O2 merger with Three blocked

The European Commission has blocked the merger between Telefonica’s O2 and CK Hutchinson Holdings’ Three, in its bid to ensure long term investment and competition in the UK market.

This decision follows UK telecom regulator Ofcom’s recommendation to Brussels that the merger could result in higher prices for consumers and business, disruption to the existing UK network arrangement, and a shift in the balance of power between operators and independent retailers.

Following the merger of T-Mobile with Orange, subsequently purchased by BT, the industry was reduced to four players. The proposed merger of Three with O2 would have made it three players and the evidence from markets elsewhere shows that three players results in higher prices for consumers compared to four.

“Later this summer, we’re expecting a similar decision from Brussels about the proposed merger of Hutchinson’s 3 Italia with VimpelCom’s Wind Group in Italy. The European Commission is sending a message that such acquisition and market consolidation will not be allowed if it means reducing competition to less than four major players,” said Jonathan Bell, VP Marketing at OpenCloud.

Telecom industry veterans suggests that instead of relying on acquisitions, telecom operators must work to better service their customers themselves. Consumers can expect to benefit from better network speed and coverage in the short term, but it is difficult to turn these into long-term differentiators.

“Operators will need to invest in the creation of unique value-added services for their business and consumer subscribers. This is a sustainable route to enhanced customer satisfaction and loyalty, as well as incremental revenue,” said Jonathan Bell.

With network operators losing streams of revenue due to regulatory changes, such as EU roaming charges, margins are under increased pressure. Because of this, and with similar deals approved in recent years, it was widely expected for the European Commission to accept Hutchison’s acquisition of O2 in the UK.

“Despite the EU stressing its commitment to not overstretching licenses, the fact remains that if we want to boost investment, not to mention retain reliable and secure services, mergers such as this should be accommodated. However, despite Hutchinson making an extensive list of concessions to restore competition in the British mobile market, it wasn’t enough to dress the commission’s concerns,” said Claire Cassar, CEO of HAUD.

By rejecting this consolidation, the EU risks leaving operators exposed to reduced investment and as a result, a drop in the efficiencies in product research and development. Equally, fewer networks would ensure regulators can control the operator ecosystem more effectively, which could lead to fewer security breaches and better overall customer experience.

For Professor John Colley, the development comes as little surprise that the EU competition authorities have said enough is enough on the rapid concentration of the UK mobile telecoms sector.

“It is clear that the merger would have substantially reduced costs in requiring less shops, marketing, administration, head offices and there would have been benefits in terms of reduced network operating costs. However, the reduced competition would have meant that Three/O2 would not have to pass those savings on to the consumer,” said John Colley.