Orange, T-Mobile merger plan catches UK regulatory body's attention, may be delayed

Early last month, Orange and T-Mobile, the UK wireless units of France Telecom SA and Deutsche Telekom AG, announced a tentative £8.5 billion merger deal with equal shareholding that would allow Orange to become the premium brand, while T-Mobile would focus on the budget market. However, the deal raised concerns among several consumer groups and is likely to involve the Office of Fair Trading (OFT) calling on EU regulators to allow the UK authorities to investigate the proposed merger as the combined entity would control a whopping 37 percent share of the UK's market. Currently, the UK mobile phone market is dominated by O2, which controls 27 percent of the market, followed by Vodafone with 25 percent, and Orange with 22 percent.

OFT's request for scrutiny by the UK's regulatory bodies is expected to at least delay the merger, if not force Orange and T-Mobile to sell off some of their mobile phone spectrum in Britain.

After months of wrangling between industry and the government's wireless spectrum adviser, Kip Meek, triggered by the government's plan of creating a Digital Britain that involves bringing 2Mbps broadband services within reach of every household in the country by 2012, Lord Mandelson called the UK bosses of all five operators (Orange, T-Mobile, Vodafone, O2 and Hutchison 3G UK) to a summit meeting last month and a deal was struck which would impose caps on the amount of spectrum each operator can own.

But the Orange and T-Mobile merger seems to have derailed all thoughts of a complicated spectrum deal with other operators and though neither Vodafone nor O2 will be forced to give up any of their assets, the deal says a "regulatory remedy" is needed to prevent the combined Orange and T-Mobile owning too big a share of the UK airwaves. In effect, both OFT and Competition Commission will not only scrutinise the merger deal but also they will decide at what level to place a cap on the merged company's spectrum.

A government official, on conditions of anonymity, said that though the government hopes to bring broadband service into every household in Britain by 2012, yet the problem is that the existing mobile broadband spectrum – bought by the five networks in the dotcom boom for £22.5 billion - is only suitable for 3G broadband services in towns and cities and is no good for running services over long distances, and hence 3G broadband in deeper rural areas is economically not viable.

"The spectrum that is perfect for running 3 G services in rural areas, however, is owned by O2 and Vodafone, which have had it since mobile services began in the mid-1980s," the official said.

"However, allowing O2 and Vodafone to run 3G services over this spectrum would have given both firms an unfair advantage over their rivals. Hence, a wholesale restructuring of the airwaves was required," he said.

The official also added that the government had plans to auction the spectrum left over from the switch-off of analogue TV - the so-called "digital dividend" - towards the end of next year. That part of the airwaves is just next to the old spectrum owned by O2 and Vodafone and also perfect for running 3G mobile broadband services in rural and remote areas.

"However, no mobile phone company would like to get involved in the auction until it found out what was going to happen to its existing spectrum," the official said.

"But the proposed merger of Orange and T-Mobile have derailed all thoughts of the government's complicated spectrum deal with the mobile operators," he added.