Commercial analysis: With the recent announcement of a string of high-profile mergers and acquisitions in the telecoms sector, Daniel Preiskel, partner, and Natalia Porto, associate, at Preiskel & Co LLP, take a look at the effects and challenges of consolidations in the industry.
What is driving the spate of mergers in the telecoms sector?
European telecoms markets seem to be following a global trend. The increasing popularity and importance of new technologies and services such as cloud computing, video streaming, over the top (OTT) voice calling apps and the Internet of Things (IoT)–all reliant upon and utilising increasing amounts of bandwidth among businesses and individuals–has increased competition in the sector on the one hand, while putting a strain on network capacity.
Mobile network operators have to invest in expensive 4G network roll out costs, having had to spend billions of euros just to secure spectrum in the various European 4G auctions. This is at a time when OTT providers such as WhatsApp (that now includes free voice calls) and Skype are eroding call and in particular text message revenues.
The popularity of bandwidth hungry services such as Netflix and YouTube over 3G has caused network management and congestion issues for certain mobile network operators (MNOs) pending the roll-out of their 4G networks.
In the EU, other pressures apply, ironically including those designed to stimulate competition with a vision of a single telecoms market as part of the EU Commission’s Connected Continent plan. For example, the steady erosion of high mobile termination rates and high roaming rates in the EU have impacted the profitability of MNOs at a time when they have had to invest in 4G spectrum and roll-out.
How have the latest mergers affected the structure of the telecoms market?
In terms of UK mergers, they have not all completed as yet and so at the moment it is a question of anticipating the likely outcome should they be cleared by the Competition and Markets Authority (CMA) and the EU Commission.
The BT/EE merger for instance is a transaction that stands to potentially help BT more efficiently serve its customers, particularly if it allows greater integration of fixed and mobile products to meet their expectations of increased customer appetite for quad-play. Combinations of quad-play products from a combination of fixed and network services are increasingly being touted as the future for the industry, with BT in poll position given the strength of its broadband and TV sports offerings.
This merger would place greater pressure on those single play or dual play operators, which is why there is some speculation of a Virgin (owned by Liberty Group) and Vodafone tie up in the future. Vodafone has, following its acquisition of Cable & Wireless in the UK, begun offering fixed broadband in the UK, giving it another string to its bow.
As for O2 and 3UK, that appears to be more of a consolidation driving economies of scale for their shareholders. Unfortunately any reduction in the number of MNOs reduces the number of potential host networks for mobile virtual network operators (MVNOs), many of whom have helped drive down pricing in the consumer mobile space in particular, and could potentially play an important role in helping drive forward innovative IoT services.
Would you anticipate further consolidation in the sector?
It seems that the European telecoms market is entering a phase of consolidation. The BT/EE merger for example is at the cutting edge of the consolidation of telecoms players in the EU, and is likely to set a precedent for a series of deals that are rumoured to be stacked up in the background, for example with 3UK/O2 having been announced shortly afterwards.
The consolidation trend in the EU telecoms market is likely to continue as the sector remains fragmented in comparison with regions where this process started earlier, such as in the US and Asia markets. For example, MNOs in the EU are mindful to point out that the USA has a handful of operators across 50 states covering a population of over 300 million and are therefore looking to drive further consolidation in the fragmented EU markets. Institutional shareholders and telecoms analysts appear to consider that MNO consolidation increases shareholder value.
What are the challenges in pursuing mergers in the telecoms sector?
Lawyers dealing in mergers and acquisitions could be in for a busy and lucrative time–though they will need to make sure they are supported by leading telecoms competition experts to help secure those all-important regulatory clearances.
On the other hand, regulators face the challenge of determining the number of players that will maintain the balance of a competitive market–taking into account both the need for economic growth and the interest of end users.
Whereas consolidation may boost investment in infrastructure, regulators must ensure that end users are not harmed by increase in prices and limitation in end users’ choices. It will likely result in less bandwidth being rolled out in the UK as a result of the consolidation coupled with the major network sharing deals already in existence in the UK.
Can the sector survive further consolidation? What do you expect the sector to look like in five years’ time?
The BT/EE and O2/3UK mergers raise the central question of whether the current regulatory regime is fit for purpose–and whether there is a need for reform–or at least updating, given the speed of change in the markets and the fact that the current regime is beginning to creak at the seams.
The potential drop in UK MNOs from five to three over a few years is not something that many would have seen as a step in the right direction for the UK communications industry as a whole, not to mention consumers.
MVNOs that are potentially best positioned to drive innovation in the IoT might find themselves with only three potential MNO hosts–none of which are ‘mavericks’ with an appetite for risk, low revenue projects or feel the need to generate wholesale revenue via MVNOs. This could hinder innovation in the UK and in other markets down to three MNOs.
Competitors will raise issues and the CMA covering the BT/EE merger will need to carefully consider the transaction in terms of whether other players that rely on BT to supply its fixed access network services on fair, reasonable and non-discriminatory terms will continue to obtain those services in a timely fashion in future.
In telecoms it is often hard to predict the future, which is part of the excitement of the sector too. However extrapolating from the current consolidation trend, we expect that most European markets will be down to no more than three mobile network operators–the strongest of which will be providing quad-play services.
The jury is still out on quad-play and whether customers want all their services from the same supplier. Nevertheless, during the next five years quite a number of operators throughout the EU will likely be considering merging on a vertical basis to offer quad-play, while horizontal MNO mergers will be sought in tandem, largely as a cost cutting exercise.
Connected devices and IoT will continue to grow exponentially and we may see a strong Google European MVNO with its sim cards being embedded in an increasing array of products. In the future, we anticipate that the majority of mobile phones will end up being sim-free.
Interviewed by Alex Heshmaty.