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UPDATE EU Block Three UK and O2 Mobile Merger – A Concession Too Few

Posted Wednesday, May 11th, 2016 (11:49 am) by Mark Jackson (Score 1,499)
three uk mobile broadband

After several months of work the European Commission has today announced the outcome of their investigation into the proposed £10.25bn merger between Three UK (CK Hutchison Holdings) and rival mobile operator O2 (Telefonica), which blocks the deal.

A merger between Three UK and O2, which was first formally agreed in March 2015 (here), was always likely to attract a disdainful eye from the regulators because it would reduce the number of primary Mobile Network Operators (MNO) in the United Kingdom’s mobile telecoms market from four to three.

The Competition and Markets Authority and Ofcom were both concerned (here and here) about the prospect of only having three primary MNOs because it “threatens to significantly [affect] competition,” which they say could also result in less choice for consumers, damage the MVNO market and deliver higher prices. It would also upset two complex network sharing agreements (i.e. Vodafone shares with O2 and Three UK shares with EE).

Initially the only solution, said the UK regulators, was for Hutchison to effectively sell off part of their merged network and create a fourth operator (effectively re-making Three UK), but there’s been little significant interest in that idea from the market and Hutchison feels that such an approach would destroy the economic case for their merger.

By comparison Three UK and O2 saw the merger as a way to more effectively compete with Vodafone and BT (EE), with the latter two still holding the lion’s share of radio spectrum. Equally customers might benefit from improved network coverage, depending upon how the existing network sharing arrangements are managed. But in the end not even a bunch of big concessions were enough to sway the EC’s hand.

Margrethe Vestager, EC Commissioner for Competition Policy, said:

“We want the mobile telecoms sector to be competitive, so that consumers can enjoy innovative mobile services at fair prices and high network quality. The goal of EU merger control is to ensure that tie-ups do not weaken competition at the expense of consumers and businesses.

Allowing Hutchison to takeover O2 at the terms they proposed would have been bad for UK consumers and bad for the UK mobile sector. We had strong concerns that consumers would have had less choice finding a mobile package that suits their needs and paid more than without the deal. It would also have hampered innovation and the development of network infrastructure in the UK, which is a serious concern especially for fast moving markets. The remedies offered by Hutchison were not sufficient to prevent this.”

A merged O2 and Three UK might admittedly still have been left at a modest disadvantage given the lack of a significant fixed line business, which is something that rivals Vodafone and BT (EE) both hold. On the other hand this also makes a merged O2 and Three UK more attractive to fixed line ISPs, which wanted a strong MVNO alternative and preferably one that wasn’t also a direct competitor in the fixed line market.

In fact one of the biggest concessions offered by Hutchison would have given traditional MVNO customers greater access to their network and to prove that they even agreed two preliminary deals to share network capacity with Sky Broadband and Virgin Media (here), but those agreements were largely linked to the merger being approved.

Tom Mockridge, CEO of Virgin Media, recently said:

“Less than three months ago the CMA approved the merger of BT/EE, without remedies, despite concerns that this concentrated too much valuable spectrum in the hands of one provider. BT/EE now has 45% of total UK spectrum, including 60% of the higher frequency spectrum best-suited to 4G services, particularly in urban areas. In comparison Vodafone has 28% of UK spectrum, O2 has 15%, and Three has 12%.

This is the very reason it is now difficult to create a new, fourth mobile network operator. A combined O2/Three would provide a counter balance to the strength of BT/EE, offering an alternative source of capacity to other providers who will drive competition in their own right.”

In the end the EC ruled that nothing offered by Hutchison was able to “adequately address the Commission’s competition concerns“, such as with regards to any structural problems created by the disruption to the current network sharing agreements in the UK. The EC said they were also not capable of replacing the weakened competition in the retail and wholesale mobile telecoms markets as a result of the takeover.

Furthermore, the largely “behavioural measures” (concessions) apparently raised “significant uncertainty” as regards their effective implementation and monitoring, also because they were difficult to define precisely and some were depended on the agreement of others.

Even if the offers were taken up then the EC still felt that mobile virtual operators would have been “commercially and technically dependent on the merged entity, with limited ability or incentive to differentiate their offerings, including in terms of network quality.” Clearly Sky Broadband and Virgin Media didn’t mind.

Hutchison has previously pledged to take legal action if their deal is blocked, while in the meantime Telefonica UK will move to consider a possible float or sale of their O2 division. In the latter case both Liberty Global (Virgin Media) and Iliad SA (‘Free Mobile’ in France) have signalled that they might be interested.

UPDATE 12:47pm

The first reaction from Hutchison is in.

CK Hutchison Statement:

“We are deeply disappointed by the Commission’s Decision to prohibit the merger between Three UK and O2 UK. We will study the Commission’s Decision in detail and will be considering our options, including the possibility of a legal challenge.

We strongly believe that the merger would have brought major benefits to the UK, not only by unlocking £10 billion of private sector investment in the UK’s digital infrastructure but also by addressing the country’s coverage issues, enhancing network capacity, speeds and price competition for consumers and businesses across the country and dealing with the competition issues arising from the current significant imbalance in spectrum ownership between the UK’s MNOs.

CKHH will now focus on working with the Commission towards clearance of our proposed merger with Wind and 3 Italia and continue to pursue strategies to bring value to CK Hutchison Group.”

Elsewhere Internet Telephony Services Providers’ Association (ITSPA) has also chimed in.

