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Straight Talk Telecoms

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Telecoms regulators tend to view mobile telecoms, fixed telecoms, and TV as distinct sectors and services. When they rule on mergers or acquisitions, they look primarily at the impact of the deal within one of the segments rather than across all of them. However, for operators the three are absolutely not separate. Over the last three years mobile operators have scrambled to acquire fixed (plus TV and enterprise) assets. Cable and fixed operators without mobile assets have sought to acquire mobile operators or launch MVNO businesses.

In competitive telecoms markets, where customers are always looking for a better deal, bundling a number of different services in a single bill creates loyalty because it removes the inconvenience of having to purchase different elements from separate suppliers. Operators can afford to offer discounts (often of between 20% and 30%) because of the reduction in churn and customer acquisition costs. They can also make a number of cost savings by providing a range of different services to the same customer across billing, customer care, and retail. Over time, they can save on their network costs by building network elements that serve both their fixed and mobile businesses.

The main argument for ruling against the merger of O2 and 3 in the UK is that the shift from a four-operator market to a three-operator market will result in higher prices. Ofcom’s research suggests that prices are between 10% and 20% lower in four-operator markets than in markets with three operators. The regulator also believes that O2 and 3 will invest more as separate businesses than as a single organization.

In reality, however, there is little or no evidence that prices rise in markets that consolidate from four to three operators. Prices per-minute or per-megabyte are in a state of continuous decline as operators invest in new network technologies that deliver capacity more cheaply. The question is whether the rate of price decrease is slower in consolidated markets. It is difficult to show that this is the case because pricing structures have been transitioning from being voice- and SMS-centric to being data-centric.

The emergence of BT as the dominant player in the UK telecoms market will likely force at least one merger or takeover involving a fixed and a mobile operator. For example, Vodafone could make a bid for TalkTalk or for Virgin Media. In the meantime, Sky, the country’s dominant pay-TV operator, which already has a strong broadband business, is in the process of launching a mobile service as an MVNO. This would leave O2 and 3 as mobile-only businesses fighting for a share of a declining mobile-only market.

In the rapidly commoditizing telecoms market, size and scale is increasingly important. If the above scenario became reality, the UK would have three telecoms-and-TV groups, one with revenues of £24bn and two with revenues of £8bn, and two mobile operators with revenues of £3bn and £2bn. Even in the unlikely case that the two smaller operators would be able, initially, to match the investments of their larger competitors, they would likely continue to lose market share to the players with bigger brands and better distribution, not to mention highly attractive multiplay pricing.

Although 3 and O2 will not go down without a fight, the EC’s recent intervention in Denmark, where its intervention resulted in a similar merger not going ahead, and the clearly articulated position of the UK regulator mean that they may be fighting a losing battle.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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