Ofcom CEO: Mobile Prices Could Rise If O2 And Three Merge

Sharon White, chief executive of Ofcom, has suggested the ongoing trend of consolidation in the UK communications market will harm competition and raise prices, raising fresh doubts on the proposed £10.25 billion merger of O2 and Three.

Hutchison Whampoa’s takeover bid is currently being reviewed by the European Commission (EC) and the UK Competitions and Market Authority (CMA) has asked for permission to investigate amid fears that the reduction of four mobile operators to three will significantly impact the market.

Hutchison is expected to argue that Three and O2 would not be able to compete with Vodafone and a combined BT-EE as standalone companies, but White said investment in the UK market had not been stifled by competition and that evidence from other countries suggested prices might rise.

Merger concerns

“Mobile operators argue that they need consolidation to boost revenues and increase efficiency,” said White. “They make the case that profit margins in the UK are too low, and that they need more scale to invest. They sometimes talk in terms of ‘market repair’, implying that the UK market has been too competitive. The companies also warn that a fragmented European sector makes it harder to compete against major players in the US.

“Consolidation can in theory have benefits – improving economies of scale and making it easier to finance investment. However, Ofcom’s experience is that competition, not consolidation, drives investment and delivers low prices. Our analysis of a dozen countries, inside the EU and beyond, shows no relationship between consolidation and investment.”

Similar mergers have been given European approval in recent times, most notably in Ireland and Austria, but another deal between TeliaSonera and Telenor in Denmark was rejected after remedies could not be agreed upon. In all cases, the proposed mergers reduced the number of operators from four to three and White said that since the 2013 merger between Three and Orange in Austria, mobile prices had risen by 28 percent.

Rising prices

“In regulating, Ofcom’s top priority is to ensure that consumers get the best possible deal,” she continued. “This means the best possible services, at the lowest possible prices that allow firms to make a fair return, so they can invest and pay out to their shareholders. In mobile, competition has been strong enough for us to avoid extensive regulation.

“Only when companies cannot make an adequate return – because competitive pressure is so intense – might we expect investment to suffer. The evidence suggests this is not the situation in the UK mobile market, which last year generated £15 billion of revenue.

“Even at a time when UK operators are investing billions to roll-out 4G, they are maintaining a healthy average cash flow margin of more than 12 per cent. We continue to believe that four operators is a competitive number that has delivered good results for consumers and sustainable returns for companies.”

“I am concerned that the UK could end up with more concentrated markets that lead to higher prices and reduced choice for consumers, without the promised boost to investment and innovation.”

Quad play fears

BT’s proposed takeover of EE is also being investigated by the CMA, but this is likely to be less controversial given BT’s limited influence in the retail mobile market. The main concerns with that deal or to do with backhaul and the loss of BT as a major new entrant. Ofcom has raised no significant concerns about that particular deal.

During her speech, White also said there were “unacceptable” barriers to communications services such as coverage and affordability and expressed her concerns about price increases imposed without an improvement to service. She also said the emergence of ‘quad-play’ packages might make it more difficult to switch provider.

“[Quad play] can bring convenience and lower prices for consumers, who can get everything they want in one bundle without having to take out different contracts with different providers,” she said. “But we are seeing evidence that customers are less likely to switch providers, which could dampen competitive pressure.”

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