A Telecom dilemma: How a merger between titans might affect prices
On 7th May 2020, Liberty Global and Telefonica announced their plans to merge Virgin Media (Virgin) and O2. Initially, the European Commission oversaw the investigation of the merger. However, the probe has since been taken over by the Competition and Markets Authority (CMA) in the United Kingdom (UK). The probe has been fast-tracked to Phase 2, as there was significant evidence that the transaction raises the issue of lessening competition in the market. The central issue with the £31bn merger deal is that it will potentially lead to higher prices for customers or poorer connectivity for rival mobile operators. This issue arises from the backhaul services provided by Virgin and wholesale services provided by O2.
Firstly, Virgin has been hailed to be the leading provider of backhaul services in the UK. This comes after Virgin signed a deal with Vodafone and Three, to provide them access to the 5G infrastructure it has established. This merger creates an unfair advantage for O2, that will now have preferred access to 5G services while its competitors (Vodafone and Three) may have to pay a higher price for those services or face poorer connectivity.
Secondly, O2 is the largest mobile operator in the UK providing coverage to direct customers and indirect clients. The indirect clients operate through their wholesale services and function as Mobile Virtual Network Operators (MVNO), a popular one being Giffgaff. As mentioned, if O2 switches to operate under Virgin’s 5G network, the MVNOs will be able to use this 5G network too. This creates the grounds for unfair competition, as O2 will then be able to dominate the mobile operator market by offering Virgin’s backhaul service in addition to its wholesale access to its indirect clients.
However, this deal is not the first of its kind as the BT and EE merger preceded it in 2015. Similar concerns were raised during that deal, such as the wholesale access of the Openreach infrastructure BT provides its clients with and EE’s offering of wholesale mobile services to its clients. The CMA cleared the deal on the grounds that there are four other main mobile providers with a substantial number of smaller players. In this case, the concern over BT’s Openreach network was reviewed by Ofcom. Consequently, BT reached an agreement with Ofcom’s requirements and has legally separated Openreach from its network division. Taking from this, the Virgin-O2 merger deal might follow the same course, becoming a major rival to the BT Group.
The merger then poses the risk of there being two telecommunication giants in the market, BT-EE and Virgin-O2. Both these companies will still be in direct competition with each other and the other existing networks, but this will spur a series of similar mergers in the industry. Vodafone, Three, Sky and TalkTalk will be among the network providers geared for deal-making activity in the following years. This will eventually affect the broadband and mobile networks as a result of the reduced number of competitors being able to form a consortium. The formation of a consortium would mean telecommunication companies will be able to fix prices or alter the quality of services to increase their profit margins, to the detriment of the customers.
It is therefore evident that the merger deal of Virgin-O2 will not only create a telecommunications powerhouse with 40 million customers; but also bring O2 and its wholesale access clients onboard Virgin’s backhaul services. This disadvantages other mobile operators using the backhaul services for 5G connectivity and the entity can charge its competitors higher prices or reduce its service quality, ultimately affecting the customers. Furthermore, it suggests that even if the CMA clears the merger, the significance of the deal in forming a telecommunications giant will inevitably lead to the onset of rival mergers. This leads to fewer market players that will be able to coordinate the pricing and connectivity strength of their services to maintain their profits. Therefore, the CMA will have to take a calculated decision when progressing this deal and it has to revise its regulatory framework for future deals between telecommunication companies.