Sky and Virgin Media Moot Mobile Network Capacity Deal with Three UK

Reports indicate that Virgin Media and Sky (Sky Broadband) could both sign significant mobile network capacity deals with Three UK (CK Hutchison Holdings), which is dependent upon whether or not the European Commission approves the proposed merger with O2 UK (Telefonica).

At present Virgin Media’s mobile service is supplied by EE, although the mobile operator’s recent acquisition by BT has encouraged Virgin to look at alternatives. Virgin briefly explored the possibility of a much more significant deal with Vodafone, but those talks eventually collapsed (here).

Meanwhile Sky have already signed a Mobile Virtual Network Operator (MVNO) deal with O2 and they aim to deliver a Sky Mobile product by the end of 2016, which will turn them into a quad-play provider. But today’s big news is that both Virgin and Sky may now be considering a major deal to buy capacity from the merged Three UK + O2.

At present Telefonica and Hutchinson are still fighting tooth and nail to get their proposed £10.25bn UK merger past the regulators, which isn’t easy when both Ofcom and the EC are opposed to the deal (here and here). However, in an effort to placate some of those concerns, Hutchison made a number of concessions (here) and one of those involved selling capacity on their network.

Hutchison’s Proposal:

Three+O2 will enable other meaningful competitors in the UK market to offer services on a completely level playing field by offering for sale fractional shared ownership interests in our network capacity – in effect selling slices of the same network capacity and quality we use to serve our own customers. This is unprecedented in the UK telecom wholesale market. It eliminates the tricks some wholesalers use to disadvantage their wholesale customers and thus make it harder for them in turn to make competitive offerings to their own customers. This approach will deliver real competition, not just slogans.

According to the Telegraph, Sky is alleged to have preliminarily agreed to a £2bn contract that would see them take a 20% share for over 10 years if the takeover of O2 goes through. Similarly Virgin Media is said to have reached an agreement to take 10% of the capacity on the merged Three UK and O2 network, which is estimated to be worth around £1bn, although this may change if BT/EE offer better terms or the merger falls through.

The EC’s competition review was originally supposed to rule on the merger earlier this year, although Hutchison’s proposed concessions have required some additional time for review. The final proposals have now been made and as such we’re expecting the EC to return a verdict in the very near future (deadline is 19th May 2016).