UK: No headline present

UK: No headline present - When Orange launched in the UK in 1994 and made its initial public offering two years later, the market asked: 'Orange or lemon?' There were big issues within that question as Hutchison of Hong Kong placed its multi-billion-poun

Last Updated: 31 Aug 2010

When Orange launched in the UK in 1994 and made its initial public offering two years later, the market asked: 'Orange or lemon?' There were big issues within that question as Hutchison of Hong Kong placed its multi-billion-pound bet. Was the mobile phone to be more than just an expensive toy for yuppies? Could Hutchison, with a management team parachuted in from the Far East, crack the UK market, live down its early UK investments like Rabbit (which was a dog), and make money as the UK's fourth mobile operator? And would its new 1800 GSM technology work?

Roll forward to today and the future of Orange looks bright. The share price is up from between £2 and £2.50 at flotation to around £10, driving market value up from £2.5 billion to £10 billion and putting it among the UK's 30 most valuable companies.

Today the phones are everywhere. At 10am last New Year's Day, scores of skiers in a sunlit cafe 3,000 metres up the Klein Matterhorn above Zermatt were dialling friends and family in the UK, Japan, the US and Germany to exchange greetings. But mobiles are not just for the elite. On the south London train from Clapham Junction to Balham, teenagers move through the carriages, jostling each other and dropping french fries, and one in four has a mobile. 'Nah, man, I'm on the train. Where are you?'

Worldwide, the penetration of mobile phones is growing faster than any consumer device in history. In the UK, it was up from 9% at the end of 1995 to 29% in mid-1999, with 35% forecast for year-end - five years ahead of most projections. That's more than 20 million mobiles.

Mobiles are sexy. Poking nonchalantly out of shirt pockets, nestling smooth and weightless in the hand. That satisfying click of the flap to end a call. And the headsets, now de rigueur for investment bankers, make merger meetings look like Madonna rehearsals. Outside in the street, frazzled characters pace up and down, shouting at the air. They aren't mad: they're seriously mobile.

Hans Snook, chief executive and group managing director at Orange, doesn't like the word mobile. He prefers wire-free. That's one of the radical changes Orange introduced in the UK - a different vision of the market.

'When we got into the market it was a low-penetration business tool, a yuppie toy, to use away from your home or office, like driving around in cars,' he recalls. 'It didn't work well. And it was very, very expensive.

We asked ourselves, what's the real customer proposition? It's to communicate and be communicated with, wherever, whenever and however. So it's not mobile; it's wire-free. It's a much larger vision.'

Bob Fuller, chief operating officer and group director of UK operations, adds: 'We never saw ourselves as a mobile voice telephony business. Even back in the early 1990s it was about a wire-free world, with voice, data, video. The opportunity was there to replace fixed-line as the customer's primary communications tool, and to open up new uses for that tool.'

It's fine to have a vision, but has Orange converted it into customers and revenue? According to the telecoms watchdog Oftel, stock analysts and market researchers, Orange's competitive scorecard is looking good.

As of July 1999, its UK customer base was three million, more than double that of a year before. UK market share was 17.5%, up from 15%, and share of new subscribers in the first half of 1999 was 20%, so market share was still growing strongly. Last month, Orange announced a £20 million investment in three call-centre operations that will create 2,000 jobs in north-east England.

Moreover, Orange has been getting the better customers. The mobile market splits into contract and pre-pay, with contract customers producing two or three times as much revenue as pre-payers (for Orange, £450-£500 a year, against £150-£200). Orange's penetration and market share gains are higher among these more valuable customers and its average revenue per user is higher than competitors' for both types. Orange is also keeping customers longer - on average for five or six years, compared with less than four years for rivals - so the lifetime value of a customer for Orange is roughly double that of its competitors.

Orange may be on the cutting edge of the new weightless economy, but it has succeeded with customers by getting right some old business basics. Snook and Fuller explain: 'We launched as a fourth player in a tainted mobile market that wasn't looking attractive to the customer.

Our competitors approached the market in a very supply-driven and technology-driven way. As a customer, you got what they offered and you had to live with the problems. We wanted to change that. We wanted to be the customer's champion.

