Home » Exam preparation » Banking » Orange no longer banking on telecoms for growth

Orange no longer banking on telecoms for growth

Image result for Orange no longer banking on telecoms for growth

Stéphane Richard, Orange chief executive, addressed a press conference on its strategy on July 11 © AFP

In a sign that the French telecoms scene is stagnating in terms of growth and consolidation opportunities, Stéphane Richard, chief executive of its biggest operator, is banking on another industry to boost earnings: financial services.

Later this year, Orange will roll out an online bank that seeks to take advantage of new legislation making it easier for consumers to change their provider. Mr Richard says the new venture “is based on a belief that in our core business — which is providing connectivity services both in fixed and mobile — it would be very difficult in coming years to find growth, because we are in a business which is highly regulated and highly competitive.”

Orange increased revenues by just 0.6 per cent last year, after they fell 0.1 per cent in 2015 and dropped 2.5 per cent in 2014.

The financial services launch has been postponed from July in order to prolong the testing phase. The idea is that it will be a full-service bank, offering consumers everything from payment services to insurance and savings. But analysts are sceptical that it can have much of an influence on the bottom line.

”I think it’s quite a good sideline, but I don’t think it will ever be that big for them,” says Simon Weedon, an analyst at Citigroup. “Banking probably doesn’t have the inherent stickiness for the core product that cross-product sales within telecoms do.”

The move into banking comes as Orange continues to face fierce competition from telecoms rivals in its domestic market, where repeated attempts at pushing through consolidation have failed. Mr Richard, a long-time advocate of fewer players in the French telecoms sector, now believes that any deals are off the table in the short term.

He says: “The authorities are against it, President Macron is not a big fan of consolidation,” and, predominantly, “each of the players that could enter into a consolidation game today have a different agenda.”

Share this chart

Performance at Bouygues, which Orange was going to buy for €10bn in cash and shares in April last year, has picked up — taking pressure off it to sell. Mr Richard says: “The only deal that might be imagined in France . . . will be between Bouygues and Altice, and this seems to be very unlikely to happen.”

As consolidation has floundered, competition among telecoms providers has turned to a new battleground: content. They are investing in it as a way of differentiating themselves in their push to add and retain clients, and increase average revenue per user.

Altice, the second largest operator, has been spending a fortune, including snapping up rights for the Uefa Champions League and Europa League for the 2018 to 2021 seasons. For its part, Orange has been more cautious. It announced this month it had strengthened its commercial ties with Vivendi’s pay-TV unit CanalPlus — stopping short of buying the stake in CanalPlus that had been previously mooted.

Mr Richard says: “I am still sceptical about the value that a telco can really create from massive investments in content, especially when it is about buying sports rights at extravagant prices. Because what we see today is a bubble and is an incredible inflation of prices in sports rights.”

He adds: “The money that you put on content, you cannot put it on networks. Either you invest massively in fibre to the home, or you invest massively in the content. We have made a clear choice to focus our investments into the networks.”

Last month, analysts at Berenberg downgraded Orange to sell from hold, noting that “competition on the French telecoms market is fierce and consolidation hopes have faded”. The note said that rivals Bouygues and Iliad have “higher growth prospects” while “Orange faces structural issues in its B2C, B2B and wholesale businesses in France that only consolidation and a complete reconfiguration of the cost base could ultimately address.”

Another challenge has been Orange’s stake in BT, whose share price is at its lowest level since 2013, following an accounting scandal in Italy and a subsequent profit warning in January, combined with falling demand in the public sector.

Orange announced last month it would be cutting its exposure to BT, where it owns a stake following the sale in 2014 of EE, the mobile operator that was co-owned by the French group.

“We are disappointed about the share price and upset about the troubles and the operational troubles at BT, especially in Italy, but also in the B2B business globally,” says Mr Richard.

“But at the same time, I think BT is a solid company, has great assets and should recover.”

Orange and Mr Richard face uncertainty regarding the role of the French state in the company. President Macron indicated during his election campaign he may look to sell down government stakes in companies, while Mr Richard’s position as effectively one of France’s most senior public servants comes up for potential renewal next year.

He has had seven years as CEO, but says around 10 are needed to “implement real change and transformation”. And he views any state divestment as more likely in the medium rather than short term.

“For a state to be, at the same time, the regulator, the industrial organiser and a shareholder of one of the players, it’s always difficult,” he says.



Leave a Reply

Your email address will not be published. Required fields are marked *