Unit 3: Impact of competition in the mobile phone market

Why are regulators in Britain and Europe opposed to a proposed £10.5-billion merger between the UK’s second-largest operator, O2, and the fourth-largest, Three?

According to the Economist, in many respects Britain’s mobile-phone market is one of the most successful in the world. About 30 operators compete for business, ensuring that prices are among the lowest for rich countries. A number of retailers offer an almost infinite variety of bundles of services, and coverage is relatively good too.

The proposed merger would continue a long-standing trend towards consolidation among mobile operators, both in Britain and other rich countries. It is a mature market, and since 2008 revenues have generally been falling. It has thus made sense for companies to merge, freeing up capital for investment in costly infrastructure and new technology, such as speedy “4G” networks. In Britain, T-Mobile and Orange merged to create the biggest operator, EE, in 2010. EE, in turn, has been taken over by BT, the former state-run monopoly, in a £12.5-billion deal that created a giant covering mobile, fixed-line phones, broadband and television.

Yet Britain’s telecoms regulator, Ofcom, is opposed to the O2-Three merger. The main reason is that the removal of one of these would so diminish competition that it “could mean higher prices for consumers and businesses”.The concern is that although there are about 30 operators overall, there are only four—EE, O2, Three and Vodafone—that run and maintain the physical infrastructure for mobiles. Ofcom contends that the reduction of network providers from four to three will allow them to drive up prices.

Mergers of this size are automatically referred to the European competition commissioner, who shares the UK regulator’s worries about the O2-Three case. Ofcom’s own research in 25 countries shows that average prices were up to one-fifth lower in markets with four network operators than in those with three.

Another reason for preferring the four-network model is that the smallest operator of the gang usually operates as the disrupter and innovator. This has been the case with Free Mobile in France and T-Mobile in America. Three has played a similar role in Britain. It was the first to launch a 4G service at no extra cost than 3G, in 2013, as well as a “Feel at Home” service, scrapping roaming charges in 16 countries. According to one telecoms expert at the OECD, in the rapidly evolving world of the “internet of things”, companies that innovate will be more important than ever.