Orange is hoping a new Internet television service will boost its struggling U.K. broadband business, but analysts say the strategy is unlikely to bear much fruit.
The France Telecom unit plans to launch the new Internet protocol TV service before the end of the year. "We have to convince the British market that Orange is an Internet provider" rather than just a mobile-phone company France Telecom Chief Financial Officer Gervais Pellissier said.
The move will allow Orange to offer customers "multi-play" packages that include TV in addition to Internet access, fixed-line and mobile telephony.
Orange ranks fifth in U.K. residential broadband subscribers, and saw its numbers drop between the first and second quarters. Reversing that decline will be a daunting challenge in a cutthroat market in which companies like Carphone Warehouse Group PLC ( Carphone Warehouse.LN) and British Sky Broadcasting PLC are aggressively slashing prices.
Indeed, Orange has "failed to respond to any of the recent price cuts by its competitors, leaving us to believe it is happy to sit by for now and watch its customers disappear," said analysts at Dresdner Kleinwort.
So the question is whether Orange - which leads the way in the French broadband market - can compete in the U.K. or will wither away to become merely an add-on to its mobile operations.
"Organic growth is tricky given the competition," said Jonathan Coham, an analyst at research firm Ovum.
The situation is a far cry from seven years ago, when France Telecom charged into the U.K. by paying GBP1.6 billion through its Wanadoo subsidiary to take control of Freeserve and become the U.K's largest Internet provider.
Since then, unlimited broadband packages have upended Freeserve's model of charging by the minute, while France Telecom has done away with the Wanadoo brand to bring all its operations under the Orange banner.
Orange's residential operations in the U.K generated first-half revenues of EUR206 million, down from EUR215 million a year earlier, while its mobile business brought in EUR3.02 billion, up from EUR2.87 billion.
Orange hopes to improve brand recognition with a TV advertising campaign over the course of the third quarter, but analysts say that might not be enough. One option, the analysts believe, would be to buy another operator. "Orange needs to add some mass to the broadband business in the U.K. to complement" its mobile operations, said Martin Mabbutt, an analyst at Nomura.
In Spain, Orange recently bought provider Ya.com to boost its market share. For the time being, though, the company seems reluctant to make a similar purchase in the U.K.
"We have to implement the right organic growth dynamic before thinking on acquisitions," Pellissier said.
Hoping To Emulate French ModelOffering IPTV in the U.K. will bring Orange closer to the range of services it provides in France, where the company's broadband packages have offset a decline in revenues from its traditional fixed-line operations.
Orange's French broadband TV subscriptions more than tripled over the last year, but such success is far from certain in the U.K.
"We are quite cautious," said Orange U.K. head Bernard Ghillebeart during a conference call in early August.
In the U.K., BSkyB and Virgin Media Inc. already provide pay TV while Freeview offers free-to-air digital multichannel programming. And Tiscali SpA (TIS.MI) said Saturday it is offering IPTV to 5 million U.K. homes and is in advanced talks with Irish broadcaster Setanta to include English Premier League soccer coverage in its television offering. BT Group PLC launched its BT Vision TV service, already comprising a deal with Setanta, not long ago.
Ian Watt, a telecom analyst at Enders Analysis, said he was "pessimistic" about the prospects of Orange's IPTV service - which has a deal on content with Disney-ABC International - prompting a recovery in its customer numbers.
"It's a necessary thing, as more of the other service providers have it," Nomura's Mabbutt said, "but it's certainly not sufficient for success."
There is also no guarantee that combining more services in one package will attract customers.
Virgin Media, the most aggressive marketer of a quadruple-play package in the U.K., saw "another decline" in its share of net new customers between March and June, according to analysts at Dresdner.
"The converged strategy has not worked well in the U.K. residential market," said Watt, who noted that individuals make decisions on mobile phones while heads of households generally make the call on Internet and TV services.
Orange, however, is sticking with the converged approach, offering free broadband to mobile customers with contracts of more than GBP30 per month.
If anything, the broadband market is likely to get even more competitive. Vodafone Group PLC has been renting network capacity from BT since January to offer mobile customers a fixed-line broadband Internet option, but wouldn't say how many have taken the bait.
Meanwhile, Telefonica SA's (TEF) o2 (now Sky) brand will unveil its combined mobile-broadband package "in the autumn," after pushing back the launch date a number of times in order to "get our offer right," Simon Lloyd, o2 (now Sky)'s head of media relations, said.
"The rush to market we've seen from other networks has resulted in less than satisfactory service," Lloyd added.
Customer service is a sensitive issue because providers, notably Carphone Warehouse, have struggled to handle customers' technical problems.
Orange has also faced customer dissatisfaction. A recent survey of 4,000 people by broadband analysis firm Point Topic ranked Orange last among U.K. Internet service providers in the percentage of customers who planned to continue giving the company their business.
Orange's Ghillebeart said the company has focused on improving the situation during the first half of this year.
The company is also pressing ahead with transferring more of its broadband customers to unbundled lines to avoid having to pay wholesale fees to BT and increase the number of possible services.
Even if Orange continues to lose broadband subscribers in the U.K, it will keep broadband and fixed-line telephony in its portfolio in order to remain competitive with the converged offers of other mobile operators, Watt of Enders Analysis said.
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