Within the next two weeks Orange will become a 3bn company and the biggest success story in the relatively short history of UK cellular telecommunications. What’s more, the City loves it.
In the space of just two years, Orange has risen from the ashes of the ill-conceived Rabbit system to secure a foothold in the mobile market. Crucially, it has grabbed 27 per cent of the digital cellular market – the area that will witness the greatest expansion in the next four years.
It has quadrupled its number of subscribers to 400,000 in the past 12 months, executed through WCRS the best and most consistent advertising the sector has seen, and has brand awareness levels higher than BT – at more than 90 per cent. The branding has been so successful, that its parent Hutchison’s name has been replaced by the new-born Orange plc. Within two years it is even expecting to make a profit.
Along the way, the company claims to have changed radically the market and forced the market leaders Cellnet and Vodafone to change their pricing strategies and positioning.
But reality could impinge on the illusion. Just as Virgin Atlantic, with a handful of aircraft, became the nemesis of the all-conquering British Airways, so Orange has assumed that role in a power game with the big players Cellnet and Vodafone. The latter are preparing to deal with the upstart.
Orange has enjoyed dramatic growth, but must now move from launch mode into the next stage of development – hence the flotation. With more subscribers will come more potential dangers. The distance between the company and the end user – it shuns service providers and deals directly with consumers – could grow; the development of other products may take attention away from the core service; and new shareholders demanding cost cuts and higher premiums might limit room for manoeuvre.
The flotation is not just a pivotal event for Orange and its two main shareholders – Hutchison Whampoa and British Aerospace – which will benefit directly through repaid debts of 650m. It is seminal for the whole industry, and not just in terms of knock-on share price revaluation. That a company, not yet two years old, in a market sector which the City has always been suspicious of, can be valued so highly is indicative of changing attitudes to the whole sector.
All the operators will launch their biggest marketing campaigns this year. Observers believe Cellnet and Vodafone will lose market share (see table); it is a question of by how much, and which rival will benefit.
For their part, the big players are conscious of the Orange factor. “In two years it has done a good job of launching a brand,” says Vodafone director of corporate communications Terry Barwick. “But I think some of its claims are ambitious.”
Top of Barwick’s “ambitious” list is Orange’s claim of 90 per cent coverage – central to its current poster advertising campaign. Orange claims its network covers 90 per cent of the population in the UK, but Barwick disputes its definition of “pop ulation”. As the two rivals are pre-paring to do battle in the law courts over Orange’s pre-Christmas comparative advertising campaign which claimed that the average customer could save 20 by switching to Orange – Barwick’s response is not surprising.
Orange dismisses Barwick’s concerns over the “90 per cent” issue as propaganda. But his counterpart at Cellnet, William Ostrom, is equally sceptical of where Orange goes from here.
“Its honeymoon period is over. It has taken full advantage of the opportunity to create marketing for a vertically integrated brand and the fast roll-out of its coverage. It had a price advantage, but that too has gone.
“Year-on-year growth in the market has plateaued and it will be up to Orange to find ways of taking its share of any fresh growth.”
Cellnet added 740,000 subscribers to its network last year, and has cut its price tariffs in line with Orange. Vodafone will introduce per-second billing and bundled airtime packages in April – the move could cost 20m per year in profits but it will bring its tariffs into line with Orange, which has consistently undercut the two majors by 30 per cent since its launch in April 1994.
The changes have sparked speculation about a price war; in fact the move to price parity was inevitable. It has served Orange very well but a price differential can only be a short-term marketing tactic.
Most observers believe its eradication signifies the industry is moving into a new phase, in which brand marketing will become a more prominent feature. Significantly, Orange has proved itself the most adroit in this area too.
A pre-flotation study from broker Hoare Govett identifies Orange’s competitive advantages as its emphasis on marketing, and ability to distribute without the need for service providers – middle men which prevent direct contact with consumers.
“In a situation where operators can match each other on quality, innovation and price, a successful marketing strategy can make a big difference to performance,” says the Hoare Govett document.
“The key difference has been to create direct dialogue with consumers,” says Orange group marketing director Lisa Gernon. “The marketing spend of Cellnet and Vodafone has to be pumped into promoting their distribution. We have created a different approach.”
Orange has invested heavily in a series of customer loyalty schemes and affinity marketing projects with the likes of Texaco, Shell and UCI Cinemas.
It will introduce “pick and mix” pricing later this year, allowing consumers to choose which price structure best suits their usage requirements and giving consumers a more accurate idea of how much they are likely to spend before they buy. And negotiations are well under way to introduce a branded credit card with the US bank MBNA (MW February 16).
