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Hue, not Three, could be Hutchison’s crown jewel as MNO model morphs

Will the EC stand in Chinese conglomerate's way?

The European Commission has two months to decide whether to allow the takeover of Telefonica’s O2 UK arm by CK Hutchison, owner of 3UK, and if it does, what conditions will be imposed.

One of the most likely demands will be for the merged entity to divest some of its infrastructure for a new entrant, or at least to earmark a large proportion of its capacity for new MVNOs – these kind of remedies have already been seen in other markets where a merger led to a reduction in the number of MNOs, such as Germany, Ireland and Austria.

CK Hutchison, for its part, is offering increasingly big concessions – as well guarantees to open up wholesale access, freeze consumer prices and step up infrastructure investments, it went even further in its annual results statement last week, saying it would be pre-pared to keep O2 and 3UK as separate operations, as long as it was allowed to sell a stake in the enlarged company to a new investor.

Last May, shortly after first agreeing the O2 takeover, Hutchison announced a deal to sell a 33 per cent stake in the combined business to five institutional investors for £3.1bn on clearance of the merger.

For all this flexibility, there is still a real prospect that the deal will be blocked – or more likely, that the conditions imposed by the EC will be so onerous that Hutchison will walk away, as happened to TeliaSonera and Telenor in Denmark.

But perhaps, in focusing on separating its subsidiaries, Hutchison, and the European Commission, are barking up the wrong tree. Hutchison sees 3 Group as a key player in Europe’s ongoing consolidation, especially as the unit is starting to deliver results from its parent’s long and patient game of investment and acquisition. Last week, the company announced that 3 Europe’s EBITDA had risen by 12 per cent year-on-year in fiscal 2015, to HK$17.4bn ($2.2bn), though revenue fell by 4 per cent (however, in local currencies, revenue would have risen by 10per cent, it said).

One factor improving its margins has been greater scale following its purchases in Ireland and Austria. Now it says a UK deal, as well as its plan for an Italian merger with VimpelCom’s Wind, would “create sufficient scale and capacity for delivering significant operational efficiencies and enhancing network quality and innovations in these markets, and in turn, generating accretive earnings to the group”.

Hutchison, and EC, need to focus more on MVNOs

However, it could achieve even better scale through its wholesale activities. The idea that strong competition is only ensured by hav-ing a reasonable number of companies deploying their own mobile networks is an old-fashioned one. Competition, as the over-the-top players have demonstrated, rests in services more than in net-works. Some MNOs remain focused on achieving competitive edge through their networks, via superior quality of experience, but increasingly the economics of the one network/one operator model will make this non-viable for most players – especially the new en-trants that competition regulators are keen to enable, often with scant regard for whether they can afford the vast costs of spectrum and infrastructure.

It will become more common for operators to differentiate their QoE via software – for instance, using ‘always best connected’ sys-tems to transfer users to the optimal link, even on a WiFi or third party network; enhancing the intelligence in the packet core, edge gateways and BSS, and virtualizing those elements to increase agil-ity; supporting hyper-personalization via big data. In that context, the cost of the actual network, with regard to the differentiation it delivers, will become excessive and MNOs will increasingly look to share their build-outs, or turn to neutral hosts to expand their cov-erage and capacity; and at the same time, to generate more reve-nues from a wider range of MVNOs and wholesale customers, to offset the declining profits of consumer data.

All this suggests that the EC should pursue the open MVNO plat-form more aggressively, when it considers merger proposals, than the totem of ‘four MNOs per market’. And that suggests Hutchison itself should step up its own wholesale and network-on-demand activities, and give one of its potential crown jewels, the Hue MVNE (mobile virtual network enabler) a far more strategic role.

The potential for Hue

Hutchison launched Hue a year ago and it was immediately ru-mored to be the future basis of expanding Google’s US-based Fi MVNO around the world. Hue, like other MVNE services, offers a single point of entry for MVNOs which want to “create global cov-erage quickly and easily” across Europe and Asia. Parent group Hutchison Whampoa operates, via various subsidiaries, in Austria, Australia, Denmark, Hong Kong, Indonesia, Italy, Ireland, Macau, Sri Lanka, Sweden, UK and Vietnam, and it will also look for deals with other MNOs outside that footprint.

“Today’s mobile wholesale market is fragmented and new entrants to mobile are often challenged with needing to understand market nuances and regulations in different countries,” said Jarrod Nink, CEO of Hue, at the time. Services to MVNOs will include mobile net-work access, customer care, billing and provisioning, as well as liai-son with third parties such as credit agencies.

It is easy to see how such operations could evolve into more flexi-ble, marketplace-style virtualized platforms in future, bringing the traditional MVNE out of the shadows and into the starring role in the network of am MVNOs. Some vendors are certainly developing the kind of tools which will enable this. XCellAir, a new company formed to market a network-as-a-service platform created by InterDigital, will start by provid-ing tools to manage bandwidth across WiFi and/or cellular small cells, but has a far broader vision of a virtualized NWaaS future. In 2013, Amdocs unveiled a platform to help smaller MNOs set up and provision MVNOs far more quickly and flexibly.

Copyright © 2016, Wireless Watch

Wireless Watch is published by Rethink Research, a London-based IT publishing and consulting firm. This weekly newsletter delivers in-depth analysis and market research of mobile and wireless for business. Subscription details are here.

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