Eli Katz, the Chair of ITSPA, stated:

“TSPA is pleased that the European Commission has blocked the O2/Three deal. We believe that, if the deal had gone ahead, it would have resulted in price rises, negatively impacting the consumers in the UK. ITSPA feels that a competitive landscape in the UK telecommunications market is vital to provide the best outcomes for consumers and businesses. A reduction from four to three mobile network operators would have threatened this.

We’re also pleased that one of ITSPA’s key concerns with the proposed merger was highlighted by the Commission as one of its top three reasons to block the deal. The Commission was right to state that merger would have resulted in fewer MNOs willing to host virtual operators, consequently the damage to the MVNO market would have hindered innovation and competition, resulting in negative outcomes for UK consumers. We are delighted that our concerns were taken into account and we hope that the UK mobile market can now become as competitive and innovative as it currently is for fixed telephony.”

Mind you, not everybody agrees with the ITSPA and NTT DATA UK adopts a different perspective.

Alastair Masson, Client Partner at NTT DATA UK, said:

“Europe’s competition commissioner, Margrethe Vestager, said she had strong concerns about the takeover reducing choice and raising prices. However, there are far bigger issues at play than simply preventing a reduction in consumer and business customer choice.

Following the approval of BT’s takeover of EE, and confirmation of its continued ownership of the Openreach infrastructure business, BT has disproportionate power over competitor services. Few competitors in the market can match BT for size, scope and spending power.

A combined O2 and Three represented an opportunity to restore some balance to the market at a time when BT’s influence has never been stronger. We, as a sector, lost that opportunity today. The EU’s decision is a short-sighted one that fails to take into account the wider needs of the marketplace. Namely, a viable competitor of comparable scale, as well as the need to maintain customer choice.

The sector needs a free market entity big enough to keep BT in check. Moreover, it needs a competitor capable of facing BT across several consumer and business-facing activities including mobile, fixed line and broadband. With Three’s acquisition of O2 shelved pending legal appeals, there is now a significant chance a counter-bidder will emerge. Either from one of O2’s existing MVNO customers looking to protect their position, or an overseas entrant that could use O2 as a platform for rapid UK and European expansion.”

Finally, we have the reaction from TalkTalk.

Dido Harding, CEO of TalkTalk, said:

“This is the right outcome for UK mobile customers. We were always clear that going from four mobile networks to three would have meant higher prices and less competition, so it’s reassuring to see competition regulators standing firmly on the side of consumers. We have long argued, as the Commission have again this morning, that innovation and improvement in service quality stems from more competition, not less. We hope that the UK regulators will take an equally robust approach to the significant competition issues that have been identified here around the future of Openreach.”

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13 Responses
  1. M

    There has been “less choice” (no competition in my opinion) for years now since Three is the only service provider with the testosterone to offer virtually unlimited tariffs and all the other operators are too stingy to compete. Three have already increased (effectively doubled) prices for most people because they know there is no viable alternative to their tariffs for those who do not want to be literally threatened by extra charges after looking at few webpages, or watching a single HD YouTube video. The merger would have removed one of these stingy operators out of the market and made the other operators realise they need to move forward ten years to 2016.

    • Mike

      Exactly and had this gone through I would of got 4G.

      Another option not mentioned in the article was Three pulling out of the UK.

  2. Chris P

    So Orange & T-Mobile merging was where it all went wrong and should never had been allowed?

  3. dragoneast

    “we hope that the UK mobile market can now become as competitive and innovative as it currently is for fixed telephony”

    ???

    Down to BT, then. Says it all really.

    • dragoneast

      You’ve gotta love those lawyers though. Preserving the status quo counts as innovation.

  4. apolloa

    Love it, a politically driven telecoms regulator in the UK that isn’t really independent, the political elite MP’s are in BT’s pockets and as a result in Open Reach pockets, BT can do what ever it likes, it can create an even bigger monopoly then it already has by buying EE.
    But when it comes to the competition the EU, NOT the UK rule no! The UK’s communications market is the most corrupt biased non competitive one I know of in the modern world.

  5. dragoneast

    It looks to me much like an argument written to fit a conclusion. Difficult to follow from any evidence base. However the benefit is it likely will stand up to judicial scrutiny as it’s internally consistent. (It’s a trick I’ve used myself in the past). It’s got every buzz word going. The trouble is all that doesn’t necessarily make it right.

    I just have the feeling that the EU Commissioners are like modern King Canutes, trying to hold back the tide of progress. Not that I think things would be any different with the British Establishment. Probably even worse.

  6. Pete Woods

    Dammit. Was hoping to get improved coverage on Three’s network. Don’t really want to have to switch to EE due to their prices for data and regressive roaming policies (having to mess about with “travel passes”).

  7. finaldest

    So the incumbent gets favouritism. AGAIN.

    So I guess I am stuck with BT/EE then as I wont go back to Vodafone ever again.

    3 and O2 are currently not a viable option for me but would have been if allowed to merge due to improved coverage as a result.

    So much for competition then.

    • FibreFred

      I love how it’s always BT’s fault 🙂

    • dragoneast

      No, but BT do seem to be extremely clever at playing the Regulation game. After all, it’s not as though they lack enough experience. We could argue that Three just weren’t quick or savvy enough to read between the lines, and took the consequences. As for the consumers, I still suspect we are pawns in this game. Maybe the State will pick up the coverage bill again as it did with BDUK and fixed broadband, after all it’s not as though they haven’t made enough money out of telecoms?

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