It is also known to be investigating alternative means of boosting sales, including developing its Subscriber Identity Module (SIM) which acts as an Orange phonecard that can be used with any compatable handset. Along with its rivals it has also considered alternative retail outlets, ranging from department stores to supermarkets.
Although the rate of market growth has levelled out there is still plenty to play for. There is less than ten per cent market penetration of mobile phones. Analysts believe it will be closer to 25 per cent within four years – a potential market of 15 million users, almost 10 million more than today.
The flotation will coincide with the heaviest wave of marketing the sector has ever seen. Vodafone, the dominant player in the market, will treble its advertising spend to more than 15m this year, whereas Orange has been spending at those levels from day one.
Orange will launch a 6m spring campaign signalling its entry into the large business market. The campaign is expected to include a free connection offer for customers who sign up.
“The brand has been robust from its launch,” says one Orange insider. “While everybody else has been constantly changing their campaigns, we have stayed with the same imagery and simple messages. We will continue to do that.”
Mercury One2One will unveil a new campaign through Bartle Bogle Hegarty later this month, emphasising its shift toward the business community. Cellnet will launch press and poster support for its TV “lifestyles” campaign through Abbott Mead Vickers.BBDO, which was first aired last autumn. BMP DDB was hired in January to develop a 15m branded campaign, alongside Leopard, for Vodafone – the first work will break in April.
Ironically, most observers have attributed Vodafone’s improved advertising recall figures in January – 59 per cent according to Millward Brown research – to the Cellnet campaign. Vodafone did not run any campaigns for most of 1995 and has not executed a branding push for more than two years.
“If there are four operators and one of them spends it benefits them all, unless the advertising is highly branded and differentiated – only Orange has used that approach successfully,” says Hoare Govett telecommunications analyst Jim McCafferty. “The marketing spend has a positive effect, but it is only through product differentiation that the operators will grow.”
Cellnet has been criticised in the past for unfocused campaigns, shifting from “Netman” to Ronnie Corbett and John Cleese, to the lifestyles campaign. It accepts that much of its advertising has had a generic rather than a brand-specific impact.
Register-MEAL figures show the total market advertising spend in 1995 was 55.5m – down 3m on the previous year. But 1996 is already destined to be a record spending year – with estimates as high as 100m.
“One of the great strengths of the Orange campaign has been its consistency,” says Ostrom. “Vodafone has been relatively absent, Mercury One2One has gone from one campaign to another in search of inspiration and ours has been experimental. We will not spend less than 15m this year and that could increase with tactical campaigns.”
For the first time in three years that level of spend will be matched by Vodafone. “Spends will run at this level from here on in,” predicts Barwick. “Our brand has not been developed over the past two years while we have not been spending – awareness levels have dipped a little and it is now our job to bring them back.”
Prior to the arrival of Orange and Mercury One2One, Vodafone and Cellnet had a free run of the field – such a free run, in fact, that the Government insisted on greater competition. The official watchdog, Oftel, had a choice between offering fresh operating licences or regulating the two companies more tightly. It went for the licences.
The two still dominate, holding 86 per cent of the market. Both have more than 2.3 million subscribers and in market share terms Orange is a poor joint third with 400,000 – seven per cent. However, six months ago it was fourth with just 4.5 per cent.
The relative market shares illustrate the point that Orange is very much the upstart. But analysts estimate it will double its number of subscribers again to 800,000 this year and hit the 3-million mark by 2000. A Hoare Govett research model predicts that by the end of the decade Orange will have a 19 per cent share of subscribers with Cellnet and Vodafone on 33 and 34 per cent respectively.
That is lower than internal Orange targets, set a share of between 24 and 26 per cent. Orange hopes to capitalise on the big players’ need to translate analogue clients into digital ones, thereby destabilising their client base just as the situation becomes more predatory.
But not everything is rosy for Orange. Among the plaudits there remain reservations. The legal battle with Vodafone, the issue of number portability and the threat of a resurgent Mercury One2One – if it can get its act together and increase its coverage – are all on the minus side of analysts’ sheets.
Some argue the company will also have to be more responsive to its expanded shareholder base, which will expect the company to deliver reduced costs and eventually high dividends. “Its room for manoeuvre will be strictly limited and it may have to save costs to provide returns to its new shareholders,” says one analyst. “Costs to consumers could creep up.”
Two years ago, when WCRS coined the slogan, “the future is bright, the future is Orange”, it could only have fantasised about how appropriate the words would become. City watchers believe the company could be worth close to 5bn within five years.
But it will be the next two – during which the company will be expected to deliver its first profit – which determine just how bright that future is.