With Mannesmann, is the future bright for Orange?

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Orange, the fourth entrant in the UK market, is recognized as a visionary cellular player in Europe, with a brand name to match. The operator was acquired by Germany's Mannesmann for $33 billion in November 1999. Hans Snook, CEO of Orange, talks to Basil Ballhatchet about innovative wireless products and the logic behind the Mannesmann/Orange transaction.

Launched in 1994 Orange was the fourth entrant in the UK market. By March 1996 the operator already had more subscribers than One2One. The latter was acquired by Deutsche Telekom in August 1999. In November Orange itself was acquired by Deutsche Telekom's main competitor in Germany, Mannesmann for $33 billion, considerably more than the price paid for One2One. Stewart Birdt, telecoms equity analyst at Bear Stearns, explains why Orange had such a high valuation: "I think that Orange has a better brand image in the market than One2One. Their customer base was larger. The deal was also done later in a rising market, and it was a stock deal rather than a cash deal. The strengths of Orange are that the quality of service is very good. Marketing and branding would be the top strengths. I was not surprised at the price that Mannesmann paid for Orange. It was at a premium."

The long-term implications of this transaction remain unclear, however, following an unsolicited bid for Mannesmann issued in late November 1999 by Vodafone AirTouch, one of Orange's competitors in both the UK and other parts of Europe. Under regulatory conditions in the UK, if Vodafone AirTouch succeeds in its bid, in all probability Orange would be spun off.

Birdt is positive about Orange's prospects in the UK, especially in the wireless data market: "I think they are very well positioned, because of their marketing skills and innovation with branding and products. Their performance over the last couple of years is second to none. I did the original flotation when I was at Goldman Sachs and I have been a big fan ever since. They have not let me down yet. I think what sets them apart is management's focus on customer service and branding. I think they figured out a lot sooner than most people that this business is not about technology, it is not about who can build the most base stations. It is really about marketing and customer services and being at the forefront of innovation in order to attract customers."

Perceived as an innovator, Orange is focusing more and more on business customers and is launching a number of futuristic products, such as Wildfire. An intelligent, voice-activated virtual personal assistant, it uses the latest speech recognition technology to listen, react and respond to customers' spoken requests. Orange is also going to be one of the first cellular operators to offer a wide range of multi-media services, involving the Wireless Application Protocol. In addition, the operator intends to launch a mobile video phone next year.

In an exclusive interview, the CEO of Orange Hans Snook talks to Global Telecoms Business about the Mannesmann/Orange transaction, the bid by Vodafone AirTouch and its implications for Orange and also provides some examples of the operator's wire-free vision and innovative strategy.

What synergies do you gain from your merger with Mannesmann? Why did you decide to accept this offer?

When you look at this offer, you will find that it all happened within a very short space of time. And this is very unusual. The reason is that Orange as a company was already intent on expanding into Europe and later on outside Europe. And we have operations in Austria, Switzerland, Belgium, as well as other businesses in Germany and France. But our main focus was leveraging those service provider businesses and our knowledge of those markets into something that was more network-related.

We initially focused on what we call virtual network operations, which involves the purchase of a huge amount of air time, almost like the big satellite systems, at cost plus basis. As we were going through that, it became evident - and we had lots of discussions with the network operators in those countries - that the current shareholders of E-Plus, in particular VIAG and RWE, were going to sell.

That gave us an opportunity, as the network hadn't been built up very long. We thought that if we secured that business at a relatively low price, we could leverage this network into something. We also had some other plans under discussion. So this had all been presented to our board. Our board had already recognized the need to go outside the UK and the other countries where we were at that time. It is becoming a global business, an international business. And the winners will be those companies which are going to control that going forward, doing it faster and better than anyone else, in particular somebody who has a brand. Companies with a brand have been the winners so far. And this is going to be even more important in the future, especially as we go global and do not operate solely in a local market.

Hutchison themselves had also come through this whole process. We were not just going to use cash in our expansion: we were going to use our currency. It makes sense as the brand is valuable. So they knew that they were going to have to dilute. So the stage was almost set for us to do something and drive the business forward.

At that point Mannesmann walked through the door and said: "Listen, we would like to buy Orange. And we know that if you go ahead with your E-Plus transaction" - they were aware of this issue, as you can't keep these things quiet - "you are going to use your currency, but you will also need some refinancing, as you are starting to be stretched on the debt market. Why don't we give you some cash and some Mannesmann shares, both to you, Hutchison and all the other Orange shareholders? So you can have your cake and eat it too: you receive some cash, almost like dividends today, you receive some shares in the biggest wire-free telecoms group in Europe and probably the most competitive combined fixed and mobile group in Europe." So for the shareholders, even for myself, looking at where I was going, I am quite sure that if we had completed the E-plus transaction, our share price would probably have hit £20 ($32). But there would have been no cash for the shareholders and we would have been obliged to go back, to some extent, to the debt market.

