The European Commission has blocked the consolidation of the UK mobile market, rejecting the proposed merger of the number four, 3 UK, and the number two mobile player, O2. The EC believes that competition would suffer if the UK became a three-player market. Both the UK regulator, Ofcom, and the UK Competition Authority (CMA) were against the proposed merger, and given the EC's earlier comments, the actual decision does not come as a surprise. In the long run though, the drive for consolidation is unlikely to be over.
Alongside a fear of higher prices, the EC was worried that a reduction to three players would slow the development of mobile network infrastructure in the UK and reduce access for MVNOs to host networks. The merged entity would have been part of both network-sharing arrangements in the UK, MBNL and Beacon, as 3 UK already cooperates with EE and O2 works with Vodafone. Unraveling these relationships could set back network development for years.
The EC said its analysis pointed to a likely increase in prices for consumers if the market was reduced to three operators. Our analysis suggests the UK market is already highly competitive. In addition to four operators, numerous MVNOs are active. Telecompaper’s recent EU Benchmark report shows a decline in some prices in the UK; for one of the more popular plans, with at least 1,000 minutes and 2GB or more per month, Sim-only prices have come down in the UK over the past two years. While the impact of one less operator is difficult to predict, the EC’s fears appear to be slightly exaggerated considering the current market features, especially as Hutchison had agreed to a price freeze for five years as well offering a guaranteed part of its network to MVNOs.
As our recent analysis of the UK mobile market showed, the UK mobile market is performing better than most others in Europe, and it will do Telefonica no harm to hang on to O2 for a while longer. In the longer term, it is clear though that mobile operators will need to find new revenue streams once the impetus from increased data usage thanks to 4G networks lessens. Furthermore, Telefonica’s strategy is centred on Latin America and the company needed the O2 sale for debt reduction, so the Spanish group is unlikely to let go of the idea of selling O2.
We believe that Liberty Global is the most likely candidate to buy O2. It already owns Virgin Media in the UK, which offers a quad-play via its cable network and a wholesale deal with EE. Liberty Global has recently shifted strategy and acknowledged it needs more than MVNOs to offer converged services. In addition to buying the mobile operator Base in Belgium, it’s pursuing a joint venture with Vodafone in the Netherlands. A merger of Virgin Media with O2 would create a worthy competitor to the newly formed BT/EE.
The situation becomes more complicated for 3 UK however. We don’t believe that Hutchinson has any intention of exiting the UK market, but as the smallest mobile player it is unlikely to be able to survive in the long term in a competitive market. 3 UK has always been a challenger and is likely to refocus on gaining customers and increasing ARPU in the near future by offering cheap(er) prices and extra services. It could also look at buying out some of the larger MNVOs to increase its customer base.
Ultimately 3 will need access to a fixed network in order to compete with the converged competitors, such as BT/EE and possibly Virgin/Liberty. We believe that the only likely candidate is TalkTalk, which has close to a fifth of the UK broadband market. Although there are some regional fixed players left in the UK, there are no other nationwide fixed operators. TalkTalk is already offering mobile as a MVNO. Such a deal is likely to face less opposition from the EC as it entails a mostly fixed player with a mobile player, and would keep the number of mobile operators at four.