'The prerequisite was coverage and call quality, which historically was poor. If people left a network, they'd say it was because it was too expensive, but really they didn't feel they were getting value for what they were paying. And the main value issue was call quality, particularly in buildings.

So we had to have a bloody good, big network that worked equally well in buildings, a continuous network without gaps between the blobs. We didn't launch until we had 50% national coverage, and now we're at 98%.

We've built a better network than the incumbents who've been there for 15 years.'

This claim looks well founded. In mid-1999 Orange had 25% more base stations across the UK than Vodafone, and 70% more than One2One. In recent Oftel and JD Powers surveys, Orange came out ahead of competitors on customer satisfaction.

Building a new wire-free network doesn't come cheap. Each base station costs up to £100,000 (Orange will have 6,000 in the UK by the year's end and 10,000 by 2001. That adds up to £1 billion. It may be cheaper than digging up the roads but it isn't chicken feed.) Add in the investment in building the customer base, service and brand, and cumulative investment in the UK will have peaked at £2 billion before cash-flow turns positive (second-quarter figures for April to June showed a profit for the first time, although those for the year as a whole are forecast to remain in the red). Graham Howe, deputy CEO and chief financial officer, says he had to juggle 'the classic tensions between the size of the cheque and the strategic vision. The vision won - the only way to win was to build the best network.'

Orange also overhauled pricing. Consumers didn't understand the tariffs, didn't trust them and were afraid to sign up. Orange bundled monthly charges and airtime packages, introduced per-second billing and threw in value-added services like answering, diverting, call waiting. Orange invested, too, in customer reassurance, providing 12-month insurance, a three-year warranty, 24-hour phone replacement and a round-the-clock helpdesk, and dealt directly with the user, while Vodafone dealt through service providers who operated dozens of different billing systems.

The company's branding - the bold orange and black statement with its stripped-down typography and the slogan 'The future's bright - the future's Orange' - was a key to market penetration. Snook says: 'We did wrap our proposition in some very powerful branding, in what was basically an unbranded market. And the Orange brand is very chic.'

Richard Brennan, UK commercial director, sees another key Orange difference in 'building our core strategic systems in-house - our call centres, customer service systems, customer databases. That way we can stay closer to customer needs and innovate faster than the competition. Our IT developers work closely with the product and customer marketing people. We were the first with over-the-air registration because we built it in-house. And of course we invest heavily in technology innovation.'

This is an impressive management team combining individual personalities and skills. Snook, the English literature graduate with a non-techie's amazement at and enthusiasm for the possibilities of technology, focusing on the vision, communicating it, aligning investment priorities with it.

Howe, the finance man with his grip on the numbers - not just financial, but market, customer and performance statistics. Fuller, the operator, delivering network performance and service. Brennan, plotting technology road maps and new products and functions. And there's Colin Tucker, international operations director. It's very cohesive as a team. They've been together with the business for more than five years, since pre-launch. The market likes the team's quality and stability. Analysts' reports cite it as a key factor in Orange's success.

How much does the team make for creating a market value of £10 billion from a £2 billion investment? As of early 1999, taking Orange's share price as £8 to £9, Snook has a pot of stock grants and options worth about £8 million pre-tax on top of a base salary and yearly bonus averaging £800,000. Howe has maybe half that. Nice, but modest for £8 billion of value creation.

So far, a fat juicy Orange. But is it worth £10 billion? The figure is broken down in the box on page 91 - if you agree with its assumptions - yes, it is fully and fairly valued.

Of course, you could challenge the valuation. At 100% penetration, when everybody has a mobile, can the average revenue per user (ARPU) be £250-£300 a year, which is not far off current household spend on all telecommunications?

(In the new subscriber explosion in late 1998, three out of four new customers were pre-pay, with an ARPU of less than £200.) Won't that 25%-30% operating margin be competed down as the industry matures?

But even if the valuation is reasonable it only just supports current market value. How could the business treble or quadruple its value again?

How is Snook going to earn his next £8 million?

Orange has two platforms for next-wave growth: new technologies and services (especially wire-free internet/e-commerce) and international expansion.

