(Image Credit: iStockPhoto/Milan Markovic)
European regulators often argue that maintaining four network operators per country is essential to preserve strong competition and protect consumers from price increases. However, a recent analysis by Morningstar challenges that assumption and suggests the evidence supporting the four-operator rule is weak. That finding could undermine objections to proposed deals such as the potential merger of O2 and Three, which regulators have said would be “dead in the water.”
Hutchison, which owns Three in the UK, is pursuing a merger with Telefónica’s O2. If approved, the deal would reduce the number of major mobile network operators (MNOs) in the UK from four to three. Ofcom, the UK telecoms regulator, has expressed serious concerns about the transaction, but for Three the merger could be crucial to remain competitive after BT’s acquisition of EE last year, which created a much larger rival with substantial fixed-line and mobile capabilities.
Three is currently the smallest of the UK’s MNOs by subscriber numbers and lacks a fixed-line broadband business that would allow it to offer bundled multi-play services. By contrast, EE is both the largest mobile operator and now part of BT, the country’s leading fixed-line broadband provider, shifting the competitive landscape significantly.
Morningstar estimates the chances of approval at roughly fifty-fifty. If the merger goes ahead, Three would likely move ahead of its competitors to become the largest mobile operator in the UK, placing it in a stronger position to compete with EE and Vodafone.
After Ofcom opposed the merger, Hutchison and Telefónica asked the European Commission to review the proposal. Ofcom sought to retain jurisdiction over the review but was denied, so Ofcom’s chief Sharon White sent a report and supporting documents to the EU arguing against approval. Included in the material was a study by WIK Consult, commissioned by Ofcom and published in July 2015, which attempted to show that reducing the number of operators tends to push consumer prices upward.
Morningstar closely examined that study and concluded it cannot reliably be used as proof that mergers lead to higher prices. The Morningstar analysis pointed to methodological flaws and measurement challenges that weaken the study’s conclusions.
The WIK Consult report relies heavily on a 2015 study by RTR Telecom Monitor, which divides consumers into four usage tiers—low, medium, high, and power users—based on minutes, SMS and data profiles used in Austria. That study found prices initially fell for most segments and later rose across all groups. Morningstar highlights two main problems with this approach: it fails to adequately adjust for the rapid growth in data consumption over time, and it assesses tariffs for new customers rather than accounting for retention offers to existing subscribers.
By not adjusting prices for increased data usage, the analysis can mistake higher nominal tariffs for actual price increases. In addition, operators often target higher-value customers through network investments while lower-usage customers migrate toward MVNOs (mobile virtual network operators) that compete primarily on price, a dynamic the RTR methodology may not capture.
Philip Kendall, a telecoms analyst at Strategy Analytics, told TelecomsTech that every pricing index has limits when trying to reflect diverse market experiences and shifting usage patterns. He acknowledged the critique that RTR’s index may not track rising data consumption well, but defended the index’s approach of rebalancing annually to keep comparisons like-for-like. He also questioned the argument that retention discounts significantly mask price trends, noting little evidence that retention offers have become markedly more attractive.
Kendall cautioned against over-reliance on unit-price measures that convert voice and text into megabytes, a method that can understate the value of voice and text and overemphasize data-driven declines. In Austria’s usage profiles, for instance, converting all usage into megabytes reduces voice and text to a negligible share, making trends hinge almost entirely on data volumes and plan structures.
Earlier research by Dutch and Austrian regulators examined the price effects of previous mergers—T-Mobile’s acquisition of tele.ring in 2006 and T-Mobile’s acquisition of Orange in 2007—and found no material price impact in Austria and only a small rise in the Netherlands. More recent RTR data through December 2015 shows prices trending downward during 2015, as the MVNO and sub-brand market in Austria grew more competitive with entrants like Hofer Telekom, eety and Yooopi! exerting pricing pressure.
A stronger MVNO sector in the UK could be an important factor in securing approval for Hutchison’s proposed deal. Three has said it would invest £5 billion in its network over the next five years—about 20 percent more than planned—and promised to enable “other meaningful competitors” to enter the UK market using an improved network.
Sky, the UK’s largest pay-TV provider and the second-largest fixed broadband supplier, has announced plans to launch as an MVNO using O2’s network. A merged and strengthened O2/Three network could make that partnership more attractive. Sky is well positioned to add mobile services to its triple-play customer base and compete with BT. Other potential quad-play MVNOs in the UK include Virgin Media, Tesco and TalkTalk, all of which could help keep retail prices competitive.
Kendall agreed that strong MVNOs are likely to benefit UK consumers and may do more to restrain prices than blocking a merger. He pointed to Ofcom analysis suggesting that a disruptive new entrant can have a bigger effect on prices than simply increasing the number of operators.
Complications remain. Three already has a network-sharing arrangement with EE, and O2 shares networks with Vodafone. If Three and O2 combined, the merged operator would be an independent MNO while also managing sharing agreements with the remaining operators, raising concerns about complexity and coordination as networks consolidate.
Kendall warned that combined BT/EE and Three/O2 could control more than 70 percent of the UK’s mobile spectrum, heightening worries about market concentration if sharing plans favor one group over another. He noted that any remedies to address these concerns must consider network-based competition, especially following Ofcom’s recent regulatory reviews that left Openreach largely intact.
Whether Morningstar’s critique will sway regulators remains uncertain, but the debate illustrates that reducing the number of MNOs in a market does not automatically produce negative outcomes for consumers. The merger’s fate may hinge less on the headline count of operators and more on structural issues like network-sharing agreements and the robustness of MVNO competition. If network-sharing is the primary obstacle, stakeholders may still reach workable arrangements to address those concerns.
Do you think a telecoms market requires at least four MNOs? Share your thoughts in the comments.