So this was such a beautiful balance, allowing Orange to expand and become the partner of a bigger group and still have the opportunity to expand the Orange brand. It was really a no-brainer. I had to recommend it and the board had to recommend it to all the shareholders. Linking up with Mannesmann affords us greater reach and provides us with greater financial flexibility - when I say us, I am refering to the combined group - but I am still talking now in some sense about Orange. If you look at Mannesmann's other operations, D-2 can't really expand out of Germany, Omnitel can't really advance from Italy. And if you look at their fixed wire projects, such as o.tel.o and Arcor, they are really home-grown products and can't really leave the domestic market.

So when Mannesmann bought Orange, it didn't only acquire a great customer base and the best network in the United Kingdom. It also acquired a great management team - our depth in staff, whether it is customer service, technical or financial is stronger in my opinion than in most other companies that I have seen in our industry. And it also acquired the brand - and it needs a brand to start linking everything together. The Orange brand today, in addition to the UK, Switzerland, Austria and Belgium, also operates in Israel through Partner Communications, which is going extremely well.

So you can look at all that and the Mannesmann operations and think about the future of wire-free telecoms: last night we launched our ISP, Orange.net; last week we launched the WAP phone, the Internet phone. Next week we will launch high speed circuit-switched data cards, little cards that you simply plug into your palm top or lap top and give you up to 64kbp/s and ISDN speeds over the air.

I suspect that the future of data and data-based revenues on wire-free networks is going to be much bigger than voice today. Everybody has seen the example of the Internet and Internet growth. It is going to explode, when mobile phones or other small devices or even voice-activated devices can access the information on the Internet, particularly if it is voice-activated. So there are great revenue opportunities.

That is one of the big drivers for Mannesmann. Omnitel in Italy was one of the first companies to launch a voice-activated access to the Internet on a mobile phone. It is still very robotic, even slow sometimes, but that is going to improve.

We launched Wildfire in the UK, which does a lot for personal messaging and intercepting callers and reminders and things like that. Our next step is Internet access. The next step for Omnitel is making it more user-friendly. Now we have to explore the possibility of linking the two technologies. And since D-2 in Germany hasn't done either yet, it may be the first fusion for those types of technologies. There are other things: the linking of the fixed and wireless networks, bundling opportunities. Mannesmann has ownership of the fixed wire and cable in Germany and Italy.

Here in the UK Orange has always adopted a wire-free strategy, although we have commercial links with companies such as NTL, for two reasons. Firstly to make sure that we always get hold of peoples's shopping lists. We don't necessarily have to solve the fixed wire part. If we want to get in, we solve the wire-free part. If we can create a better bundle for them or a better overall solution, by putting them both together, we will do that.

Once we have them as a customer, we can understand their needs better. And we can start developing more pro-active services, particularly for the business market, that make them more wire-free. So they will migrate slowly over time. I think with Mannesmann - and they share this view as well - there is a short-term inter-marriage in a bundling concept for a lot of people, whether they want to have one supplier for fixed and mobile. Eventually all that traditional voice and data traffic is going to go wire-free and our business is going to change dramatically.

But so are the companies that do fixed today, as it is all going to revolve around ultra-high bandwidth services. There will be holograms in your living room or office. So most of the time when you want to talk to people, you will wear something in your ear or lapel. You will talk to it to access information. Your personal avatar will put you in touch with whoever you want to talk to or whatever information you want. But if you are at home or in the office and you really want to see somebody, you talk to your holographic screen and you use the same avatar.

So they are going to make a lot of money on 3-D television, inter-active television, super-high bandwidth Internet, holographic communications. And the technology to do this exists today. Let us take holograms. The inventor of the white line photograph for credit cards has a project in the US with MIT. And he has created the world's first full colour hologram. It floats in front of you: it is not like 3-D. You can actually walk around it or go underneath and still see the whole thing in colour. The limiting factor today is one thing: cost. But the computing power required to do that - and if you just follow Moore's law in what is happening in silicon - I predict that in 10 years it will become a real commercial reality, instead of a plaything. Some operators in the US on the cable side are saying that it could happen in five years.

