How to win the telecoms war game

    7 March 2015

    Aficionados of early 1980s teen movies will remember with affection WarGames, starring Matthew Broderick as a teenage hacker who accidentally cracks the system that controls the American nuclear arsenal. In the climactic scene, Broderick has to teach a computer pre-programmed to nuke the world about the futility of what it is about to do. ‘The only winning move is not to play,’ the computer eventually decides, calling off its first strike on Moscow.

    It’s a lesson worth learning for anyone contemplating the less dangerous but still costly games of mergers and takeovers now being played out between UK telecom and media giants. In a deal-making frenzy that has a 1980s
    flavour to it, the telecom firms are paying billions to take control of one another. BT has just forked out £12.5 billion for EE, a mobile network itself made up of what used to be Orange and T-Mobile. Hong Kong billionaire Li Ka-shing is merging his Three network with the larger O2, controlled by Spain’s Telefónica. Sky is muscling in with a deal to buy capacity from O2, allowing the broadcaster to sell mobile lines to its customers.

    Every broker’s note in the sector is now pushing the line that Virgin, TalkTalk and of course the biggest player of all, Vodafone, are under intense pressure to come up with deals of their own — or risk getting left behind as their deal-making competitors race ahead of them. Except, of course, it may not be as simple as that. In fact, this latest round of telecoms and media mergers is unlikely to turn out any better than the last one 15 years ago, which destroyed wealth on an epic scale.

    The big idea behind these deals is something called ‘quad play’. Despite what Spectator readers might expect, that isn’t a new way of playing your old Who albums. It refers to packaging mobile, fixed-line, broadband and TV, and selling the whole lot in a single bundle. Customers, we’re told, find that far more attractive than buying each one separately. If you can’t offer them the whole lot, you’ll lose customers to someone who can. On that logic, BT reckons it has to own a mobile company and a football channel, while Sky has to offer mobile lines — and Vodafone needs to buy in both.

    On closer examination, however, the quad play idea turns out to be remarkably flimsy, and certainly hardly worth the £10 billion-plus cost of joining in. True, Sky has had a lot of success from selling broadband connections alongside its pay-TV packages, and TalkTalk has made some progress in bundling up fixed lines, broadband and a modest TV package, while BT has made an initial success of its sport TV business. But it’s a big jump to argue that customers automatically want to buy all their media from the same company.

    In most industries, customers are fairly resistant to ‘bundles’. A surprisingly large number of us have credit cards and bank accounts from different companies, even though it would be hard to think of two more complementary products. No one thought much of the clothes on sale at Tesco, and if John Lewis tried to sell cars, it would probably be greeted with widespread indifference. In fact, quad play is mostly investment-bank hype.

    There is no evidence customers care one way or another. They will buy a bundle or pick and mix, depending on the quality and price of each product. If you give away free football, as BT has been doing, they’ll take it, just as they’ll take any free offer. Likewise, if Sky gives away broadband as a bonus for subscribing to its pay TV, they’ll take that as well. They’d also take a free case of wine if it was offered. Whether they will pay for it is another matter.

    But while the benefits of that ‘bundling’ are very hazy, the costs aren’t. Companies have to pay vast sums to acquire each part of the quad. And as they get bigger, they inevitably get harder to manage. Are you looking
    forward to getting hold of customer services at your quad play provider when you have a technical problem? No, I thought not. Meanwhile, the core business of providing fixed and mobile lines is under pressure as the internet becomes ubiquitous, and access is mostly free. The number of calls on both is falling steadily. Mega-deals are usually a poor way of reinvigorating a core business in trouble.

    In reality, these telecoms deals are mostly driven by corporate egos and fee-hungry bankers. BT could have been a dull but successful provider of broadband, but has chosen to reinvent itself as a multimedia conglomerate. Three and O2 and even Sky could be heading down the same route. Right now the big winner looks to be Vodafone, which — perhaps too scarred by its blockbuster deals at the start of the 2000s — has so far sat this one out.

    Not playing — as Matthew Broderick discovered in WarGames — might be the winning strategy.