Analysis: Vodafone and T-Mobile

Speculation that Vodafone, the UK’s second biggest-mobile operator, is looking to snap up rival T-Mobile, if it comes true, could see a dramatic shift in the balance of power in the telecoms landscape.

T Mobile flashmob advert

If any such deal does go ahead the initial result would see Vodafone leapfrog market leader, the Telefonica-owned O2, to take the number one spot.

Currently, O2 has a market share of 27%, followed by Vodafone with 25%, then Orange with 22% and the Deutsche Telekom-owned T-Mobile with 15%.

A company owning 40% of the market would surely raise the eyebrows of the regulator, Ofcom, which has been both vocal and active about ensuring that the UK is one the most competitive mobile markets in the world from a regulatory perspective.

This is not to say however that Vodafone doesn’t have a few arrows to fire in its defence. Ovum senior analyst Steven Hartley points out there are other countries in Europe, such as Spain, which quite happily operate with players with a 40% market share.

Also, unlike the struggling automotive and financial services industries which have been lining up at the Government’s door with their begging bowls, the telecoms companies have so far managed to deal with year-on-year revenue losses themselves.

“So there’s a certain amount of good grace floating around to push a possible merger through. Vodafone is also a UK company which could work in its favour. The scenario ticks many boxes,” Hartley says.

Vodafone posted a pre-tax profit fall of 53.5% to £4.2bn in 2008 compared to £9bn a year earlier. It is now also accelerating its £1bn cost-cutting plan in response to the weakening European market.

With this in mind there are questions being raised about whether buying T-Mobile would be the best strategy for Vodafone – in the short-term – given how much its revenues have already been hit by the economic downturn.

Also, in the case of T-Mobile, it has only recently installed new executives, including the appointment of Srini Gopalan, formerly Capital One Bank Europe MD, to the new role of chief marketing officer

“As a company it’s [T-Mobile] not actually doing too badly. It still has around three times the market share of 3 [owned by Hutchison Whampoa] and if you were to look at which player would exit the market I would still say 3,” Hartley says.

“It’s only just gotten a new management team. It makes sense for them [Deutsche Telekom] to at least give them a chance to turn it around.”

He adds that is it not so much about what T-Mobile has done so disastrously wrong that has led to its underperformance, but is perhaps more to do with not having enough “stand out” in its communications.

Future Brand marketing director, Tim Hill, says there has been a perception that T-Mobile was “never really sure what their brand was about”.

“If you try to capture its essence in one sentence or a word, it’s hard to say. I would struggle to even try to define it,” Hill says.

This year the mobile operator increased its marketing spend by 15% to over £115m and launched a high-profile campaign, “Dance”, which saw a flash mob staged at Liverpool Street tube station. This was followed up with a mass karaoke session at Trafalgar Square.

Its agency Saatchi & Saatchi was awarded a Gold last week in the Direct Lions category for “Dance” at the Cannes Lion international advertising awards.

“T-Mobile do good, funny [ad] campaigns, but then I would say so does Orange. T-Mobile doesn’t have a core essence or it’s not consistently communicated,” Hill says.

He adds that Vodafone is not necessarily in the best brand position itself. While it may have high brand awareness, owing to its size, brand perception is a different matter.
It most recently launched a new campaign created by Bartle Bogle Hegarty, with one execution showing a mechanic miming to the song “If I Ruled the World”.

Hill says: “Familiarity unfortunately can often cause consumers to think it’s a bit boring. It’s so large and always in your face either on a poster or on your screens.

“Its products are not boring, but its image is so large it becomes connected with being staid and dull.”

But according to a YouGov survey, Vodafone still manages to generate “Buzz” around the brand. In late January, the Buzz, a measure of whether people had heard positive or negative statements about the brand, stood at 2.2 but by last week had seen a dramatic rise, recording 6.3 points on June 26. It also scores consistently high in customer satisfaction, moving between 5.5 points to over eight points so far this year.

In contrast, the “buzz” around the T-Mobile brand stood at 1.4 points on June 26 and its satisfaction rating was 3.9 points on that same date, though was still higher than the three points recorded on May 8.

It remains to be seen how serious the discussions are between the two mobile operators, though T-Mobile owner Deutsche Telekom has brought in JPMorgan to assess the future viability of the UK business which is estimated to have an enterprise value of £2.5bn-£3.4bn.

But one name that has hardly yet featured in this whole affair so far has been 3, which has a 3G network sharing deal with T-Mobile.

The Deutsche Telekom-owned company’s sale to Vodafone would in theory see the latter owning that relationship. Vodafone already has a network sharing deal with O2. Significantly, such a deal would then see Vodafone, 3, O2 and T-Mobile all on the same network sharing deal, with only Orange operating in isolation.

This is a situation not likely to gain favour with 3. As Hartley says: “That would make 3 squeal. They’re already good at squealing at the competition. I can’t see that they’d be very happy about this at all.”

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