How do you view the battle for mobile supremacy in Europe? Do you think that Vodafone AirTouch have a good chance?

This is interesting. First, look at the purchase or merger of Vodafone and AirTouch, rather than the result of a desire to become a global player. It was much more of a defensive move by Vodafone. They always had a relationship with AirTouch. In my opinion, they could have made this move a lot earlier and far more cheaply. But it would seem that Vodafone was not attracted to the North American market. They have always been more Euro-centric, even though they have operations in Australia and South Africa.

When Bell Atlantic made the bid for AirTouch, in my opinion Vodafone felt that if Bell Atlantic acquired AirTouch, it would lose its relationship with AirTouch. So they had to do something. So then they outbid Bell Atlantic. However, this didn't take account of the Bell Atlantic and AirTouch joint venture, which covered some areas of the east coast and some central parts of the US, which broke up.

Vodafone could then have bought Omnitel and Aerial - which would have given them most of the presence that they needed. They could have done it at a very cheap price. But they didn't. They let Voicestream do that and consequently they found themselves excluded in the American market.

So the next possible step was to buy Mannesmann. And now I suspect that Klaus Esser was thinking: "do we want to be Vodafone? No, I don't think so. We want to expand." He moved very quickly to gain a controlling shareholding stake in Omnitel in Italy. Klaus then thought about where to go next: he had a shareholding in Italy, Germany and a small holding in France. Where should he go to capitalize on developments. The UK. What should he buy in the UK? Orange.

So Vodafone let all this happen. Potentially they now risk being a smaller operator in a future world of giants or a take-over target themselves, if they can't buy Mannesmann. In addition, Vodafone has 35% of D-2 in Germany and also have a link in Omnitel through AirTouch. Most of their operations in Europe are minority stakes.

And it seems unlikely that they will be able to create tariff packages for Vodafone subscribers who move around. What might be great for Vodafone as a group to give to their customers isn't necessarily going to be the best thing for all the shareholders in a given country.

So Vodafone had to bid for Mannesmann. Mannesmann paid about £20 billion for Orange. This is superb value creation. Interestingly, as we will work so well together owing to all the combined synergies and other opportunities, it is actually a great deal for Mannesmann as well.

Interestingly, if Vodafone actually succeeds in its attempt to buy Mannesmann, they will buy Orange as a premium to Mannesmann's purchase. So which company has created the value in this whole equation? Clearly Orange. Vodafone has to try. I don't think that they will succeed. First of all Mannesmann's shareholders are going to want a higher price, which would be great if they could achieve that goal.

However, Vodafone's shareholders may not view this in such a light, as they could see it as over-payment. Obviously owing to regulatory concerns, Vodafone would have to sell Orange or offer the shareholders some pro-rata rate for Vodafone shares. Then Orange would revert to a FTSE company again all on its own with no major shareholders. This would be another interesting situation.

But, as you know, no hostile bid has ever succeeded in Germany. Hutchison has indicated its readiness to back Mannesmann against Vodafone, and rightly so. They have a 10.1% holding in Mannesmann. Again this makes it difficult for Vodafone to go out and obtain all the support that it needs. So I think that this be a tough one. Going forward, if they don't succeed, they will become a take-over target themselves.

How do you view the demand for mobile data applications in the UK? What types of services are available to customers? How do you view the opportunity for E-commerce over a wireless phone?

The opportunity is going to be huge. It is easy, user-friendly access to the Internet. I was talking earlier about putting a lapel on your ear pin. Wildfire today is all about voice-activated services. If you can imagine that you have a stud and you have Mary or some other personal avatar that you created yourself on the Orange network - you can choose the sex, voice - and you have access to all the data, information services on the Internet. You are walking down the street and just say: "Mary, I am going to Houston tomorrow, can you book me a flight, can you tell me what the temperature is and do I need a raincoat?" And this avatar can give you all that information immediately, through the access that you have to the Internet, as well as booking your airline tickets and everything else.

Now if you can do that kind of thing, wherever you are, without worrying about it, usage is just going to be phenomenal. And it is going to change the way that we think and do things to an extent that I don't believe that we can imagine today. And usage will skyrocket . Essentially we are giving people wire-free access in an easy way, things that they want to have anyway. I think that the revenue potential is going to be significant.

What kind of demand do you perceive for mobile video phones, which you are launching in late 1999/early 2000? Which businesses will first use such phones?

