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Getting It Together in Europe

January is quite a sobering month, following the usual excesses of the holiday season just past. And in the cold light of day I can't help thinking that we might see two of Europe's second-string carriers pooling their resources this year. I am referring to mmO2 plc and KPN Mobile. Just a hunch.

Here's what I think. Both these carriers have operations in a few countries, but not enough countries to see the benefits of any extensive economies of scale, and not enough to have any major clout with the vendors. MmO2 has a strong player in the U.K., an operator in the small territory that is Ireland, and weakish players in Germany and the Netherlands. KPN Mobile has the market leader in the Netherlands, and then bit players in Germany and Belgium.

Meanwhile, Vodafone Group plc (NYSE: VOD) is strutting its stuff (see Vodafone Extends Euro Reach), and both Orange SA (London/Paris: OGE) and T-Mobile International AG hold stronger international hands than either KPN or mmO2.

On their own, KPN Mobile and the British group, spun off from British Telecommunications plc (BT) (NYSE: BTY; London: BTA) in 2001, will never have the muscle to compete with the big boys, who will eat increasing amounts of the most valuable traffic – that used by business users and roaming customers. Joining forces would make sense.

And there is some evidence that they're clearing the aisle for such a marriage. KPN Telecom NV (NYSE: KPN) is recapitalizing KPN Mobile to make it more financially healthy (see KPN Posts Q3 Profit). One reason for doing this would be for KPN to follow BT's example, and spin off the mobile business.

That would leave the issue of regulatory clearance as the main hurdle to a merger. The two operators are currently competitors in two countries – Germany and the Netherlands. In Germany it is hard to see that any regulator would quash the idea of two market weaklings joining forces to compete more readily with the dominant mobile operators, T-Mobile AG and D2 Vodafone. The combined market strength of these two companies has already seen Germany's 3G field reduced from six to four (see Quam Quits for Good and MobilCom's Monster Q3 Debt).

The Netherlands would be a different story, with KPN Mobile being the clear leader with more than 40 percent market share. But what's this? Could mmO2 be offloading its Dutch operation? (See Euro Shrinkage: The Netherlands.)

The Dutch market could do with some consolidation anyway, with five operators sharing about 13 million customers. But it would be ever so handy for mmO2 to pick up some cash for a minor asset before it starts kissing KPN Mobile behind the bike sheds.

— Ray Le Maistre, European Editor, Unstrung
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