Ofcom: O2 acquisition will damage competition and retail markets

Ofcom chief executive Sharon White outlines the regulator’s concerns over Three’s acquisition of O2

Sharon White, chief executive of telecoms regulator Ofcom, has outlined serious concerns about the proposed acquisition of mobile network operator (MNO) O2 by rival Three.

Writing just days after EE was swallowed up by BT in a £12.5bn deal, White said that British consumers had enjoyed innovative services and falling prices through healthy competition, and allowing the smallest UK network, Three, to take control of 40% of the market would risk that.

White said the proposed acquisition followed a pattern of mobile mergers in other EU countries, notably Austria, Ireland and Germany, all of which were left with just three networks as a result, as the UK would be if the O2 deal went through.

This would mean that the choice of MNOs in the UK would have decreased by nearly half in the space of barely five years.

White acknowledged there were arguments that operators must consolidate to increase their sales, efficiencies, and investment potential.

However, she said, the UK’s market was not broken, with revenues healthy, investment in 4G strong, and cashflow margins well into double digits.

“Competition, not consolidation, has driven investment,” she said. “We have put those arguments to the European Commission, which is reviewing Three and O2’s proposals, and outlined particular concerns.”

White set out a number of these concerns in an open letter, which was also published in the Financial Times, in which she warned that the deal would be likely to bring higher prices.

Three’s reputation as a scrappy insurgent network mounting a challenge to the big players would be at risk, she contended, saying that average prices were lower – by up to 20% in some cases – in markets where disruptive operators were found.

“Austria’s regulator says that, since the deal there, overall mobile prices have climbed by 15% – despite some falls in recent months – and by 30% for customers who only make calls and send texts,” she said.

Balance of power

On the consumer side, allowing the acquisition to play out as planned could adversely affect high street mobile retail models. In the UK, said White, most phone contracts are still sold on the high street, with chains such as Carphone Warehouse operating as an independent counterweight to help constrain handsets and bills. A merger would shift the balance of power in favour of the MNOs.

The merger would also threaten the economies of scale that have been established in recent years through network and mast-sharing arrangements, many of which would have to be unpicked if Three and O2 were allowed to come together.

“We want UK consumers and businesses to enjoy fair mobile prices and cutting-edge products for years to come. For that, we need strong competition, the basis of protection and the incentive to progress,” said White.

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Alastair Masson, client partner at NTT Data, blasted Ofcom’s concerns as anachronistic and said there were wider implications it was failing to account for.

“The market must be viewed as one ecosystem where the actions of one provider creates a domino effect onto another,” he said.

“As more consumers move towards the temptations of triple and quadplay, the size and reach of BT is where concerns over competition should be channeled. 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.”

Masson argued that by approving the Three – O2 deal, a business would be created that was 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,” he said. xxxx xxxx xxxx xxxx xxxxx xxx x x xxx

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