In the last couple of years, a scramble to consolidate has taken place in the UK telecommunications market and reignited tensions between business and governing bodies.
A long-awaited £12.5 billion merger between telecom giant BT and EE was cleared by regulators in January, while a proposed £10.5 billion merger between O2 and Three that would create the UK’s biggest mobile operator was blocked on antitrust grounds after a year-long investigation. A similar merger between Orange and Bouyges in France, a comparable market, was aborted at the eleventh hour.
However, even with BT and EE now one combined entity, the telecom market in the UK remains fragmented, with seven big players competing for market share: BT-EE, Vodafone, O2, Sky, TalkTalk, Virgin, and Three.
It seems that corporate bosses have felt the ground shift in recent years. Firstly, a rush towards “quad-play” services — the full suite of broadband, television, telephone, and wireless — is underway. Companies hope that tying customers into bundle deals reduces network hopping and allows for greater operating efficiencies. The BT-EE merger created the UK’s third such company, alongside Virgin Media and TalkTalk.
A second factor behind the push to consolidate is revenue hit by structural changes in the industry. The European Council’s decision to end roaming charges by 2017 could cost operators some £750 million a year in lost revenue — great news for consumers (no more mega-bills for forgetting to turn data off) but a headache for the businesses.
Furthermore, the rise of web messaging services such as WhatsApp and Facebook Messenger and technologies like Voice-Over-Wi-Fi is changing consumption habits, with the traditional revenue sources of texts and minutes quickly being eroded by equivalent internet services.
And, thirdly, there is the issue of infrastructure investment, which is where the telecom industry and regulators are butting heads. Margrethe Vestager at the European Competition Commission views competition as a stimulant for investment, and that consolidation is bad for competition.
On the other hand, analysts have argued that there is no evidence to support the idea that competition leads to investment and that allowing companies to consolidate and swell their profits will allow them to invest in 4G and 5G services.
The picture is further complicated by the UK’s decision to leave the EU. Depending on the terms of the departure, UK companies would presumably no longer be bound by these regulations and could renew consolidation efforts. However, the exact date of the UK’s withdrawal from the EU remains mired in uncertainty, with departure estimates ranging from anything between 2018 and 2025.
Lastly, the picture in the UK feeds into the wider European telecom market. The extraordinarily fragmented European market comprises some 150 operators, with minimal cross-border operations; by comparison, the US has only four. Cross-border consolidation is an avenue that remains unexplored, and in the future could lead to integrated pan-European networks and new opportunities for expansion. Right now, however, obstacles remain too great, with differing regulatory frameworks and diversity in content tastes hindering synergies.
So for the time being it looks like business as usual. Three’s owner, Hutchison, will likely challenge the block on its merger with O2, but even if this is successful, a full resurrection of the deal appears unlikely. Similarly, cross-border integration with and within Europe remains a way off, not least due to the prospect of Brexit (somewhere) on the horizon.
Malcolm Gledhill is Dun & Bradstreet’s expert on the European marketplace. Malcolm joined Dun & Bradstreet’s Macro Market Insight team in 2014 before moving to the Company team in 2016, and has a BA from the University of Southampton.