Economic environment a risk to mobile network investment, Ofcom acknowledges

Ofcom set out its position in a new paper addressing its future approach to mobile markets and spectrum (60-page / 1.1MB PDF). Its conclusions come after it considered mobile markets and spectrum demand in separate discussion papers published earlier this year.

According to Ofcom, Three, one of the four MNOs that currently dominate the UK mobile market, believes “consolidation is needed in the UK so that all MNOs have the required scale to invest in high-quality networks”. However, it said that while MNOs “face a challenging investment climate” and warned about how this may impact their incentives to invest in future, it believes they currently have “commercial incentives to continue to invest to improve mobile networks”.

It said: “While MNOs have said that their financial performance in recent years has not been supportive of investment, they have all undertaken significant investment: a total of £2.7bn a year on average over the last five years. In addition, their business plans show that they plan further significant investment over the next few years, to deliver increased capacity and widespread rollout of 5G, with some looking to launch 5G standalone (5G SA) shortly. We recognise though, that the current economic climate creates greater uncertainty and challenges to financial performance. This may dampen MNOs’ incentives to invest and could slow down the rollout of 5G.”

In recent months, Three and Vodafone have held talks over a potential merger. Ofcom said there had been a perception that it has “an entrenched position against future mobile consolidation” but said this was not the case.

Prior to the 2021 merger between Virgin Media and Telefonica, which created Virgin Media O2, the last major attempt at consolidation in the market concerned the proposed merger between O2 and Three, which was blocked by the European Commission on competition grounds in 2016. Though the Commission’s decision was ultimately annulled by the EU courts in 2020, the deal was never reignited. Both Ofcom and the UK’s lead competition authority, the Competition and Markets Authority (CMA), expressed opposition to the deal, which had fallen subject to Commission scrutiny because of its size and the fact it manifested pre-Brexit.

“In the UK, it is the CMA that assesses mergers,” Ofcom said. “However, the CMA as a matter of course engages with sectoral regulators in relation to mergers in regulated sectors.”

“We continue to take the view that the question of whether a particular merger is likely to result in a substantial lessening of competition will turn on the effectiveness of competition that can be expected in the market after the merger, rather than just the number of competitors. Our stance on a potential merger would therefore be informed by the specific circumstances of that particular merger, taking into account how markets are evolving and functioning. We are therefore confirming that any future mergers would need to be assessed on a case-by-case basis, rather than on a presumptive view of the appropriate number of competitors,” it said.

Simon Colvin, technology law expert at Pinsent Masons, said: “The economic environment is posing significant investment challenges for all businesses including MNOs, with little sign of let-up, in the short-term at least. This strengthens the case for market consolidation given the efficiencies that companies can achieve through mergers and acquisitions, so a more agile regulatory approach to the MNO market is welcome in this respect. However, how the apparent willingness to consider mergers tallies with the broader push for supplier diversity in telecommunications in the UK and beyond remains to be seen.”

Telecoms expert Diane Mullenex, also of Pinsent Masons, said: “Competition in the market can drive businesses to innovate and generally leads to greater choice and lower prices for consumers. However, too much competition can be an inhibitor to business investment and a barrier to innovation as a result. Policymakers and regulators have been seeking to find the right balance for years across different markets, including in the mobile market where the current economic climate is reigniting old debates.”

“Across Europe, many countries have highly fragmented mobile markets – even some small countries have as many as four mobile operators, many of which are saddled with debt and wary of upgrading their networks to 5G without a clear path to recouping the investment. Greater consolidation in Europe is considered essential to address the problem and the need for better connectivity in the UK makes the case for consolidation there too – the UK ranked just 35^th out of 220 countries in the worldwide broadband speed league 2022, behind 18 other Western European countries. In contrast, the US has just three main MNOs and is 11^th in the rankings, delivering approximately 50% better download speeds for users on average,” she said.

In its paper, Ofcom said it expects demand for mobile data to continue to grow. It said MNOs will need to add capacity to their networks to meet this demand and predicted that small cells technology and mmWave spectrum will play an important role in the densification of networks in this regard.

mmWave spectrum offers high-speed, low latency connectivity, but those qualities only apply at short range and the strength of signal can be affected by weather conditions, according to an explanation of the technology by 5G Radar.

Ofcom also said that it has “moved to a new phase” of its consumer work. There will now be a “greater emphasis on holding providers to account for compliance with existing rules”, it said.