Let's take expansion first. Since 1997 Orange has been investing with local partners in mobile networks in Belgium (50% ownership), Switzerland (42%) and Austria (17%), and licensing to operators in Israel and Hong Kong. It plans to enter the US market, working with Voicestream/Omnipoint and buying airtime from other operators to create a 'virtual network'.

Orange can make money in each of these markets by being the best customer-focused operator and local brand. But the long-run goal is bigger than that. Fuller and Howe see Orange as 'potentially the first real global communications brand, delivering consistent products and services internationally'.

That's a long way from where mobile is today. Until now, a European phone hasn't worked in North America, and vice versa. You have to rent a handset and plug in your SIM card. You have to deal with different local networks and tariff structures. Call quality varies wildly. You can't access messages without dealing with international access codes, pin numbers and so on. (The handset problem is being tackled at last.

Orange has launched a tri-band phone from Motorola that works in both Europe and the US.)

Brennan is clear that 'these services have got to work the same everywhere in the world. Orange will look after you in the same way. We call it a virtual home environment. Most of Vodafone/AirTouch's businesses are minority stakes, without control and consistency. We want the Orange brand to add up to more than the individual pieces.'

The other next-wave growth platform is William Gibson territory: new technologies, an explosion of wire-free services and traffic (voice, data, e-mail, internet, multimedia, e-commerce), and the displacement of fixed-line.

Here's the techno-primer. What we use today is second-generation mobile technology (GSM 900 and 1800 in Europe), which is digital (the first generation, in the 1980s, was analogue). It delivers data speeds of 9.6K (kilobytes per second) - too slow for a useful internet connection. Over the next three years, data speeds should be pushed up through 28K-56K (as fast as today's BT copper wire internet connection in the home) to 200K or more (faster than BT's Home Highway).

Then there is third-generation wire-free: greater capacity and much faster.

The UK government will auction third-generation licences in early 2000 and services could be launched within three years. By 2005, data speeds could be up to 2,000K, which is high-quality videophone on your Dick Tracy wristwatch.

Brennan is confident that 'next year, we'll be matching what 80% of people can get on their fixed line. Then in a few years the technology will let you do more wire-free than you can do now on any fixed line, including at the office.'

Third-generation is a real convergence of computing and communications.

At Orange's labs in Bristol, development projects combine engineers from Orange, Fujitsu (base stations), Cisco (internet routers), Ascend/Lucent (network intelligence software) and a fifth partner developing the interface between Orange and e-commerce providers. The network operator is not leaving it to Nokia and Motorola to take the technological lead.

Bandwidth capacity and speed is the great liberator of wire-free potential, but it's not the only one. Wildfire (which Orange launched in July) is a virtual personal assistant, a cyberchick who takes messages, places calls and stores contact details, all via voice interaction - so you say: 'Wildfire, call Jane at work'. Bluetooth is a technology for wire-free connectivity with all electronic devices such as PCs, faxes, and printers and those embedded in home appliances and products.

Then there are the devices themselves, getting smaller and smaller and more and more powerful: WAP phones with internet access and display, videophones, phone studs that clip on your ear and are worn everywhere except in the shower (and they wake you in the morning with a soft 'Time to get up, Andrew' from Wildfire).

All these new technologies and applications will drive growth in communications traffic: voice, data (internet, intranets, extranets), video. And with high performance, reliability and competitive pricing, wire-free could displace fixed-line voice and data traffic. The crunch for BT comes when customers start ripping out their fixed lines and repainting their skirting boards. Wouldn't you prefer to have one contact number - wherever you are, that you can do anything with - and never have to wait in again for a BT engineer?

Orange wants to get a large piece of that huge potential traffic growth, but it also sees its role as the network operator changing. It wants to be the AOL of wire-free internet access: an ISP, a portal, and an e-commerce provider. This month it is launching an internet provider in parallel with the first internet-enabled (WAP) wire-free handset. It is lining up partners like ITN, Reuters and to deliver news and information, entertainment, financial services, and travel - the current killer applications in e-commerce.

The vision is a much broader and more valuable relationship with customers.

