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Ofcom raises concerns over Three/O2 merger with EU regulator

The UK's telecoms regulator has raised concerns with the European Commission over the proposed merger of Three and O2. The Commission is currently reviewing the transaction under its merger control regime.

If the deal goes ahead it could mean higher prices for consumers in taking out mobile services, Ofcom chief executive Sharon White said in an article for the Financial Times.

White said Ofcom had written to the Commission to outline its view that "competition, not consolidation, has driven investment" in the UK's mobile market.

The UK mobile market is currently dominated by four network operators; EE, O2, Vodafone and Three. White said research carried out by Ofcom has found that the average cost of mobile services in countries where there are four main competitors are 10-20% lower than in other countries where there are "only three established networks".

"Many of our concerns relate to competition between operators who own the networks on which mobile phones rely," White said. "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."

In her Financial Times article White also highlighted issues beyond consumer pricing and service that Ofcom has raised with the Commission over the proposed merger.

"The UK’s networks would face disruption," White said. "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. 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," she said.

The European Commission is currently carrying out "an in-depth" competition investigation into the planned Three/O2 deal. The Commission has said that it is concerned the proposed £10.25 billion transaction "could lead to higher prices, less choice and reduced innovation for customers of mobile telecommunications services in the UK". The Commission is responsible for assessing the potential impact of major M&A deals on competition in EU markets.

The Commission is due to rule on the Three/O2 deal by mid-May. It previously rejected calls from the Competition and Markets Authority (CMA) to pass responsibility for scrutinising the merger to the UK authority.

"Whether the merger is blocked or cleared by the Commission will likely depend on whether the parties can agree suitable commitments to address competition concerns, including those highlighted by Sharon White," said competition law expert Angelique Bret of Pinsent Masons, the law firm behind Out-Law.com.

"For example, the Three/O2 Ireland merger was cleared by the Commission in 2014 based on commitments to offer two new entrant mobile virtual network operators (MVNOs) fixed fee, fixed capacity deals with the aim of creating operators with a similar cost base and incentive to compete as a mobile network operator. The parties also agreed to offer to divest spectrum to these MVNOs and agreed a commitment to amend and strength existing network sharing arrangements," she said.

Earlier this year the CMA gave BT clearance to complete a £12.5 billion takeover of EE. The CMA had assessed the potential impact on competition of the deal and concluded that the consolidation is "not expected to result in a substantial lessening of competition (SLC) in any market or markets in the UK, including in relation to the supply of retail mobile, wholesale mobile, mobile backhaul, wholesale broadband and retail broadband services". 

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