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

Tuesday, March 15th, 2016 (5:11 pm) - Score 953

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.

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By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
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12 Responses
  1. Lois says:

    So its ok for BT to take over EE (even though Openreach supply most of the backhaul – and increasing overhead as bandwidth demand grows?) but its not ok for Three to take over O2 – this doesn’t seem very fair, particularly if there’s scope for more MVNO’s.

    As for the price hike – really? how would this be even plausible with BT’s sim only deals to lure away customers of any MNO daring to increase their prices.

    1. Andrew says:

      BT Buying EE does not reduce the number of networks.
      It’s as plain and simple as that.

    2. Matt Fisher says:

      someone at Ofcom probably didn’t receive a bribe from Three lol

      Like you said it seems odd how BT are allowed to buy EE with no issues!

  2. Brian says:

    Interesting thing this whole competition business.

    Ofcom are always interested in making sure there is competition in the market place for the benefit of the consumer, which is a good objective to have.

    However, businesses are not charities.They are there to make money. Further, if I’m in a position of competeting for something, job, sports etc, I do it to win. Businesses are no different. It should not be surprising that the market is now entering this phase of consolidation as if you don’t make aggressive or clever plays, you will lose. The circle is that if you have bottom prices, to make money you have to grow. A good way of doing this quickly or to maintain your position against others is to buy up other assets, be it customers or the network assets.

    The market will correct itself.

    I recall the same happening with ISPs, in particular Tiscali going on their rampage. It didn’t work well for them in the end, but did the market fall over?

    I think Ofcom need to stop over analysing.

    1. Sledgehammer says:

      That reminds me when AOL were on a charge, grabbing customers then they were swallowed up. If ThreeUK and O2 did merge there is going to be less for OFCOM to do, so why not get rid of all competition and OFCOM AT THE SAME TIME. Just let bt supply everything?

  3. Ignition says:

    Ofcom take a position on something.

    Ofcom produce ‘research’ justifying their position.

    I don’t see why this would surprise anyone.

    I’d quite like to see Ofcom produce some research justifying their own existence given the mess they’ve made of the UK broadband market.

    1. Steve Jones says:

      As some have pointed out before, if competition is good, why is there only one regulatory body for a given market?

      One interesting stat (unless it’s changed in the last two or three years) is that Ofcom had the highest average salary of any of the regulatory bodies. They have to justify those somehow.

  4. Captain.Cretin says:

    As above, please remember that the head of OFCOM is resolutely against the merger; which is why it has had to go to the European court.

    This just smacks of propganda, and unless OFCOM can come up with solid evidence, I would suggest O2 and 3 sue them.

  5. DTMark says:

    I’m not sure why the idea that prices may rise is seen as contentious.

    It doesn’t mean that the newly merged network would raise prices. Indeed it couldn’t since it still has a competitor.

    If I read it right, it means that the market – all three – may raise prices. Less competition = higher prices as evidenced by comparison with other countries.

    But then if the government didn’t forcibly rape millions out of mobile operators by charging to use the air we breathe then it’s just possible there might be more operators.

    Seeing what happens to established players being essentially blackmailed into deploying into less commercial areas by way of threat of increased licence fees while the government gives its favourite a billion pounds for nothing would make anyone run a mile from investing.

    1. Ignition says:

      If you’re thinking of what I think you are prices went up because usage increased. Price per MB actually dropped despite the drop from the arbitrary 4 companies to 3.

      Mobile companies don’t appear to suddenly form cartels when there aren’t 4 network operators.

      Now if only Ofcom tried so hard to encourage fixed line network competition rather than spending the past decade encouraging ISPs to resell BT copper as cheaply as possible.

  6. dragoneast says:

    This presumably relies heavily on the Austria example. The trouble with stats is that it depends what exactly you are looking at, the FT suggested that initially prices rose by 20% odd in Austria – but with virtually no remedies imposed, or they came into effect after a delay; and that subsequently prices dropped back. Ofcom need, in their marketing parlance, to get round to Specsavers, perhaps. I’ve never been sure whether they see themselves as a dispassionate even-handed regulator or a cheerleader for the industry. It seems to be more of the latter, clapping or booing from the sidelines as the game proceeds.

  7. Craig Arthur says:

    Someone needs to take OFCOM to the side and point out the “AND a disruptive operator” part.

    Not sure which part of removing old tariffs and doubling folks monthly price is classed as disruptive? In the past 18 months or more 3 have been anything but disruptive.

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