By ECM Plus Staff</>
In the wake of BT’s recent moves to acquire EE, followed by Hutchison Whampoa’s Three UK now set to acquire Telefonica O2, the established telecoms apple-cart is well and truly being up-ended as a raft of consolidation, retrenchment and ‘must-have’ anti-dumb pipe ‘quad-play’ offerings appear set for the British telecoms market. But what is most likely to happen and what will the market look like by the end of the year?
After almost a decade of relative stability in the competitive UK telecoms market, the dynamics of the sector have quite clearly entered into a new evolutionary phase, as evidenced by recent moves and changes, acquisitions and speculative bids from telcos with big capital pockets yet gaping holes in product portfolios. BT’s move for the Deutsche Telekom-Orage joint venture, Everything Everywhere (EE), and most recently, the decision by Three UK to acquire Telefonica’s UK mobile business, O2.
According to BT, the acquisition would enable it to “accelerate its mobility strategy that would combine fibre, broadband, Wi-Fi and TV” for what is calls ‘Enhanced Fixed Mobile Convergence (eFMC) services.
For Hutchison’s CEO Li Ka-Shing has clearly adopted a ‘take-or-be-taken’ strategy with its intention to add Telefonica O2 UK to its portfolio of European properties, which, while many analysts had been citing the possibility that Telefonca might itself bid for Three UK, seems
now remote given that Three had already acquired O2 in Ireland.
All that now seems clear is that Vodafone is left as one of the big telcos without a firm fixed business – both Talk Talk and Liberty Global Group appear obvious targets. Vodafone has already realised it needed to evolve and has been following a converged strategy for some time, with its acquisitions of Kabel Deutschland in Germany, Ono in Spain, Stet Hellas in Greece and Cable & Wireless in the UK. A content-rich player such as Sky, or more likely, Liberty Global’s Virgin Media would tick many of the boxes it still needs to compete in the nascent quad-play space.
Declan Lonergan, head of mobile telecoms research at The 451 Group concurs. “Content is one of the most effective ways to sell mobile broadband and 4G in particular. On the mobile side of the fence, Vodafone has been the most active player. Its 4G differentiation strategy is based almost entirely around exclusive content bundling, through partnerships with Spotify and BskyB (for Sky Sports).” Nordstrom agrees. “Mergers and acquisitions take time but it’s likely that this year we’ll see Vodafone make at least one more acquisition in order to become a fully converged operator in the UK.”
All In all, the immediate challenge faced by all quad-play hopefuls in the UK will be regulatory, as the mobile sector falls from four competitive players down to three. The radio spectrum allocations between all the prospective new operators will present an immediate issue, as well as the fact that the acquisitive trend is set to continue apace, as consolidation and retrenchment sweeps across the European telecoms space. However, Chris Cowan, associate director at Coleaga Consulting believes that from a radio spectrum perspective, the hurdles won’t be significant to scupper the BT/EE deal. “From a pure regulatory perspective, there should be no problem, since the central plank of Ofcom’s regulatory position in the mobile market has been to preserve four national wholesalers, which this acquisition will continue to do.” According to Cowan, Ofcom went to quite some lengths in the 800MHz auction to ensure that Three won 10MHz of 800 spectrum so that the market would continue to have a fourth national wholesaler). “So, there are no obvious regulatory hurdles, although there will likely be some concessions given the very large spectrum holding that BT will then own.” However, now that Three itself is to combine with O2, there may be a reluctant acceptance by the regulator that the market is consolidating organically, and that it will be impossible to preserve a quartet of mobile operators in the light of major consolidation and quad play-based business models.
REGULATORY & COMPETITIVE LANDSCAPE
From the regulatory and competition law perspective, matters are far from certain when it comes to fair markets and anti-trust legislation. “The proposed acquisition by BT of EE from Deutsche Telekom and Orange still has some regulatory hurdles to clear” says Jonathan Snade, Partner at Thomas Eggar LLP. “In addition to the consent of BT’s shareholders being required, the telecoms regulator and competition authority, Ofcom, will need to be on board.” According to Snade, it is unlikely that Ofcom would prevent the acquisition from proceeding though, looking specifically at Openreach, BT’s wholesale broadband offering, it will be interesting to see the extent to which BT’s wholesale customers (including Sky and Vodafone) will be lobbying the regulator to use its powers to force BT, for example, to dispose of some of its wholesale broadband offering. Furthermore, the UK and European competition authorities will also be examining the proposed acquisition.”
Dr Marius Luedicke of Cass Business School believes the Three/O2 takeover could help Li Ka-shing’s firm Hutchinson Whampoa to cut costs as well as hike prices. “In Austria, after the most recent reduction of telecom providers prices have gone up. However, such price rises also render the market more attractive for new entrants. In the Austrian case, the new entrant was Hofer telecom, who is now serving the market at the lowest prices, thus putting pressure on the more established providers. Negative effects for consumers therefore are most likely to result when new competitors do not get fair and price-regulated access to network capacities that are owned by only a few companies. If access is denied, new entrants cannot compete, competitive forces will be reduced, and prices are likely to rise.”
