Meteor purchase, Hutchison demise – Ovum


7 Mar 2003

Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Pin on PinterestShare on RedditEmail this to someone

Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Pin on PinterestShare on RedditEmail this to someone

Respected telecoms analyst Ovum has predicted that ailing mobile operator Meteor is likely to be acquired by another operator, namely MmO2, adding fuel to rumours that the company is looking to be acquired.

In recent months it has been speculated that 3G (third generation) licensee Hutchison Whampoa has been looking at acquiring Meteor.

In a commentary, entitled ‘Prospects for European Mobile Operators’, Ovum paints a rosy picture of the present European mobile sector – the pain of 3G auctions is a distant memory, average revenue per user (ARPU) is starting to grow after years of decline and mobile operators have reduced handset subsidies.

However, Ovum predicts storms on the horizon, particularly the disappearance of many of the small 2G operators in Europe – sold to the second or third operator in each country.

“So in Ireland MmO2 might buy Meteor and in Germany Vodafone or Deutsche Telecom might buy MmO2. To see why this will happen we only need to look at the profit margins that these different businesses generate. Profits before interest, tax depreciation and amortisation (EBITDA) as a percentage of revenues is a good indicator of a company’s ability to generate cash. Small mobile operators with a market share of 15pc or less now generate EBITDA margins of less than 10pc,” said Ovum consulting director, David Lewin.

In Ireland Meteor has less than 5pc of the market with some 118,000 customers, contrasting with O2 and Vodafone, which collectively control some 96pc of the Irish market. Held up by legal rows over the awarding of its GSM licence, Meteor missed out on the watershed years of 1999 and 2000 that saw the Irish mobile market reach its present 79pc population penetration. The company has since struggled to ratchet up its subscriber base, despite introducing innovative call and SMS (short messaging service) pricing options for its largely prepaid customers.

Ovum’s Lewin continues: “In contrast the market leader typically manages 40 to 45pc per annum. The low EBITDA margins of the small operators reflect the fact that there are substantial fixed costs in running a mobile network – first in providing national coverage and then in developing the data applications, which are needed to be competitive in today’s marketplace.

“If these fixed costs are spread over only a small number of subscribers the result is high unit costs and low profitability. Now that the mobile markets are reaching maturity it is virtually impossible for these small operators to win enough market share to become profitable. In these circumstances the best course is to sell to, for example, the second operator in the country that is keen to overtake the market leader,” Lewin reasons.

Over recent months, many market observers had predicted Hutchison Whampoa to acquire Meteor, which would give it access to a state-of-the-art GSM network and enable it to roll out 3G services.

However, Lewin’s predictions negate this outcome and his hopes for the survival of greenfield 3G operators such as Hutchison are negative.

“We expect to see 3G greenfield operators, that is operators with a 3G licence but no 2G network, to disappear rapidly. We wish Hutchison 3G well in its UK [and Irish] service launch. But we also recognise that the odds against its success are high. Of course Hutchison has no legacy systems to hamper its thinking, its offerings, or its network and systems development,” he adds.

“But the 2G operators have so many advantages; there are substantial economies of scope between 2G and 3G networks. Customer acquisition costs are much lower. The 2G operator only has to migrate customers from 2G to 3G. The 3G licensee has to acquire them from scratch. The 2G operator can roll out a network faster and cheaper by using existing 2G resources (sites, distribution channels and skilled staff).

“Many of the 3G greenfield licensees have looked at these problems and decided not to enter the market. Hutchison has decided differently. It hopes no doubt for significant first mover advantage. But the owners of ‘3’ (Hutchison) are rational and hard-headed businessmen who will set clear performance goals and pull the plug on their investment if it does not perform well rather than allow it to haemorrhage cash from their global business portfolio,” Lewin predicts.

By John Kennedy