Orange Pooh-Poohs Deutsche Telekom Merger Talk, Again

The latest rumors that Germany's Deutsche Telekom is eyeing a merger with France's Orange have acquired the iffy smell of an old Roquefort after the French operator swiftly dismissed a Handelsblatt story that cited sources in management ranks. "There is no project or discussion about a Deutsche Telekom-Orange merger," said a spokesperson for the operator.

The operators' reasons for combining would not be hard to fathom. The two operators already jointly procure some equipment and services and have teamed up on various initiatives, including the development of a smart speaker (branded Djingo by Orange and Magenta by Deutsche Telekom). In these areas, a full-on merger could promise cost savings and give the two companies a bigger R&D punch.

A combination, more importantly, would create the kind of telco giant that Europe lacks and so desperately needs, according to critics who regularly draw unfavorable comparisons with less competitive US and Chinese markets, home to massive players such as AT&T and China Mobile. A European equivalent might steer the region more speedily toward the sunlit uplands of 5G.

Regulation would be an obstacle because both companies operate networks in eastern European markets such as Poland, Romania and Slovakia. That said, Orange's biggest European markets are France and Spain, while its fastest-growing are in Africa. Deutsche Telekom has no presence in any of those countries and is interested in selling its Romanian assets, according to press reports.

The chief barriers to a tie-up remain financial and organizational, as they did in January 2018, when Orange was last forced to play down merger talk. "Nobody has proven that big consolidation is value creating," said Gervais Pellissier, one of Orange's deputy CEOs, at the time.

One problem he acknowledged then was the huge difference in market capitalization between Deutsche Telekom and Orange. That situation would inevitably mean a takeover of Orange by Deutsche Telekom, as opposed to a strict merger. "That would not please many people in France," said Pellissier, referring to the political opposition the acquisition of a partly state-owned business would encounter.

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None of this has really changed. Orange's market capitalization is currently about €40 billion ($44 billion), while Deutsche Telekom is valued at nearly €73 billion ($80 billion). Significant chunks of both companies remain in public-sector hands.

Integrating networks supplied by different vendors and workforces who speak different languages could be a Franco-German nightmare, especially if new German managers decide the redundancy guillotine should fall mainly on the Orange side of the business.

Nothing is impossible -- and this year has been one of repeat surprises on the news front -- but a merger between Deutsche Telekom and Orange remains about as likely a prospect as an odorless Roquefort.

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— Iain Morris, International Editor, Light Reading

daveburstein 11/30/2019 | 2:37:43 PM
Slumbering giants not needed Whoever told you "Europe desperately needs telco giants" hasn't looked at the data. The three Koreans, a fraction of the size of Deutsche Telecom, are the world leaders in 5G. Little Switzerland is the European leader in 5G, with relatively small Sunrise already connecting 350 small towns and villages. In the US, the largest 5G offering as I write is from #4 Sprint, although the larger companies will soon come in.

In fiber, Orange and Telefonica Spain are far ahead of the US giants, Verizon and AT&T. The best fiber network in the US is being built in Northern California by Sonic, where a symmetrical gigabit sells for about $50/month.

In the fight for customers, #3 T-Mobile USA has been clobbering AT&T & Verizon for years. In Korean 5G, LG Uplus, the smallest, is gaining market share.

In finances, giant China Mobile is suffering, while relatively small Telstra is one of the most profitable.

Giant companies have some advantages, but they also are very, very resistant to change. Many build absurdly large bureaucracy. Ask anyone who has ever worked for a huge company. Smaller companies are often far more innovative.

Less competition usually does lead to higher profits but not usually increased investment. Canada, one of the least competitive and highest-priced markets, isn't turning on 5G until 2020. 

Actually, strong competition drives investment. Verizon built Fios, the biggest fiber network in early days, because little Cablevision was winning market share from DSL. Orange in France built one of Europe's largest fiber networks because Free was winning broadband customers.

Deutsche Telekom and British Telekom did no FTTH until others started building and scared them. Strong competition is the most effective way to inspire investment. But that's increasingly rare in telecom, because building redundant networks is very expensive. 1 network is cheaper than 2. 2 or 3 networks are much cheaper than the 4-7 usually needed for competition to work its magic. 

In 5G so far, strong government pushing has been most effective, starting with Korea and now in China. Hands-off government policy only works where competition is very strong, rare in telecom.  

5G will develop in most busy parts of networks in affluent countries because it is much cheaper per bit. DT's 70% cheaper may be a high estimate, but clearly productivity improves. 

Deutsche Telekom, like most companies, wants to grow bigger and more powerful. Large companies have remarkable ability to influence the common wisdom for the policies they want. 

Data, not opinion, should come first.
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