The confirmation that BT and EE are in exclusive talks demonstrates that the former national provider considers the ownership of a mobile network as essential for its future success in the UK telecoms market. Until now, BT has been something of an oddity in Europe, where most fixed-line incumbents have a mobile arm. The acquisition of EE would mean regaining complete control over how it prices and offers mobile services.
Most observers had probably expected BT to enter this exclusivity period with O2 rather than EE given the lower price tag, and the owner’s willingness to sell. However, the lure of 24.5m customers and one of the world’s most advanced 4G networks was too good an opportunity to pass up. Yes, acquiring EE is set to cost BT significantly more, however EE’s owners, Orange SA and Deutsche Telekom, have indicated a deal is possible. For the past 12 months, it has been no secret that Deutsche Telecom and Orange have been looking at a sale or initial public offering (IPO). A considerable amount of money and energy has gone into positioning EE as the UK’s leading mobile operator with a 4G network that rivals even those of South Korea and Japan. Ultimately EE should be proud to see the business in such a position after a relatively short period of existence.
One of the most talked about aspects of the deal is that it will enable BT to become a quad-play operator, offering fixed line, broadband, TV and mobile services to its customers. The UK telecoms market has until now lagged behind in quad-play services and until very recently only the cable provider Virgin Media has pushed quad-play bundles. EE changed that with the launch of its TV service, which went live in early November 2014. The slow UK uptake of quad -play reflects one of the challenges of this strategy; explaining the benefits to consumers. By acquiring a significant high-street retail presence, the combined BT EE would be well placed to make the most of this opportunity.
On the regulatory front, things look promising and the green light is likely to be given, albeit with some concessions. Recent remedies accepted as part of merger and acquisition transactions in Germany and Ireland came about because the number of mobile operators was being reduced. However, this move preserves a four-player mobile market. One of the concessions is likely to focus on the combined spectrum holding. BT was particularly successful in the 2013 4G spectrum auction, acquiring spectrum at 2.6GHz, and regulators are likely to focus attentions here. Secondly, if the BT/EE tie-up goes ahead, the other mobile operators in the UK are also likely to ask for a guarantee that wholesale products BT currently provides for mobile backhaul will be offered on a non-discriminatory basis.
Competition issues would probably be more relevant if Hutchinson, owners of Three, turned its attention to acquiring O2, as some reports have indicated is being considered. This would see a change in the number of operators, something Ofcom has fought tirelessly to preserve, to the extent that the 2013 4G auction nearly didn’t happen owing to rules put in place to ensure four winning bidders would emerge.
As Ofcom research has shown, UK consumers benefit from some of the lowest prices and greatest choice in tariffs, not only in Europe, but also further afield. Competition has underpinned declines in real prices while investment and innovation have delivered new networks and services and increased quality and choice. It seems unlikely that would change should BT be successful in acquiring EE. For consumers the move would be felt most noticeably through increased competition among offers that bundle a range of broadband and telephony services with content, which would likely lead to lower prices, as operators discount their tariffs to attract customers.
A successful move by BT for EE would probably trigger more ownership changes in the market as companies look to make acquisitions to remain competitive. O2 is likely to be the biggest loser should the move be successful. O2’s owner Telefonica has previously shown a clear interest in exiting the UK market and it could now struggle commercially against its convergent rivals BT, Virgin, and Vodafone. From the fixed line perspective, Sky and TalkTalk may also be marginalised if quad-play proves successful, although they have not made such public proclamations regarding a market exit in the same way as O2.
Matthew Howett is practice leader, regulation at Ovum
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