The now seemingly inevitable UK market consolidation is occurring primarily as a response to several key variables that are propelling the hitherto stable market into this new dynamic, chaotic phase The first agent of change is the almost total collapse of telephone call revenues over the last decade, which threatened to condemn telcos to becoming the dreaded, mere ‘dumb pipe’ carriers. Telcos soon realised they needed to move into content, as evidenced by moves such as BT investing huge amounts of capital in sports content and similar OTT and content deals with Netflix from many telcos. The second key driver for change has been the colossal ongoing capital expenditure requirement for both fibre and LTE for fixed and mobile operators respectively. The collapse in fixed call network revenues has driven a relentless reliance on mobile and wireless data revenue – but even this is insufficient. Hence, the European and UK markets are consolidating and hunkering down in domestic markets in order to reinvent themselves as multi-play businesses. Also, due to financial and geopolitical concerns over information surveillance and national security issues, other major externally-driven capital and operational expenditure demands are being made on all telcos. Consolidation is key to mitigating capex and opex here too.
NETWORK SHARING: MILLSTONE OR MILESTONE
As if regulatory and anticompetitive hurdles weren’t enough to overcome, in the UK there exists an already somewhat complex and some might say a rather technically convoluted and even a set of incestuous relationship between all of the mobile operators when it comes to the sharing of each other’s mobile network infrastructure and systems. Complications which, on the surface, makes an even further mockery of any semblance of true, standalone competitors in the market.
First off, Three UK has a network sharing arrangement with EE. EE is set to become part of BT; O2 has an existing network sharing joint venture arrangement with Vodafone. Furthermore, when Three acquired O2 in the Republic of Ireland, the deal was dependent on honouring O2’s so-called ‘passive’ network sharing with Vodafone while remaining in the ‘active’ sharing joint venture with Eircom (Meteor). According to recent research by strategic consulting firm Coleago, the UK is different because both joint ventures are ‘active’ sharing; it will not make financial sense for 3/O2 to remain in both. Coleago further found that whichever joint venture 3/O2 exits will put the jilted party at a financial disadvantage to the other mobile network operators.
According to Coleago, 3/O2 will need to ‘square the circle’ between relinquishing radio spectrum, selecting the lowest-cost network sharing joint venture and placating its jilted partner. Why? It says that the European Commission will probably require 3/O2 to relinquish spectrum and that depending on what spectrum 3/O2 retains, the two network sharing joint ventures will have different costs to implement and operate the merged entity. Furthermore, 3/O2 will need to understand the implications for EE or Vodafone in order to craft a solution to ensure that its proposed acquisition is not blocked or delayed by their objections. Such a situation has not arisen before, resulting in a new landmark in network sharing and industry consolidation.
QUAD-PLAY: THE NEW BACK FOUR OF TELECOMS
Notwithstanding these underlying issues, the main top-level thrust of the changes is the so-called ‘multi-play’ or more recently, ‘quad-play’ strategy that UK telcos are finally moving towards. ‘Quad-play’ – fixed, broadband, mobile and TV content are now seen as being vital and de rigeur for all self-respecting telcos to be moving towards. But the cost of doing such a strategy is, quite unsurprisingly, hugely costly and effort-intensive. Bengt Nordström, CEO of Northstream believes that other quad play operator candidates do exist in the UK. “It’s unlikely that Vodafone will give up its operations in its home market” he says. “Expect Three, Telefonica, France Telecom or Deutsche Telekom to retreat from the UK and follow similar consolidation paths in their respective home markets.” According to Nordström, one of the most important trends among all operators is the move away from being a pure play fixed, mobile or cable provider to become a converged quad play operator. “To do so requires ownership of both fixed and mobile networks that deliver broadband and media services to consumers and enterprises alike” he says. “The era of pure play mobile, fixed and cable operators is coming to an end, and the operator of the future will almost certainly be a converged operator.”
CONCLUSION: ONE SIZE MAY YET FIT ALL
Unless a protracted process of due diligence discloses unexpected black holes in pension liabilities or other unaccountable financial irregularities, the main remaining hurdle to such market consolidation and contraction in players will hinge on radio spectrum imbalances.
However, with capital expenditure concerns mounting in the risk-averse, capital intensive network hardware build out of 4G/5G and FTTH, capex mitigation across Europe will continue to dominate the boardroom agenda, including those in the UK. Whichever way the UK telecoms marketplace twists and turns, the underlying strategic trends of market consolidation, and backhaul network sharing will also set the pace for quad play-centric market players. For customers, while choice may be wide for services, the double-edged sword could see prices rise as the market has few but bigger operators offering qua-plays and other new OTT apps. In the meantime, and until Vodafone plays its hand in the fixed network acquisition debate, notwithstanding regulators blocking any of the deals on the table, the stage looks set for some interesting times. With the end of pure-play cellcos and even the MVNO model now under scrutiny, the investment burden of bespoke fibre and 4G infrastructure may be too much for all players to carry on their own.
But it would be somewhat ill-advised and disingenuous to imply that all in the industry are keen on the moves and changes afoot, especially those concerning former state-owned telco British Telecom. Mark Collins, director of strategy at CityFibre thinks an ill wind is set to chill the market if the BT/EE deal progresses unchallenged. “Neither the UK nor the industry will benefit from BT as a communications infrastructure monopoly” he warns. “BT has refused to use its market power to lead the reform and modernisation of the UK’s digital infrastructure. Instead it has used its financial muscle to further expand into the consumer content and mobile sectors, mostly funded by wholesale revenues from the behemoth that is Openreach – an infrastructure that is largely based on out-dated copper networks upon which nearly all service providers and mobile operators are reliant.” Whether the regulators listen to the dissent or heed the concerns remains to be seen.