Ofcom Warns of 20 Percent Price Hike from Three UK and O2 Merger

The regulator has published an “econometric analysis” of the effect of disruptive firms (e.g. Three UK) on mobile pricing, which among other things suggests that the proposed £10.25bn merger between Three UK and O2 could result in consumer prices going up by between 17.2% and 20.5% on average.

The results, which examined mobile prices across 25 countries (from 2010 to 2015) and concluded that disruptive firms reduce overall prices in the markets in which they operate, play into Ofcom’s seemingly unshakable belief that the United Kingdom must have four primary Mobile Network Operators (MNO) in order to deliver the best market flexibility, competition and thus lower prices.

Extract from the Report

Combining the two sets of confidence intervals indicates that prices could be between 17.2% and 20.5% lower on average in countries where there are four or more mobile operators AND a disruptive firm is in the market. By implication, this may suggest that removing a disruptive player from a four player market (as is proposed in the H3G/O2 merger in the UK) could increase prices by between 17.2% and 20.5% on average, all else being equal.

The proposed merger could also cause problems in other areas, such as for the network sharing agreements that already exist between operators (e.g. Three UK shares with EE (BT) and Vodafone shares with O2).

But the flip side of this argument is that O2 and Three UK may struggle to compete with the big boys of BT (EE) and Vodafone unless they merge. Meanwhile subscribers might also benefit from improved network coverage, depending upon how the existing network sharing arrangements are managed.

Ofcom’s report also overlooks the recent pledges by CK Hutchison Holdings, Three UK’s parent, which promised to open up more of their network for use my MVNO’s, boost investment and to keep prices at the current level or lower for the next 5 years (here).

Perhaps the argument should focus on more than just price, particularly with BT now having so much combined power over both mobile and fixed line communications.