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UPD Last Ditch Warning – Ofcom Tell EU to Reject O2 and Three UK Merger

Monday, February 1st, 2016 (9:33 am) - Score 1,326

The CEO of UK telecoms regulator Ofcom, Sharon White, has made one last ditch attempt to block the merger of mobile operators O2 and Three UK by calling on the European Commission’s competition regulator, which has the final say, not to ignore the serious competition concerns.

The EC’s competition regulator is this week due to decide whether or not to allow O2 and Three UK to merge as part of a £10.25bn deal that was agreed between parents Telefonica and Hutchison Whampoa last March 2015 (here).

All of the major regulators have “significant” concerns with the deal, not least with regards to the way that it would shrink the number of primary mobile operators in the market from four to three and thus negatively impact competition (this could result in higher prices for consumers and less MVNO choice etc.).

The deal would also cause problems for the network sharing agreements that already exist between operators (e.g. Three UK shares with EE (BT) and Vodafone shares with O2 etc.), which could be very difficult to re-organise. Furthermore Ofcom has concerns about the impact upon high-street stores and the threat to independent retailers by a bigger group.

Sharon White, CEO of Ofcom, said (FT Letter):

“[We aim to maintain progress] through competition. So we are concerned that the smallest mobile network, Three proposes to become the biggest by acquiring its rival, O2. The combined group would control more than four in 10 mobile connections.

This follows a pattern of mobile mergers in Austria, Ireland and Germany. Like those countries, the UK would be left with just three networks. Some argue that operators must consolidate in order to boost revenues, increase efficiency and widen their scale to invest.

But this is not a broken market. Last year, UK mobile companies generated £15bn of revenue. They have been investing billions to roll out 4G technology, while maintaining cash flow margins above 12 per cent. Competition, not consolidation, has driven investment.”

On the flip side Three UK and O2 see the deal 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 and not forgetting their significant fixed line infrastructures (something that both Three UK and O2 lack). Equally customers might benefit from improved network coverage, depending upon how the existing network sharing arrangements are managed.

Never the less many observers predict that the EC might not outright block the merger, although they would almost certainly attach significant concessions to such a deal and ordinarily that would be enough to stop it. But Ofcom are concerned that Three UK’s parent might press forward with the deal even if faced with such concessions (they’ve said as much in public), which could force the regulator into trying to build a new fourth operator (not easy and very expensive).

UPDATE 12:11pm

Just added a comment from IT services provider NTT Data below.

Alastair Masson, Client Partner at NTT Data, told ISPreview.co.uk:

“Measuring competition is not as simple adding up and taking away. Despite the Three and O2 deal resulting in one less mobile network, there are much wider implications that seem to be missing from Ofcom’s anachronistic warnings around competition. The market must be viewed as one ecosystem where the actions of one provider creates a domino effect onto another.

As more consumers move towards the temptations of triple and quadplay, the size and reach of BT is where concerns over competition should be channelled. The Three and O2 deal, if it goes ahead, is a mere blip on the radar in a market where BT is increasingly ruling the roost across integrated communications and media.

A positive step forward for the industry would be to approve the Three and O2 deal. This could help create a business that is better equipped to support a minimum service obligation for broadband, alongside BT. Ultimately, the aim must be to remaster the market with the consumer in mind and this could be a positive first move.”

We note with interest the remark about supporting a new USO at the end, which suggests that NTT Data expect mobile operators to play a part in the currently Government proposal for a 10Mbps Universal Service Obligation (USO).

The inherent problem with mobile is of course that related signals can be affected by all sorts of things and the user is always moving, which makes adhering to a 10Mbps USO rather difficult unless the rule itself is softened.

Leave a Comment
20 Responses
  1. Avatar Michael V says:

    Get out the way Ofcom. Allow Three to buy O2 & merge it into their network

  2. Avatar Ignition says:

    Thank you, Mark. Joined the other voices commenting on the article putting the boot into our ‘wonderful’ regulator.

  3. Avatar Ignition says:

    Few things say how marvellous our mobile market is more clearly than that Deutsche Telekom and France Telecom have exited the market, and Telefonica want out.

  4. Avatar SpencerUk says:

    Telefonica don’t want to be in the UK market. Three is offering them an exit. Makes sense to me.

  5. Avatar dragoneast says:

    Ms White seems to have gone native quickly, rehashing Ofcom’s traditional complacency and self-satisfaction. “We’re doing quite all right as we are, thank you”. I’m not quite so sure. When I look around, sure mobile has steadily improved in central London, and perhaps the mets; but in general those areas that lacked or had poor mobile coverage a decade ago, often still do today. It’s patchy. It’s hard to think of anything the regulator could do that’d harm mobile where the commercial successes are, but it seems to do precious little for the rest of the country. (On the other hand perhaps the Government have given the best shot in the arm to rural broadband in awarding the successor contract to the Airwave emergency service to existing operator EE, hardly increasing competition, though).

    We are pleased that we have lots of outlets selling mobiles (though it hasn’t stopped a few of them going bust); a fat lot of use if you can’t use them. As for tariffs, they seem to me to increasingly become much the same. Past comparisons are fine, but they’re not a prediction, and it depends what period you look at. Recent history might paint a different picture. Markets mature and change over time. Are Ofcom stuck in a time warp? You don’t keep your adolescent in nappies (tempting as it may be, sometimes). It all reminds me of Animal Farm. The pigs all recited the same mantra “more [competition] is better than less”. It doesn’t necessarily make it right all the time. Personally I’d like to see a bit more reasoned argument and rather less zealotry.

  6. Avatar Vanburen says:

    I don’t think going down to 3 primary mobile operators would be necessarily bad for customers, as long as the compete properly. In fact it it is more efficient, as it seems redundant to have multiple operators deploying networks covering the same areas.

