Mallinson: O2, Three UK merger could produce a dynamic marketplace

Keith Mallinson

Writing in the Financial Times at the end of January, Ofcom chief executive Sharon White weighed-in against the proposed O2-Three merger in the UK. Less than one week later, the European Commission issued a Statement of Objections to the deal, reportedly running to several hundreds of pages and expressing its particular concern about the effect on consumer prices. As I wrote here last October, the devil is in the detail with these competition assessments in terms of assessing prices and interpreting laudable objectives such as Ofcom's in furthering the interests of citizens and consumers by promoting competition, and encouraging investment and innovation in relevant markets.

These interventionists are failing to recognise the new and expanding ways that innovation and competition may occur, while pricing trends everywhere are undeniably and most significantly with dramatic increases in mobile data consumed per month per unit of expenditure. Other communications players including Sky and Iliad apparently see prospective merger "remedies" as an opportunity and Virgin has called on Brussels to approve the transaction.

Applauding while also resisting change
If one seeks to support a particular outcome -- either the approval or the blocking of the proposed merger -- there is no shortage of ways one can select, analyse or present facts and figures accordingly. Interpretations and opinions may differ. However, I observe contradiction and bias.

White's article is revealing in her inconsistency about the desirability of "disruptive" change. She states that disruption is very good for innovation and prices, and then goes on to indicate that disruption is very bad for networks because it would threaten the status quo there.

"First, the deal could mean higher prices for consumers and businesses. Three's owner Hutchison has often acted as a 'disruptive' operator, successfully challenging established players through innovation and low prices. We are analysing mobile prices over recent years in 25 countries. Our findings show that average prices are around 10-20 per cent lower in markets with four operators and a disruptive player than in those with only three established networks. Austria's regulator says that, since the deal there, overall mobile prices have climbed 15 per cent and by 30 per cent for customers who only make calls and send texts. Second, the UK's networks would face disruption. Recently, the four operators have combined their cables and masts into two networks -- one used by Three and EE, the other by O2 and Vodafone. This works well: the four companies are still effective retail competitors, who compete independently on coverage and quality. Any merger would threaten that arrangement" (emphasis added).

Pricing discrepancies
One the most egregious ways of alleging price increases is to equate rising ARPUs as increasing prices. I have argued against this ploy here since 2011. ARPUs are as much a function of increasing consumption volumes, which have increased substantially as amounts paid per unit of consumption have fallen manifold. A July 2015 consulting report commissioned by Ofcom on competition and investment upon which White bases her remarks also included a dissenting conclusion from HSBC that "prices have not risen in Austria post consolidation, but fallen. Bills have risen in Austria (modestly), but bills are not prices. Bills are a product of price and capacity: the unit price multiplied by the quantity of units supplied. The reality is that unit prices have continued to fall, but operators are selling larger bundles of capacity, with the result that bills have risen."

Mobile broadband and the amounts paid per gigabyte of data used are increasingly important with the overwhelming shift to smartphones in recent years. My teenage children, for example, hardly ever make calls. According to the Digital Fuel Monitor, data prices average €3.05 ($3.43) per gigabyte in Europe. Whereas DFMonitor's pricing analysis also shows large differences among nations, even consumers in Germany, which is estimated to be one of the most highly priced nations, were using four times as much for their money in 2015 as they were in 2012.

More recent and prospective new disruptions
France provides an enlightening case for comparison with the UK by showing what disruptive new-entrant competitors can do at the network level, as well as in services and pricing. Iliad's Free provides fixed-broadband and mobile services. It is significantly responsible for French mobile prices falling from among the highest to among the lowest in Europe by significantly undercutting its rivals. It entered the mobile market at the beginning of 2012 and has grown its market share to 18 per cent of French connections.

Back in its day as a UK new entrant around a decade ago, Three was also very disruptive at the network and service-pricing levels with its 3G-only network supplemented by national roaming. Similarly, Free Mobile has disrupted network competition by most aggressively deploying today's latest LTE technology. Once highly dependent on a roaming agreement to use Orange's nationwide mobile network, Free Mobile has expanded its own nationwide network and it claimed to be the nation's leader in 4G rollout in Q3 2015. And there is much more about Free that makes it innovative and highly competitive in its marketing and operations. Capabilities it also seems very inclined to replicate abroad, including in the UK and the U.S.

Iliad and others are a desirable competitive threat to UK arrangements. White also indicates "[a] third concern lies on the high street. Most phone contracts are still sold in shops, with independents taking a big share. A combined Three/O2 would shift the balance of power between mobile networks and the independent retailers who help constrain the price of mobile handsets and bills." Instead, negotiating the terms for this proposed merger provides the opportunity for the authorities to open up networks even more widely, easily and cheaply to those without mobile networks of their own. This will enable existing UK fixed broadband and media content providers to more competitively bundle mobile services with their other offerings into quad-plays and offer them on the high street or online themselves or through independent retailers. There are already dozens of MVNOs in the UK. Fixed broadband market shares are widely spread -- including significant shares for Sky and TalkTalk -- despite the fact that physical connection to more than half of the UK's homes can only be provided by BT's Openreach and Virgin is the only alternative for virtually all the remainder.

There is therefore no reason why mobile service market shares could not become as widely spread with three MNOs following the proposed merger. If challengers also chose to acquire spectrum, as Iliad did in France, they can also become MNOs themselves.

I have no opinion on whether three, four or any other number is the right number of MNOs for the UK or any other nation. Instead, I believe that markets generally work for the best. Forces for change, including those for consolidation and new entrants should be allowed to prevail. Dynamic is better than stifled and stagnant.

Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. Find WiseHarbor on Twitter @WiseHarbor.