Plans by Hutchison to Buy O2 Will Create Headache for Authorities and Uncertainty for Consumers
Last week’s news that Hutchison is in exclusive talks to buy O2 looks likely to reshape the UK telecoms landscape. Questions remain about what effect this deal might have on UK consumers, and whether competition authorities look favourably or disapprovingly on the likely outcome.
The UK is one of the most competitive markets in Europe and includes some of the region’s heavyweight operators. This has helped to create an environment of generally low tariffs that consumers have enjoyed for several years. A key element has been Ofcom’s determination to retain a four-player mobile market, and the 4G spectrum auction in 2013 was designed with this structure in mind for the long term.
Three UK has continued to disrupt with innovative offers and low-cost tariffs. The inclusion of 4G at no extra cost, for example, was a move that forced rivals to offer more competitive pricing. This has resulted in strong uptake of 4G services, establishing the UK as the leading European market for the technology based on number of subscribers.
However, consolidation of the UK to a three-player arena raises serious concerns that consumers will have to pay more for mobile services. Evidence in other European markets, notably Austria, points to an increase in prices following a similar reduction of four operators to three. Mobile tariffs in the UK would be set by just three huge providers — each with at least 20 million subscribers — and there would no longer be a market disruptor to keep larger rivals on their toes. Ofcom is likely to be uneasy about such a situation.
However, the ultimate decision may not rest in the UK regulator’s hands — the international reach of Hutchison and Telefonica mean that the final judgement could be down to the European Commission. We expect the deal to be approved, albeit with significant concessions. Brussels already set something of a precedent last year by agreeing to a deal between E-Plus and Telefonica in Germany that saw a reduction of four operators to three and created the largest mobile operator in Europe outside Russia.
Regulators are already moving away from fostering competition purely on price, with a new regime in Brussels appearing to take a more sympathetic approach after years of tough legislation that have heavily affected Europe’s leading operators. The region’s highly fragmented and heavily regulated structure hasn’t created an environment conducive to making investment on the scale of other regions. This has seen Europe fall behind leading Asian and North American markets in the deployment of new technologies.
This is the dilemma for the authorities. Three and O2 will argue that synergies achieved from the deal will strengthen their ability to better serve customers and invest in networks at a time when demand for mobile connectivity has never been greater. BT is continuing to discuss a take-over of EE, and rumours of consolidation are rife in other markets such as France and Italy — it looks like Europe’s regulators are in for a busy 2015. Balancing the position of network operators, consumers and all other parties will be a tough juggling act.