LSE Analyst – BT and EE Merger May Entice Ofcom to Split Openreach

A researcher for the London School of Economics (LSE) has warned that the recently approved £12.5bn merger between fixed line telecoms giant BT and mobile operator EE may “change the competitive balance of the UK communications landscape” and challenge Ofcom’s approach to regulation.

The merger was officially cleared last week after both Ofcom and the Competition and Markets Authority (CMA) effectively ruled that it would not negatively harm competition in the either the United Kingdom’s mobile or fixed line broadband markets.

In fairness, few expected the deal to be stopped because of the limited overlap between the two different businesses (BT is fixed line / EE is mobile). Never the less some were surprised when the final deal was waved through without any significant concessions being attached.

According to Tom Evens, Senior Researcher at the University of Ghent and Visiting Fellow at LSE, the argument made by Ofcom and the CMA that the merger will not harm competition, and therefore will not affect consumers, is “questionable“.

Evens notes that the enlarged footprint will put BT in a “very strong position in both the broadband and mobile market“, with 40% of revenues for fixed and mobile revenues sold to consumers and up to 70% of the wholesale market. This in turn may also give them a lead in the emerging market for quad-play bundles etc.

Tom Evens said:

“BT is determined to conquer the market for bundled services, where households take all services – broadband, mobile, TV and phone – from a single provider, and raise revenues by selling convenient, yet more expensive, bundles to its consumers. More importantly, BT is able to pursue this bundling strategy independently and run all services over its own network.

This is a huge competitive advantage, both strategically and financially, compared to BT’s main rivals Sky, Virgin, Vodafone and TalkTalk who all depend on Spectrum and/or wholesale access from another network provider, which in most cases is BT.”

Admittedly what Ofcom actually said was that many of the concerns could be tackled through their existing regulation, not least via the as yet uncertain outcome of their on-going Strategic Review (here) and the earlier Dark Fibre proposal (here).

“We believe the current and future proposed regulation that we apply to BT will limit BT’s ability to discriminate over price, quality and innovation in the provision of leased lines,” said Ofcom in last year’s submission to the CMA. The regulator also pointed specifically to their plans for regulated Dark Fibre access, which they said would, “limit any potential attempts to discriminate over product innovation in mobile backhaul.”

However some analysts have recently suggested that BT’s merger with EE may also add weight to the argument for BT to be split from control of their national UK phone and broadband network (Openreach), which is currently being “seriously considered” as part of Ofcom’s review. Indeed Evens appears to agree with this.

Tom Evens added:

“It is vital for the UK communications industry that other operators retain access to EE’s mobile infrastructure, based on reasonable and non-discriminatory terms, in order to promote competition in the mobile market. Not only is wholesale access crucial for bundled service competition, but mobile virtual network operators have historically been new challengers in the market, devising new business models and/or introducing competitive pricing to consumers. However, the regulator’s new approach may include structural remedies that go further than the existing wholesale remedies.

The merger might influence Ofcom’s decision about the future of BT’s Openreach, which grants broadband access to most of BT’s competitors. Now that BT becomes the only operator in the UK market that controls both fixed and mobile infrastructure, Ofcom could propose remedies that prevent BT’s competitors from becoming overly dependent on the goodwill of a dominant operator that controls the gateways to consumers and businesses.

Against this backdrop, there might be a strong argument from the regulator to separate Openreach from BT.”

The regulator is widely expected to announce its preliminary decisions next month, which may or may not reshape the current broadband and phone market. Right now the only certainty is that Ofcom won’t maintain the status quo, which means that change is inevitable.. but how much change.