By Alastair Masson, Client Partner at NTT DATA
With BT’s acquisition of EE formally blessed by competition authorities, attention has now turned back to the other big mobile phone deal looming over the industry – the acquisition of O2’s UK operations by CK Hutchison’s Three.
This deal, first announced in March 2015, involves the smallest of the UK’s network operators by market share buying the second largest, creating a combined entity with around 40 percent of the market, overtaking current leader EE.
At the most superficial level, this deal will further reduce the number of physical mobile carriers in the UK from four to three (rather apt really), leaving Three, EE, Vodafone and a handful of MVNOs as the remains of the UK’s mobile industry.
However, there are far bigger issues at play here than simply a reduction in consumer and business customer choice.
With BT’s takeover of EE complete, and no signs that it will be required to divest its Openreach infrastructure subsidiary any time soon, it poses an unchallengeable competition obstacle for the rest of the UK telecoms sector, as well as international competitors looking to enter the market.
For this reason, a combined O2/Three represents an opportunity to restore some balance to the market (a point that Three itself is making very clear to regulators).
It would create a free market entity big enough to keep BT in check across several consumer and business-facing activities including mobile, fixed line and broadband.
Unfortunately, depending on which news reports you choose to read, things are not looking promising for Three’s acquisition plans.
There’s a very real chance the deal will be scuppered.
Both UK and European competition regulators are not enthusiastic about the deal.
The final say is expected from Europe in mid to late April.
Ofcom has also been critical, raising concerns about prices, reseller agreements, consumer choice and investment in services.
The regulator has taken a relatively pragmatic approach in the recent 10-year digital communications review, stopping short of a break-up of BT Group and Openreach.
That is fine if the Three/O2 deal goes ahead, as it will create a large player capable of competing with BT without having to move towards a forced and full demerger of Openreach.
If the deal is blocked, a deeper look at the level of influence BT has over the outcomes of its fixed line and mobile competitors will need to take place.
So if the deal fails, what are the options for O2?
Its parent company is keen to realise a return on its investment in order to invest elsewhere and pay down debt, hence its desire to exit the UK.
One option is to float O2, setting a market value and allowing for a longer-term disposal of the asset.
A trade sale to a non-competing service provider, like EE’s takeover by BT, would nullify the current regulatory concerns.
Another is to embrace some of its MVNO partners.
Sky is readying a launch of its own MVNO running on O2’s network.
While it doesn’t have the appetite to wholly own a physical network, owning a stake in one to protect its MVNO investment and aspirations makes sense.
The same applies to other triple and quad-play service providers such as TalkTalk that currently rely on MVNO relationships with little or no long-term stake in network development.
Selling small stakes would allow Telefónica to release some short-term cash-flow, while also establishing a market value for the UK business.
There is of course the prospect of an overseas stalking horse.
A US mobile carrier or cable operator could use an established UK mobile network with plenty of capacity and nearly a third of the market as the basis for a wider assault on the UK market.
It is a ready-made platform for launching triple and quad-play services, or even over-the-top (OTT) streaming offerings.
Despite the cold regulatory response to its proposed deal, Three has made overtures to woo Ofcom and other detractors.
It has promised a five-year price freeze post-takeover, a valuable and potentially huge concession to customers given the six percent price inflation we are seeing in fixed line charges alone.
The move is an effort to alleviate concerns that it will increase customer charges sharply in order to start recouping its outlay.
It has also committed to a £5 billion investment programme (more than the two companies planned to spend separately and surely good for universally high[-er] speed broadband access) and committed to opening its unused capacity to more MVNO players in an effort to stimulate competition.
Nonetheless, these promises may not be enough to win over sceptical regulators and create the counterbalance to a reinvigorated and strengthened BT.