Analysis The mergers of O2 and Three, and BT and EE, could drive prices up for consumers and be A Bad Thing.
This is the warning given by Ofcom boss Sharon White in a presentation to the London School of Economics this week. She warned that fewer mobile operators could lead to prices rising.
The mergers of telcos is pretty much the way of the world. It’s an industry driven by the economies of scale. Having more customers means more traffic for each cell site and so reduces the lead cost from coverage to capacity. In the UK in particular where planning permission is a major issue, coverage is much more expensive to improve than capacity.
The operators will point out that both co-operation through site-sharing and mergers should lead to a better quality of service. White is concerned that it will also lead to higher prices. She says that there are no signs that we’ve seen higher investment from the combined companies. She might well have looked at the results of the T-Mobile/Orange combination to form EE which saw a lot of sites decommissioned.
Sharon White is an economist, and talked to the LSE mostly about the finance side of things, pointing out that despite heavy 4G investment, the UK networks are maintaining a healthy average cash flow margin of more than 12 per cent.
In particular she pointed to how Three was innovative and added competition when it was launched by having special rules for the sale of 3G spectrum which stipulated a new entrant.
A bit of background
Those who’ve been around in the industry longer than Ms White may remember that Three foundered a bit at the start. Your correspondent remembers that it tried video calling, which flopped, then spent outrageous amounts on football rights. One insider quipped it had so few users for the goals highlights service it would have been cheaper to have bought every subscriber a house. Finally, the innovations which saved Three were bargain basement prices - it is still one of the cheapest mobile data networks in the UK - and soft porn.
What wasn’t said was that Ofcom has spectrum auctions pending, and fewer bidders is a bad thing for any auctioneer. A combined BT and EE has a vast amount of high frequency spectrum and is unlikely to be that interested in spending too much on getting much more. If Three is busy absorbing the cost of O2, it is going to have less to spend with the government. Vodafone would probably be interested but as anyone who has watched their chest of drawers go for pennies on eBay knows, one bidder doesn’t make much of an auction.
A new spectrum- and customer-hungry operator would be good for both Ofcom and consumers, but while in 2003, when Three launched, it was tolerable to offer poor coverage if the prices were low enough that’s not going to wash today. With an objective of 90 per cent of landmass it would be an impossibly tall order.
Something Ofcom should think carefully about is taking a paternal attitude to TalkTalk’s plan to be a mobile challenger. The telco has talked in the past about how it wants to use its DECT guardband licence it owns to launch a 4G service, putting femtocells into broadband routers so that broadband and TV customers then become the backbone for a new network. This creates two problems.
Firstly, spectrum it has is barely enough for 4G and secondly, it needs permission to run 4G at the 1800MHz frequency, which was bought at a time when 2G was the only game in town. Fixing both of these problems is well within Ofcom’s ability. It will be interesting to see if Ofcom, which tends to be very good at proper scientific analysis of such things, sees it as a solution. ®