We didn't develop mobile video phones in the belief that we would sell hundreds of thousands next year. There are a number of reasons. Firstly, owing to the design, build and spectrum capacity of our network, we can actually put what are termed third generation services onto a second generation network. We are one of the few operators that can do that. We will be able to do that in Belgium and Switzerland as well, as we are designing the networks in the same way.

We are one of the few operators in the world that can also deploy high-speed circuit data. We know how to do it and have the capacity. We know that the future will be in data, video and inter-active services. There will be a lot of revenue potential. We know the opportunities that you can gain from first mover advantage. We have all the technology in house.

So what do we get out of it? We gain innovator advantage. People who want a video phone for whatever reason, will only be able to obtain one from Orange: Orange in Switzerland, Belgium and Israel as well. We will have access to certain markets, whether they are executives, who want a video phone. They may move their whole account to Orange to obtain a video phone. Usage is going to be high.

But let us go back and consider potential users. Let us take paramedics out on the field or ambulances. This is a very simple thing. The camera doesn't have to face you. So while they are describing someone with a gaping wound, for example, they can actually show somebody what it looks like. So then it would be life-saving. There is a need in the emergency industries in different ways.

There are other people who want to look at each other when they talk or whatever they do. A video phone could also be used as a child minder, but it would be expensive. But you would be able to see your child, even when you are not at home.

Some people have claimed that it is very hard to access Internet sites through a mobile owing to the time it takes to type in the names of web sites. How are you resolving this problem?

First of all, the WAP phones we launched have a very simplified typing system. As soon as it sees a letter, it guesses the word that you are coming up with. And you can reduce the number of key strokes to type in something. So that helps. But the real benefit will come a little bit in the future through Wildfire. You won't have to type, you will simply say: "Wildfire, IBM website, semi-conductors" and you will have that.

How do you view the threat posed by new competitors such as Virgin, which claims that it will offer the lowest possible mobile prices? Surely it has a built-in advantage owing to its brand name and ability to leverage its music and film sections to attract a new generation of subscribers?

This is interesting. This is the first time that another real brand has appeared. So it will be seen as the battle of the brands. I think that Virgin's presence can only heighten interest. It may open the market a little bit more. But Branson's strategy in the other businesses he has gone into, hasn't worked in our industry. He has typically entered industries, which were in his opinion over-priced. Nobody was helping out. Virgin would be the white knight. But actually today their offering is one of the least attractive in the market.

We have always been the leader in our industry for fairness, transparency and offering great value to customers. The industry we are in moves a lot faster than other industries. Virgin's market reach is going to be relatively small: about 300 outlets of Virgin and Our Price stores. Orange today has over 12,000 outlets. Clearly Virgin can leverage a little from their other merchandise and services. But we can do that as well. They may not be Virgin services. You can use Orange to access lastminute.com and obtain the best airline tickets. You can access ITN news services on an exclusive basis,. They are talking about downloading music. We could do a deal, for example, with Polygram, saying that our customers want to know about the new CDs that are coming out. We want to play it down the phone. It is not a very big deal.

I am interested in what they are going to do. In my opinion, they are targeting what I would characterise as One-2-One customers, rather than Orange clients. I wonder if they will cannibalize One-2-One's existing customer base.

Would you look to form relationships with companies such as Microsoft to develop wireless applications?

First of all we will have relationships with Microsoft and others. None are firmly cemented. We have a Sun-Netscape alliance, which was very instrumental in bringing out the first mobile ISP service.

There is something else that I would like to add. In July we thought that if this world is 150% or 300% penetrated, can we do this ourselves? We are going to be living in a world of multiple niche markets. If we live in a world of multiple niche markets, how can we create the products and services for each of those niche markets? And we looked at the computer industry, looked at Microsoft and Apple and thought, Hey! These guys have a common operating system and they allow people to access that common operating system and those people are going to write a bunch of software. Those people will then sell the software onto their customers, which use Microsoft, as there is more software available on Microsoft.

So we thought, why can't we build our network that way? We decided to provide common access to our network for people to create products and services. And we can help them do that as well. We had our first developer's conference in July. It was standing room only. We had expected 80 people. In fact 130 showed up. So we are already working in that area, not just with Microsoft, but in a totally different way, again looking at customer expectations and deciding how we will drive the market forward.

Finally, what are your hopes and ambitions for the company? What trends do you see emerging in the world of mobile communications over the next two-three years?

The future is data, as well as voice. Our industry is going to change dramatically. The wire-free players of the future are going to resemble the PTTs of the past in terms of their size, power and revenue-generating capabilities. The businesses of fixed operators will also change: they will end up more in the entertainment businesses.