It is over a year since Sky at last did what we had been urging for a long time by announcing its entry into the mobile market, at least in the UK. Yet it seems Sky had to be dragged into it by the impending merger between BT and EE, bringing the former back with a vengeance into mobile after being absent for over a decade. This highlighted how mobile was becoming a fiercely contested field once again and especially so for a major regional player like Sky facing the likes of Vodafone, Telefonica and Liberty Global in what has become a multiplay market. A weakness in any one of the plays, whether mobile, fixed broadband or TV, would increasingly compromise success in the others.
As it happens Sky’s entry is coming at a time of extreme flux in the UK mobile arena itself, which has both complicated the matter and presented opportunities. For one thing it has brought into focus the consolidation in the industry and blurring of lines between fixed and mobile, as well as between MNOs and MVNOs (Mobile Virtual Network Operators).
Sky’s original plans announced in January 2015 were to hitch over O2’s network to become an MVNO, much like TalkTalk. In fact, with TalkTalk also riding on O2 there was the prospect of a direct price war between the two.
But then came the move from Hutchison to acquire O2 through its mobile subsidiary Three for £10.5 billion ($15 billion), which would overtake EE as the UK’s largest cellular provider with about 32 million customers.
But this immediately created a regulatory storm with the UK Competition and Mergers Authority (CMA) in the thick of it after controversially coming in hard with an assertion that the deal would be bad for competition in the UK on the grounds that it would reduce the number of mobile carriers from four to three.
What irked Hutchison particularly though was the CMA’s move to send its letter to Brussels’ competition chief Margrethe Vestager, who is currently scrutinizing Three’s planned takeover of O2. Hutchison’s main complaint is that the CMA did not act in a similar way to oppose BT’s acquisition of EE, which went through in January 2016 with relatively little resistance.
The CMA argued that this was not a threat to competition because the two were largely confined to the separate fields of fixed broadband for BT and mobile for EE, with only minimal intersection in pay TV. Hutchison’s riposte was that the obsession with number of mobile operators in isolation has become a red herring and is now obsolete in the era of converged services and downward competitive pressure on rates. It might have cited the growing impact of MVNOs in an era of increasing global competition, fueled by regulatory action such as the EU’s abolition of inter-state roaming charges after 15 June 2017. This will follow a year of transition during which roaming charges will be capped at the domestic price plus €0.05 per MB of data, also with limits for voice and SMS texts.
This all adds weight to Hutchison’s argument that regulators should be more concerned with ensuring there is adequate competition at the regional and global levels across all sectors, rather than within mobile in single countries. As it happened Hutchison had already offered various concessions including its five year freeze on tariffs in return for the merger’s go-ahead.
Meanwhile Sky and Liberty Global’s UK operation Virgin Media have moved to take advantage of Hutchison’ strengthening position with deals to acquire 4G/LTE capacity. Sky has agreed to take a 20% stake in the new combined O2/Three network for over £2 billion if the deal goes ahead and Virgin 10%. This would mean they would not purely be confined to MVNO status but would have a significant stake in a major operator. It would raise some questions, such as whether it would mean Virgin Media ending its current MVNO arrangement with EE, now under BT’s ownership. Most likely Virgin Media would in the first instance play the two off against each other to obtain the best wholesale deal.
In terms of spectrum the new combined O2/Three, perhaps a third owned by Sky and Virgin Media combined, would still have only 27% of total UK spectrum and less of the higher frequency spectrum that works best for 4G/LTE. BT through EE has 60%, Vodafone has 28%, O2 15% and Three 12%, adding further weight to Hutchison’s argument that it makes sense to merge the bottom two, with little room for a fourth MNO.
It is another matter whether Hutchison itself is becoming too powerful, but that is not the argument being made by the CSA. Meanwhile for Sky there are other questions, especially what it is going to do for its German and Italian operations which are lagging behind on mobile. In Italy it is likely that the UK Hutchison deal will be replicated in some way, even if there is no intention there for any equity arrangement. Hutchison is present there as H3G SpA, again with the 3 brand, which did have 10 million active customers ranking four there in mobile behind TIM, Vodafone Italy and Wind Telecomunicazioni. However, in an echo of the UK situation H3G is merging with Wind to create the country’s largest MNO with 31 million subscribers.
In Germany it is not clear yet what Sky’s intentions are but Hutchison currently has no presence there as the field is carved out between three players, Telefonica through ownership of E-Plus and O2, Telekom Deutschland (part of Deutsche Telekom) and Vodafone.
Whatever happens there is inevitably going to be further consolidation on a pan European basis. Regulators should therefore concern themselves with ensuring there is going to be sustainable competition between a sufficient number of big players with continued vigilance to avoid cartels emerging, rather than fighting old battles to prevent the mergers occurring in the first place.