Broadband as a platform – BT urges regulator to fast track £12.5bn EE acquisition
- Summary:
- The appetite for owning 'broadband everywhere' is evident from the UK's quickly consolidating telecoms market. Content will be key to success.
The UK telecoms market is one of the most complex and diverse in the Western world. For a nation that is around half the size of California in terms of land mass and a population that is around a fifth of the size of the USA, the UK's broadband market has a large players across both fixed line and mobile.
Since the privatization of British Telecom (BT) in 1984, the market has seen a surge in companies entering telecoms, where competition has increased, prices have dropped and innovation has been strong. For example, fixed line broadband providers now include Virgin Media, BT, TalkTalk, Sky, plus some other smaller companies. Whilst for years, the UK also benefited from a number of mobile providers – including T-Mobile, Orange, O2, Three and Vodafone.
This has meant good deals, lots of choice and decent performing networks in well populated areas.
However, we now stand at a crossroads where the market is beginning to understand that siloed broadband infrastructure isn't as appealing to the consumer as 'broadband as a platform' is.
Whilst in recent years consumers have been able to get themselves an okay deal on their mobile phone and on their fixed broadband connections, some of the bigger players in the market are starting to recognise that the real winners are going to be the ones that can offer consumers a gateway to all the content and services they need over a single broadband network.
Mobile 4G and super-fast fibre broadband connectivity will also not be enough to win big. Content will be key.
This is why we recently saw BT acquire the rights to Premier League football (soccer to those of you reading in the US). This is also why mobile operators are offering bundles over their networks with the likes of Netflix and Spotify. And this is also why we are seeing consolidation in the mobile market – where Three is anticipated to complete a £10 billion merger with O2.
BT now wants to jump on this bandwagon and plans to acquire the UK's current larges mobile network EE – if BT can offer TV, fixed line broadband and a mobile network, with bundled content delivered over the top, then it puts itself in a very strong market position.
However, that doesn't mean it doesn't face some challenges, namely from the UK's Competition and Markets Authority, which is set to evaluate whether or not a merger of the two giants is good for the UK and good for consumers.
With Three acquiring O2 and with BT acquiring EE (which was already the result of a merger between Orange and T-Mobile), the UK's broadband market is beginning to shrink in terms of the number of players.
Late yesterday we heard that BT was urging the Competition and Markets Authority (CMA) to speed up the evaluation process of the bid for EE, where it has argued that being bigger is actually better for consumers, competition, investment and innovation in the UK.
It believes that acquiring EE will not reduce competition – as the number of mobile network operators will still stay the same, given that it doesn't currently own any mobile backhaul – and that consumers will have more choice when it comes to providers offering quad-play bundles (currently Virgin Media and TalkTalk are the main providers of bundles that include mobile broadband, fixed broadband, TV and a phone line).
Because of this BT has asked the competition regulator to proceed directly to a Phase 2 investigation, in order to deal with any complex issues in depth without delay. It is expected that the regulator will respond to the request in approximately three weeks, but it is thought that the likely decision will be a yes.
Gavin Patterson, BT's Group Chief Executive, on urging the CMA to fast track the decision, said that bigger is better for the UK.
BT’s acquisition of EE will be good for consumers, businesses and UK plc, as well as for BT shareholders, so we are keen to get regulatory clearance. A larger BT will be able to invest and innovate even more than now, something that’s good for jobs and good for customers.
The acquisition will lead to greater competition, given our history as a natural and willing wholesaler, enabling other companies to use the networks we own.
We provide wholesale access to companies in the broadband market and we are happy to support others who wish to compete in the mobile market as well.
The UK is one of the most tightly regulated marketplaces in the world and that will continue to be the case ensuring all companies can compete on a fair basis.
Considerations
However, there a number of complexities for CMA to consider. Whilst BT's argument that consumers will benefit from more choice seems plausible, the deal could potentially impact a number of ways in which the UK's mobile infrastructure is owned, shared and operated, which could in turn negatively impact other players.
For example, BT's acquisition of EE will mean that BT sees a huge boost in the amount of mobile spectrum it owns. There are changes happening to the legalities around the amount of spectrum one company can hold, and it seems that BT will fall under this cap as of next year even if the EE deal goes ahead; but the CMA will be questioning how this impacts those owning a smaller share.
Equally, there is currently a joint venture deal in place between EE and Three, dubbed MBNL, which allows the two to share mobile mast infrastructure. MBNL is used to provide Virgin Media and CityFibre customers with fibre connections; but there is concern that if BT buys EE that it may decide to cut costs by moving traffic onto its own cables, rather than using the shared agreement, which could impact the current deals.
CityFibre has been vocal about this concern and again it is something the CMA needs to consider. CityFibre has said that MBNL deals in metro areas could be impacted by the merger. In a statement it said:
Hull was the first city called off on a national framework agreement. However, post BT/EE the framework has been effectively neutered and the UK is unlikely to benefit from an accelerated rollout of metro fibre to 100 cities. In a post BT/EE world, MBNL should continue to be able to buy from the provider of best value and choice and not be compelled to buy from BT.
Matthew Howett, telecoms analyst at Ovum, also argues, however, that one of the biggest concerns to
regulators, including regulators at a European level, is going to be the lack of a 'challenger' in the UK market if the deals between BT/EE and Three/O2 go ahead.Having Three as a small player in the mobile market, for example, forced deals on unlimited data bundles and free use of data when travelling abroad. Without a smaller player to challenge, what will this mean for the telecoms industry in the UK? Howett said:
A number of uncertainties remain, however. First, how will the CMA consider Three/O2 as it works its way through BT/EE? EU competition authorities are unlikely to want to hand over control of the Three/O2 approval, but the CMA might try its luck and ask for jurisdiction.
Which leads to the second uncertainty: how EU competition authorities will view further consolidation (the now-familiar cases of Germany and Ireland were approved under the previous Commission) and what concessions they might accept. MVNO access has been a popular choice, but the UK already has a vibrant MVNO scene and so that is less relevant here.
Instead, competition authorities will want to preserve the “challenger” behaviour in the market we’ve seen from Three. What could that look like? Will Vodafone’s bullish statements about moving into broadband and TV be enough?
My take
I'm of the view that this deal will likely go through and there will be some benefits for some customers. Those opting for BT will likely receive a nice bundled package of fixed, super-fast broadband, a quick mobile 4G network, as well as good TV packages.
However, it is hard to deny that all will currently be able to compete with this. BT is putting together a killer package and will be one of the few in the UK that truly owns a broadband as a platform offering, coupled with great content, if the deal goes ahead.
As a Three customer, I've truly valued having a challenger in the mobile market. Whether the CMA values this too, remains to be seen.
There are also questions, however, about BT's approach to CRM, post an EE acquisition. For example, how will it integrate all of these services? BT and EE currently both have pretty poor customer service records. And considering EE is already a combination of Orange and T-Mobile, further customer service integration may be tricky. Despite having a killer bundle, this could still be a sticking point when acquiring new customers.
However, it can't be denied that the future is content and unique offerings delivered over a unified broadband platform. BT is ahead of the game in recognising this and is doing well to deliver on that strategy – as can be seen from the appetite from investors. However, others will need to get there too if we want to keep our competitive UK telecoms market.