Why we should worry about the Three O2 merger

 
Richard Neudegg
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The deal awaits approval from the European regulator (Source: Getty)

It won’t have escaped your notice that Three and O2 want the path cleared for a £10.5bn merger.

Even with the owner of Three - Hutchison - proposing to keep O2 operationally separate, it would still leave Three/O2 with a 40 per cent market share.

Ofcom has sounded alarm bells, and been uncharacteristically vociferous in its opposition. While Brussels deliberates, we should be nervous about what the future holds for UK mobile customers. Why? Well, try to imagine a post-merger world...

We could see a scenario where the lack of a disruptive player allows the remaining operators to make a beeline for different niches - Vodafone targeting business customers and the freshly combined BT/EE chasing the multi-play market with bundled mobile, TV and broadband packages, leaving the way clear for Three/O2 to clean up on standalone mobile deals.

If each has all the high-value customers it wants, there is a danger the industry will focus more on extracting cash from its existing pool than trying to win new ones by innovating.

A study by Ofcom supports the proposition that “greater competition - delivered by a greater number of players - has a positive effect on pricing” as do the presence of disruptive firms, like Three. As if that needed saying…

There is an argument that short-term price rises can be mollified by a merger driving investment into a network, which can lead to a higher quality offering and lower prices in the long term. But without a competitive environment there is little incentive for companies to break out the chequebook.

One of the conditions of this merger might be that the new mobile behemoth could be forced to offer a dedicated portion of its spectrum to a mobile virtual network operator (MVNO).

But opportunities for positive disruption by MVNOs are limited under the iron fist of the host network, so it’s unlikely to be good enough pay off.

Should this deal be fully blocked? Not necessarily. Given that the Euopean Commission has allowed other countries to do this, we should be keeping a very keen eye on any remedies it puts in place should it give the green light.

Remedies must ensure new players can successfully step into the market. And if you want to step in - including convincing investors - you’re going to need masts and network infrastructure, a workable slice of spectrum, and customers.

Remedies that carve out all three of these for an independent fourth national mobile operator should be on the table.

The EC has to get this right. Going from four to three would be difficult to reverse, and it is customers – businesses as well as consumers – who could suffer.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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