely that if approval is given, there may be similar in France. Also note that this is a merger from weakness, not from strength. There’s no golden egg here for a merged SFR-Bouygues to lay – just consolidated cost savings to peck at.

As for Free? It is boxed as low cost fixed-mobile player, only now faced with taking on a network it didn’t build and design and integrating it with its own growing network, and potentially even taking on a customer based with all the costs and operational challenges associated with that.

In essence, we would be close to where we started – with three operators and Orange in the lead (or about to take the lead), only this time around Orange has rid itself of a lot of its pesky, cost-intensive, baggage.

If the merger is not approved – that’s still OK for Orange. Two struggling competitors and an upstart Free struggling beneath Orange’s dominance.

A final irony. France now has a government that wants to clip the wings of its own regulator, ARCEP, the regulator whose guidance ensured a smooth entry for Free in terms of beneficial termination rates, and whose inspections and reports have given Free the nod on network and service quality, is now viewed as to pro-competition, and too unaccountable. The government also wants to see telcos get on a little better – to stop beating each other up on cost.

Speaking in mid-February, French minister of industrial renewal Arnaud Montebourg, said the government “wanted to clip the regulator’s wings to “put it in its place”. He also pledged to promote greater co-operation between telcos.”

According to a report: “He contrasted an emphasis on competition, which he described as ‘an absence of policy,’ with his own vision of a state-led industrial policy, in which the government “introduces order where there is disorder”. He said he hoped the formation of such a policy would help to combat the “excesses of competition… in a helpful way.”

This time around, a government that wants to “order” the market rather than see competitive forces shape it may be just what Orange – a company that has benefited from increased competition – wants to hear.

Paradox regained.

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