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Summary

Hutchison (owner of mobile operator Three) has announced it is in exclusive talks with Telefonica for a proposed acquisition of its UK subsidiary O2 for more than £10bn. The move would reduce the number of UK mobile network operators from four to three and make the combined entity the largest in terms of customer numbers.

The regulatory spotlight shifts to Europe

The biggest concern will be the impact on consumers, particularly at the lower end of the market– a segment Three has catered to very well. While consolidation is being encouraged and similar deals have been approved in Ireland and Germany, sceptics are likely to point to what is currently happening in Austria, where Three also acquired a rival. Recent research suggests that since that transaction, prices have been rising – and the hardest hit have been customers on low-cost monthly tariffs.

Long-term observers of the UK mobile market will know that Ofcom, and before it Oftel, has made it a priority to ensure a competitive mobile market. Ofcom has fought tirelessly of late to preserve the four-player market structure, and has particularly valued Three’s disruptive nature and innovation around tariffs. At one point the auction of 4G mobile spectrum nearly didn’t happen because of in-fighting around the rules to ensure that all four operators emerged with enough spectrum to be “credible nationwide operators.” However, this time it won’t be Ofcom that has the final say. If the deal concludes, EC competition authorities will take control. In other markets, such as Germany and Ireland where we have seen similar consolidation recently, the EC has focused its attention on two main areas: spectrum holdings and MVNO access.

A combined Three & O2 would result in a concentration of the lower frequency spectrum (ideal for providing coverage), yet would have no higher frequency spectrum at 2.6GHz, which is needed for capacity given consumers’ insatiable appetite for data. Interestingly, a merged BT & EE would have the lion’s share of that higher frequency spectrum and, as part of that transaction, would also likely have to give up some of the airwaves. By mandating MVNO access, the EC will hope to strengthen and maintain competition between the main network operators, and may even be keen to see Three & O2 guarantee a certain amount of network capacity to newcomers. Other recent developments in the UK market suggest that Sky could be an interested party here.

Appendix

Author

Matthew Howett, Practice Leader, Regulation

matthew.howett@ovum.com

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