Ofcom comment on the proposed merger of Three and O2

01 February 2016

This article by Sharon White, Ofcom Chief Executive, first appeared in the Financial Times on 1 February 2016

What would Herbert Hoover, the pioneering US president who excelled at engineering and economics, make of today’s digital society?

He’d surely be impressed by the range of affordable devices we use each day, from smartphones to tablets, increasingly powered by fibre optics and 4G mobile. But I don’t think he’d be surprised by the economic forces that brought all this about.

Competition is the lifeblood of today’s telecoms market, spurring innovation, better coverage and fair prices. Just as President Hoover observed: “Competition is not only the basis of protection to the consumer, but is the incentive to progress.”

To see that happening today, take a sector that underpins how we communicate every day: UK mobile phones, where four networks compete for customers.

Consumers have enjoyed innovative services and pricing in recent years, from unlimited internet data to free overseas calls. UK prices are among the lowest in Europe, with the cost of a typical package falling by two thirds since 2003.

Ofcom aims to maintain that progress through competition. So we are concerned that the smallest mobile network, Three, proposes to become the biggest by acquiring its rival O2. The combined firm would control more than four in ten mobile connections.

This follows a pattern of mobile mergers in Austria, Ireland and Germany. Like those countries, the UK would be left with just three networks. Some argue that operators must consolidate in order to boost revenues, increase efficiency and widen their scale to invest.

But this is not a broken market. Last year, UK mobile firms generated £15bn of revenue. They have been investing billions to roll out 4G, while maintaining cashflow margins above 12 per cent. Competition, not consolidation, has driven investment.

We have put those arguments to the European Commission, which is reviewing Three and O2’s proposals, and outlined particular concerns.

First, the deal could mean higher prices for consumers and businesses. To date, 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 emerging findings show average prices around 10-20% lower in markets with four operators and a ‘disruptive’ player, versus those with only three established networks.

Austria’s regulator says that, since the deal there, overall mobile prices have climbed 15 per cent – despite some falls in recent months – 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. The scale economies of sharing networks are already being enjoyed; any merger would threaten that arrangement.

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.

I accept that mergers often have conditions attached, such as promoting more ‘virtual’ firms to piggyback over networks. But these rules often focus on the retail market – where, in the UK, dozens of virtual brands already sell mobile contracts.

Many of our concerns relate to competition between operators who own the networks on which mobile phones rely. Only these four companies can make your mobile signal faster, more reliable and widely available.

Establishing a new mobile network might be one answer, but this would take time, and considerable investment.

While the merger is reviewed, Ofcom will keep working to promote healthy rivalry between operators. For example, making it easier for people to switch provider.

We want UK consumers and businesses to enjoy fair mobile prices and cutting-edge products for years to come. For that, we need strong competition: the basis of protection, and the incentive to progress.