The Phone War
Richard Branson and Charles Dunstone lead our troops into battle over mobile networks in France.
Precisely 200 years after Nelson’s victory at Trafalgar, a new Anglo-French battlefront has opened up, this one over mobile telephone networks.
Sir Richard Branson is leading the troops in this latest skirmish. Yesterday, he announced a joint venture with Carphone Warehouse, led by that master tactician Charles Dunstone, to launch a virtual mobile network operation across France. The 50-50 joint venture will operate under the Virgin Mobile brand name and use the Orange network, owned by France Telecom.
The venture aims to launch in the first half of next year, although there are many details yet to be finalised. Sources believe the timing of yesterday’s announcement was dictated by France Telecom, which preferred to have the news of the venture in the public domain ahead of its results presentation on Thursday.
International expansion has long been an aim of Virgin Mobile; the prospectus of Virgin’s initial public offering in July 2004 specifically targeted overseas operations as a medium-term goal.
And in this 21st-century battle, the French defences appear to be amongst the most porous in Europe.
French mobile penetration rate lies between 75 and 78 per cent, compared with more than 90 per cent over the rest of Europe. Industry sources believe penetration in Britain is approaching 100 per cent, with many people owning more than one mobile.
“You could argue that, from that point of view, there is scope for a new mobile operator,” said an analyst.
Given the relatively low rate of mobile ownership in France, the government there has been complicit in Branson’s advance. “The regulator has been interested in promoting mobile virtual network operators (MVNOs),” said an industry source. Two French mobile providers, SFR (in which Vodafone holds a minority stake) and Orange have sewn up the French mobile market, with Bouygues a very distant third. “They haven’t had any meaningful MVNOs or resellers,” said an analyst. “It’s only been in the last 12 months that MVNOs have been able to get access to existing networks.”
And Branson may be just the man to storm the French fortress. He already has a high profile in the country, thanks to 35 Virgin Megastores dotted across France. “The Virgin brand in France is very strong,” said an insider. Virgin Records launched in France back in the 1970s and retains a reputation as a label of choice for promising newcomers.
Virgin launched a digital music download service in France well ahead of Apple, which has revitalised itself with its iPod and iTunes download service. In fact, Virgin maintains a higher share of the music download business in France, whereas Apple has moved into the number one slot in America and Britain.
Furthermore, Branson’s Virgin Express airline flies from Nice and Toulon in France, guaranteeing further media coverage of the great man’s exploits. France is “one of the countries where his personal image is like it is in Britain”, said an insider. Branson regularly commands multi-page spreads in glossy magazines such as Paris Match.
And it is Branson’s notoriety here that explains at least a portion of his success in Britain. “Brand recognition has been the key,” said an analyst, pointing out that Branson’s launch of Virgin Megastores in Germany, where he is less well known, has been problematic.
Virgin will try to replicate the business model underpinning its British operations and aim at the younger pre-pay market. Pay as you go packages are much less popular in France than in Britain, say industry analysts.
“France is the most attractive market for Virgin in Europe — its brand is known, the regulator is trying to support MVNOs and its core target market is not yet well served,” said John Davies, telecoms analyst at Dresdner Kleinwort Wasserstein.
The analysts applaud the choice of Carphone Warehouse as a partner. With more than 200 branches, Carphone is now the biggest independent distributor of mobile phones in France.
The deal will allow Carphone to continue to increase its take of the after-sale market; some 60 per cent of profits now come after Carphone actually sells a handset, through insurance, the sale of accessories, upgrades and advice.
Carphone also earns from providing billing services for some of the networks it promotes and, increasingly, from the provision of fixed-line services. “It’s one port of call to get the best deal on telecoms services in what is a fast-changing world,” said one insider. Profits from the joint venture will be split evenly between the two partners.
However, there are question marks over the venture. For one thing, it’s not clear whether Virgin will get full access to the Orange network. “It probably won’t be able to get as good a network access deal as it has in Britain with T-mobile, as this was negotiated as part of the settlement of legal action between Deutsche Telecom and Virgin,” said John Davies at DKW.
Others wonder if Virgin is ready to turn its attention abroad, with much left to do in Britain. Virgin launched a contract service only a few months ago, and comprises just 3 per cent of the British market by revenues, or between 6 and 7 per cent by number of customers.
“The British market remains competitive. Management needs to make sure it keeps its eye on the ball,” said an analyst.
Virgin only launched its contract service over the summer; another analyst considers the service “a cause of uncertainty” in a segment of the market favoured by two thirds of customers. However, an insider insists the Virgin Group “would never allow that to happen”.
Investors were unimpressed by yesterday’s announcement, pushing the shares 1.75p lower to 291p. Still, Virgin remains well above 200p, the price at which it floated on the London Stock Exchange in July 2004.
But much of that strength comes from speculation of a takeover, which many analysts believe is unlikely. “We think (takeover talk) has gone too far,” said Davies, counselling investors to sell the shares. One likely bidder, Deutsche Telecom, may find greater synergies in taking over O2, he added.
Furthermore, fears that Branson could be considering a reduction of his 73 per cent stake could also weigh on Virgin shares over the short term. The Virgin Group aimed to place more shares than it actually did at the July flotation. With the shares well above the flotation price, it could be looking for an opportunity to sell, say analysts.
But they also say if anyone can make this venture work, it is Branson. And at least the stakes are lower than in Nelson’s day. Thankfully, Branson is unlikely to perish in this battle — although he does take part in some rather dangerous hobbies, including hot-air ballooning.
The great man was unable to take phone calls yesterday, engaged as he was in a safari in South Africa.