What Impact Will Three-O2 Merger Have On UK Mobile Market?

The latest chapter in the ongoing consolidation and convergence in the UK telecoms market could see Three and O2 join forces to take on Vodafone, EE and BT, TalkTalk and Virgin Media, as well as Sky, which is believed to harbour mobile ambitions of its own.

Ofcom engineered the auction of 4G spectrum in such a way that four operators would be able to operate and has boasted that the UK mobile market is among the most competitive in the world.

But if the deal is completed, the number of mobile networks will be reduced from four to three, although a number of Mobile Virtual Network Operators (MVNOs), including TalkTalk and Virgin Media, will still exist.

What impact will this development have on consumers, businesses and on communications in the UK? We asked three mobile industry observers what they thought of the potential merger.

Matthew Howett, Principal Analyst, Regulation at Ovum

“The biggest concern will be the impact on consumers, particularly at the lower end of the market– a segment Three has catered to very well. While consolidation is being encouraged and similar deals have been approved in Ireland and Germany, sceptics are likely to point to what is currently happening in Austria, where Three also acquired a rival. Recent research suggests that since that transaction, prices have been rising – and the hardest hit have been customers on low-cost monthly tariffs.

“Ofcom has fought tirelessly of late to preserve the four-player market structure, and has particularly valued Three’s disruptive nature and innovation around tariffs. At one point the auction of 4G mobile spectrum nearly didn’t happen because of in-fighting around the rules to ensure that all four operators emerged with enough spectrum to be ‘credible nationwide operators.’

“However, this time it won’t be Ofcom that has the final say. If the deal concludes, EC competition authorities will take control. In other markets, such as Germany and Ireland where we have seen similar consolidation recently, the EC has focused its attention on two main areas: spectrum holdings and MVNO access.

“A combined Three & O2 would result in a concentration of the lower frequency spectrum (ideal for providing coverage), yet would have no higher frequency spectrum at 2.6GHz, which is needed for capacity given consumers’ insatiable appetite for data. Interestingly, a merged BT & EE would have the lion’s share of that higher frequency spectrum and, as part of that transaction, would also likely have to give up some of the airwaves. By mandating MVNO access, the EC will hope to strengthen and maintain competition between the main network operators, and may even be keen to see Three & O2 guarantee a certain amount of network capacity to newcomers. Other recent developments in the UK market suggest that Sky could be an interested party here.

Imran Choudhary, consumer insight director at Kantar Worldpanel

“If the BT and EE quad play deal prove successful, analysts could expect another acquisition from Three and O2 in the future; the provider currently has no pay TV or broadband offer where EE offers a full quad play service.  Suppliers like TalkTalk and Virgin Media would be a good fit but are also potential targets for Vodafone which is now in greater need of a partnership than anyone else out there.

“British consumers will have fewer providers to choose from in future, although in the short term this could lead to value-for-money propositions and impressive deals as the new providers compete for market share.  Longer term, however, a smaller number of big players may make the pricing less competitive.”

Dominic Baliszewski, telecoms expert at broadbandchoices

“Taking a wider view beyond this deal – should BT and EE complete their buyout, Sky will be the last major communications provider without a mobile offering and now O2 and EE are both off the table to purchase. If Sky seeks to redress this balance, potentially through a deal with Vodafone, 2015 will be the year that completely changes the landscape of UK communications services.

“When the dust has settled, customers need to be sure they are the ones getting the best terms from these mergers and be ready to switch if necessary. O2 and Three customers do not need to do anything now except keep a close eye on any emails or letters from their provider. We would be surprised if any changes were made to prices or service terms immediately.

“One point that may reassure customers is how Three have typically offered low prices and generous allowances in comparison to their competitors. Make no mistake, mobile data is where the growth lies so we will be watching closely to see if Three’s generous data terms (including unlimited data deals and free roaming in many countries) are altered in the coming months.”

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