Connected Research

Union policy research in the 21st century

More T-Mobile speculation

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Today’s media is again full of speculation about the future of T-Mobile, coming hot on the heels of T-Mobile’s own denials just ten days ago (blogged here) that it was looking to sell the unit. This time, it is Vodafone that is apparently considering a purchase offer. The story’s reference to a firm of consultants being engaged to provide advice on ‘strategic options’ is usually a precursor to sale and, if true, would seem to make a lie of Deutsche Telekom’s previous assurances on this issue. It declined to comment on the FT’s story, as did Vodafone.

The story itself looks to be more than just speculative, but it does include some data which may be: 3’s mobile share, quoted by the BBC story linked above, which seems to have been drawn from the original story in the Financial Times (registration required), is not in the public domain since Ofcom does not publish statistics for 3.

As the reporting indicates, Vodafone would find it difficult to gain regulatory approval for such a merger since it would, inherently, be anti-competitive given the dominance it would give one operator. It might, therefore, reasonably be wondered why such speculation has (again) emerged, not least since it would seem to serve the purpose only of destabilising T-Mobile and its workforce.

The history of the UK mobile market has been about establishing equivalence between service providers, with the result that we have four major operators (and 3, a newly-established 3G only operator) all with roughly equivalent market shares, if Ofcom’s data on subscriber numbers is to be believed: Ofcom’s figures for the fourth quarter of 2008 (part 3, Table 4) show that Vodafone had a subscriber market share of 24%, while O2’s was 28%, T-Mobile’s 23% and Orange’s 24% (numbers exclude virtual operators). To create one operator with 47% of subscribers would involve Ofcom in taking a decision that would clearly distort the market, and O2 and Orange (and 3) would have every right to complain.

That said, any debate about the future of any one of the four major operators does raise interesting regulatory policy issues:

1. As the reporting says, other countries have markets in which one operator dominates. What it doesn’t say is that these are usually the mobile operations of ex-incumbent operators benefiting from looser regulatory regimes during the creation of a new market: the UK is different in this respect since the incumbent operator (BT) doesn’t have a mobile operation while telecoms regulatory policy in the UK has been, since before the beginning of the mobile market segment, been wholly geared towards the establishment of competition. Probably none of the models operating elsewhere in Europe has resulted from the merger of existing operators. Raising a debate about whether the UK needs now to move to a market based on one dominant operator rather than the model it currently has (and, if so, which one operator that should be) may well, of course, be Vodafone’s aims if indeed it is responsible for this speculation.

2. Given the latter point, Ofcom would be in an interesting position, as it were, should any such bid for any one of the operators come about. If the conclusions of Digital Britain in this area are to be implemented, Ofcom’s remit is about to be changed from one solely based on competition to one that also encompasses the impact of its decision-making on investment. Connect has welcomed this as it should seek to encourage the establishment of a more responsible regulatory framework in the interests of the nation. However, its effects would be rather less welcome were the implications of this to be extended to situations where, for example, one operator were to claim that it was no longer able to finance the network investment required by its continued participation in the market, as has recently happened in the merger between Vodafone and 3 in Australia (blogged about here). The decision here, involving two junior participants in the market, ought to be distinguishable from that facing the regulator in which participation in the market is much more established, and investment much more entrenched, as is the case in the UK. Ofcom has also in the past refused to engage in ‘picking winners’ which any such merger proposal between two of the four major operators would seem necessarily to engage it in doing.

3. Clearly company priorities do change and their permanent participation in the markets in which they currently operate cannot be guaranteed, especially in situations of globalised brands competing in many different markets, to different degrees of success. Competition in the UK between the big four operators in a saturated market is a costly business, since acquiring subscribers from each other is expensive and resource-hungry, and one which has very few long-term results in terms of customer loyalty. Clearly, that’s not attractive to a company – however attractive it is to consumers – although that would appear to be the rules of the game. Where cartels are not permitted to develop, dealing with corporate demands for exit from such a situation poses, again, interesting questions for a regulator whose policy up to now has been aimed at creating just such a perfect market.

4. Of course, the sale of any one operator doesn’t have to be made to one of the existing operators – a new entrant is possible although that would seem to raise certain spectres by itself if it encompasses, for example, any private equity involvement.

Should the speculation turn out to be true, rather than just a piece of kite-flying on the part of one or other of the operators, Ofcom has an interesting time ahead of it while observers of the scene may be about to see the questioning of some of the touchstones of regulatory policy up to now.

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Written by Calvin

29/06/2009 at 4:33 pm

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