    I think the best way to ensure competition, would be to separate the mobile infrastructure from the consuming facing networks e.g. split the infrastructure component from primary mobile operators (e.g. Vodafone), so Vodafone becomes an MVNO. In this way every consumer facing network is an MVNO, and the three infrastructure suppliers compete for the business of the MVNO’s.

    I’m not sure if this is actually possible to implement in reality, but I think it would be interesting to see how it would affect the market. It could hopefully lead to the best of both worlds, where MVNO’s focus on customer service and the infrastructure players focus on things like coverage and reliability.

  7. Avatar Chris says:

    OFCOM should not have let T-Mobile & Orange merge if they are now concerned about lack of competition of Three & O2 merge.

  8. Avatar dragoneast says:

    I thought that O2’s spectrum obligation carried OFCOMs “98% coverage obligation”? If Telefonica want out (which presumably means they won’t “honour” it) and OFCOM rule out a merger which would transfer it to Three, who do they expect to take on the obligation? Or have they given up on their single attempt to improve coverage across the country? Not that it was worth much anyway. Credit to Ofcom, the consumer is never far from their lips, but lip-service is about as far as it gets.

    1. Avatar MikeW says:

      Coverage is easy… A few tall masts, running at high power with limited spectrum. But, with high demand, no-one will actually be able to use it.

      It is far harder getting high coverage at the same time as high capacity – many masts, lower power, more spectrum, reused more densely. Much more backhaul.

      Three’s coverage maps showed this last year, when they turned on 800Mhz coverage for a few types of mobile. The additional coverage it gained could be traced back, by the appearance of spoke-patterns, to relatively few transceivers – especially in the north.

      If the merger doesn’t go through, expect o2 to go for the cheap option. And Ofcom to buy it, because they only care about cheap. Not quality.

  9. Avatar MikeW says:

    Sharon thinks this isn’t a broken market, and points at the £ value of investments.

    Unfortunately, if she looked at the outcome of those investments, she’d find customers complaining about coverage and capacity. About a Three that doesn’t have enough 4G sites and spectrum to give capacity (where customers upgrading to 4G are leaving a 3G that has better performance). About an O2 that seems to be barely bothering with 4G.

    It looks to me like the market is broken in terms of the quality of service. With operators barely hanging in there. The £ value she points at might well represent the bare minimum.

    O2 and EE’s owners – Telefonica, Deutsche Telekom, and France Telecom – wanted to sell up, and all those suitors ran forwards because they really wanted a piece of the UK market, right? Oh. BT not only had a choice, but got to pick and choose from a bargain basement.

    Getting a regulated market right is about balance between consumer and provider. Getting decent prices for high quality infrastructure and services is the gold standard. Getting just low prices isn’t. The UK is missing the balance.

    1. Avatar dragoneast says:

      I suspect the UK is at risk of keeping poor quality and getting higher prices, Ofcom’s way. Any new entrant has to earn a decent return, as Three have learned.

    2. Avatar Ignition says:

      You win this discussion.

    3. Avatar MikeW says:

      I just followed the link you gave, to the post on your blog. Looks like you were saying something similar.

      The worst of all worlds.
      If we want better stuff, we ultimately need to pay for it.

      If we want to keep getting better stuff in the future, not only do we (as a nation of subscribers) need to show potential investors that we understand that, but we need Ofcom to show that it can run a market based on that principle too.

      At the moment, it seems to employ a footgun.

  10. Avatar Darren says:

    Three have almost singlehandedly brought down mobile costs in the U.K. However since the EE merger however prices have been going up, as opposed to previously when they were going down. Three is doubling price of their unlimited plans. Three found it tough enough to break into the U.K but persevered. Post merger, these companies would have less reason to drop prices. Plus newcomers will be fewer and far between. MVNO annoyed at one carrier? Might be only 1 other alternative. It can only affect the consumer for the worse.

    1. Avatar Ignition says:

      How about price per GB of usage, how does that look rather than just raw, not necessarily equal conract prices?

      The old One plan excepted as that pricing bordered on suicidal.

    2. Avatar Darren says:

      Your right. The cost per GB, hasn’t risen as much as double. However it’s significant. The prices I pay have increased 30% in 3 years, compared across the industry. In a time when inflation is zero, and historically prices have dropped.

    3. Avatar dragoneast says:

      I suspect those people happy with their mobile coverage will want more operators, on the hope that some idiot will come along and offer them more for less. After all they’ve got what they want so they can’t be worse off, can they?

      For everyone else it’s less clear cut. But one thing is certain, the Regulator doesn’t control investment or, actually, mobile service prices. And real life doesn’t imitate the textbook; it’s rather more complex. So rather than the academic discussion about whether four legs are better than three, two or whatever, I’d prefer to see the analysis of the issues and the consequent remedies. Thank God for Europe, perhaps. It has an opportunity to show whether it can actually improve things in the UK. For once.

    4. Avatar MikeW says:

      Reductions in price per GB only happen when technology advances make a GB more abundant at lower cost to provide.

      Unfortunately, this happens in the mobile world in leaps in the air interface. GPRS to EDGE to 3G to HSPA to LTE. Within a standard, the air interface is largely set – and making more GB capacity available means spending more – more masts, more backhaul, more spectrum.

      Ultimately, the high cost per GB is to stop you from wanting to use too much. While that bottleneck remains, or the only way to remove the bottleneck is to double your investment, the cost won’t be coming down.

  11. Avatar Captain.Cretin says:

    Sharon White is talking out of her arse.

    If ANY deal should have been blocked, it was the BT-EE merger; THAT is the elephant in the room.

    Complaining that the mice are ganging up on the elephant is beyond parody.

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