Snook imagines a future where Wildfire contacts you and says: 'That book you ordered on Amazon is back in stock. Do you want me to order it?' He points out: 'You're linked into the internet with e-commerce behind it.

In that kind of world, what business is Orange going to be in? Communications?

The internet business? E-commerce? In the future, access could become a commodity, or voice could be free, like local calls in the US. But there will be services and content you can only get from Orange, that give you enormous value and really lock you into us. What's going to happen to churn rates (customer turnover) once you've got Wildfire configured to your personality, you're wired into the internet, you're using all this stuff every day and you're generally happy with it? What's that going to do to monthly user revenues?'

Probably the biggest practical problem is the chasm between the sparkling techno-vision and dreary customer reality, or what Dilbert would call the 'Stupidity Factor'. Will customers be able to use even 1% of this vast technological capability? You had a VCR and you managed to record half the programmes you wanted to watch (that's better than 90% of the population); now you've got a home entertainment centre and your hit rate is down to one in 10.

You've got 12 remote controls and none of them work, or you need to retune the TV and you've no idea how to do it. You've lost all your internet passwords and cash card pin numbers. When you hit redial on your mobile it quits. And BT calls you every week asking if you want to pay £2 a month to get 25% off calls to Australia on bank holiday weekends after 9pm.

Technology makes your life easier?

It's not just consumers who are stupid. I spent an hour last month trying to buy something to connect my sexy dual-band mobile with my lightweight laptop - I wanted to be an early adopter of wire-free internet. In the six (six!) mobile shops on Putney High Street, none of the sales people knew what I was going on about. Motorola has mailed me something, but it's not a cheap cable into my existing modem. It cost £100, the CD-ROM installation program doesn't work and I don't know whether to call Motorola, Dell or Orange. The man on the Clapham omnibus might need some encouragement through that process.

That's also Orange's view. 'We've got to innovate hard, but make it simple and practical for the customer. That's how we made such an impact when we launched, but it's easy for the complexity to build back-up. And we've got to keep focused on where the real practical value is for the customer.

We may get excited about high-speed internet connections, but it's our new off-peak call package of 50p for 50 minutes that will really start to eat into fixed-line.

'We've got to shift the focus of our business and organisation even more on to customer management. As an industry, we've been reactive. We wait until people come and talk to us. That's not good enough. We need to be doing things like using the internet for service and communication (Orange's own useless brochure site is a bad advertisement for its commitment to the internet - although it promised that you would be able to manage your account on it later this year). And we need to segment the market better, because you won't succeed with a blanket approach.'

Customer management may be the core of Orange's business in the future, rather than network technology. If it can get all this right - next-generation wire-free e-commerce, international growth and customer management - maybe that £10 billion market value could triple or quadruple. It's certainly an interesting challenge for Snook and his team.

How does he see his personal role in leading the charge? 'My primary function is to keep on getting across the key elements of the Orange culture, to keep our eye firmly on the vision, and to communicate it. That's even more important today, because we're past start-up. We're a big complex business in the UK that's growing at a fantastic rate and we're expanding internationally.

'Having said that, I'm a details person who gets involved in an awful lot of things. I think there can't be a disconnect between your vision and what's happening today. You have to ask: How many customer complaints did we get today, what are the main ones, how are they changing? How do we make sure all our marketing has the same look and feel? Are our business systems and processes effective? The only way you can ever know that is by looking, touching and talking in lots of different areas at different times and experiencing it yourself. I'm a very pragmatic visionary.'

This pragmatic visionary has helped to grow one big juicy Orange.


Assume 50 million mobile subscribers in the UK in 8-10 years' time (100% of the over-12 population)

Assume an ARPU of £250-£300, a pre-tax margin of 25-30%, and a tax rate of 33%

Then industry after-tax profits = £2.5 billion a year

At an earnings multiple of 20, industry value = £50 billion

In today's money (at an 8% discount rate), value = £25 billion

Assume Orange gets a quarter of that = £6.25 billion

Add in positive cash-flow over the next 8-10 years, present value = £2 billion-£3 billion

Total present value for Orange UK business = £8 billion-£9 billion

Add in international interests, value = £1 billion-£2 billion


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