Certainly Three’s attempts to acquire Telefonica UK (02) have been thwarted – save for a possible legal challenge. Back in March of last year, when Hutchison Whampoa announced it had agreed a £10.3bn deal to buy 02 from Spain’s Telefónica, creating Britain’s largest mobile network, most industry insiders thought that this deal would happen. The new network was quickly dubbed ‘03’. Mobile is all about scale these days and in this, its largest ever overseas deal, Hutchison would combine 02 with its Three mobile business to bring together 31m customers, or about 41 per cent of the UK wireless market. After all, the precedent had been set already in Europe with the approval of similar deals in Austria, Ireland and Germany, all allowing a reduction in the number of operators.

This news broke only one month after BT, the former monopoly provider of conventional ‘fixed’ line services had announced its intentions to buy EE for £12.5bn and add 25 million mobile customers to its base and emerge as a very bulky fixed mobile converged player. Indeed, with its existing internet business and its more recent foray into content spending heavily on some of the Premier League football rights, BT was arriving as a real quad player, and crucially, one with huge scale. This was again subject to regulatory approval and again industry insiders were predicting a nod through and already speculating on what both of these deals would mean to the UK market. As is often the case when analysts analyse, they were coming up with different answers but very few, if any, were saying these deals would be blocked. In general, sentiment was positive that the deals would be good for the telecoms industry in the UK. It’s true the deals were different in nature as the ‘BEET’ deal was not reducing the level of completion in the mobile market but it was certainly tilting the playing field in mobile services. ‘03’ seemed like a necessary counter balance.

One year on and us industry insiders are one for two. The BT deal has glided through the regulatory process like a swan on water whilst the 02 deal has been holed below the water line. This week the EU Commission for Competition has decided that from their view in Brussels, the Hutchison acquisition of 02 is not a good deal for the UK consumer. I have read some accounts saying how dare these unelected and unaccountable bureaucrats block the deal which should be a matter for the UK to decide. However, those making that point probably have ulterior motives whilst another debate altogether about Brexit rumbles on and also ignores the fact that our very Ofcom and the UK’s own Competition and Markets Authority (CMA) were also putting the boot in in no uncertain terms. In fact, it was the UK’s very own CMA that referred this deal to the EU. In truth all the regulatory forces had seemingly combined to make sure that this deal didn’t happen. Quite what brought about this change of direction in regulatory bodies is still unclear but the industry is now left scratching its collective head on exactly what the policy is now in Brussels, or if there is even a policy at all, as the current Commissioner for Competition is taking a very different line compared with her predecessor. Industries prefer consistency from governments and regulators and dislike uncertainty.

Now I will be the first to admit that the 03 deal was, as Sherlock Holmes may have put it, a two pipe problem. Indeed, it was a weighty problem for sure and we can even put a figure on that; 2.6kg was proudly boasted by Competition Commissioner Margaret Vestager as the weight of the documentary proof and evidence behind her decision. There is a certain degree of ‘never mind the quality, feel the width’ going on here. We think the same decision would have been arrived at with ten pages of evidence as minds were made up from the very beginning of the review process, but there is a civil servants delight in producing a tome instead. The evidence is in there somewhere; but good luck in trying to find it. I think that few of us will force our way through the full document. We all have a will to live after all! Maybe the lawyers will be picking their way through it all, especially if Hutchison carry out their threat of a legal challenge.

I confess therefore to only having read a few grams of the report but we can see one of the main reason for rejecting the deal; it will reduce competition in the market place from four MNOs to three and that all the evidence shows that when a market goes from four to three players, prices go up. Much of the 2.6kg of evidence deals with this in great detail (I’m told) but I know I am not alone in thinking that all of this data is short term based and we are still to see the real impact over time in any market of three instead four operators. The EU Competition Commission also claims that the more competitors there are, the more innovation one sees in a market. We at Azenby are free marketeers, so we go along with this latter argument to a certain extent but where we begin to differ with the EU Competition Commission, Ofcom and the CMA, is that a lot of the innovation being sought by regulators requires an awful lot of investment and a lot of investment requires very strong balance sheets to support it.

At Azenby we have concluded that three bigger, stronger, more profitable operators, with healthy balance sheets is a better recipe for longer term forward investment in crucial elements such as 5G, rural expansion, high quality in-door coverage and much faster mobile broadband. The status quo of one giant quad player, another major MNO apparently disengaging from the wholesale market and two others without the wherewithal for substantial investment is not going to help consumers. We also accept that better services like 5G will cost us all a bit more money on our monthly bills but we are convinced three larger competitors is the optimal mix on between price competition and obtaining forward investment in new services and innovation.

In short the EU has got it wrong and more sadly Ofcom too. Industry insiders just wonder if economists really understand the businesses they are asked to regulate? The advancements they wish to see, are very expensive to deliver.

One of the other convincing factors for us at Azenby in thinking that the 03 deal would have been good for the market was that it was going to considerably increase the market power and presence of some of our virtual mobile operators like Talk Talk, Virgin, Dixons Carphone, Tesco and the soon to launch Sky mobile offering. Without this deal the landscape for MVNOs looks bleak. Baroness Harding, CEO of Talk Talk, has been quoted as saying that she believes Vodafone are in the process of withdrawing from the MVNO market and others in the industry take a view that 02 and Three alone, don’t have the necessary spectrum or network capacity to allow MVNOs to scale up. This leaves the MVNO wholesale market in the UK looking short of competition, a bizarre outcome from the competition regulator indeed!

This is a really important point. Were we really looking at a market going from four operators to three, or a market reducing to three MNOs but with the tempting prospect of as many as ten service providers, the majority of whom would be MVNOs, all competing with each other with retail deals on the high street? We believe that if Hutchison had followed through with their ‘open to all’ network strategy, it would have kick-started a new age for MNVOs and this would have forced both Vodafone and BT to respond, creating a new competitive market for wholesale. This would have increased competition for consumers.

Here is the case in a nutshell for us. Much of the investment needed is in the radio networks, that’s where the big sums of long term investment are required and do we really need four operators investing in the same infrastructure where the benefit to the customer is barely noticed? Surely we want investment in new products and services, all of which can happily share the same radio infrastructure. Radio network sharing is a reality today after all. We are much more likely to see faster, better, more extensive mobile coverage when radio networks are shared and co-invested in. If your view-point is the former, as would seem to be the case with the EU Competition Commission, then we think you are going to be disappointed because even though the EU has preserved the status quo, it is by no means certain that all four operators are going to be investing in infrastructure that has marginal value in differentiating themselves in the market place. When did you last see a coverage map in a phone store?

Perversely, the EU Competition Commission seemed to recognise this when they said that the deal would endanger the current RAN sharing initiatives in the UK. The very initiatives brought about because no one MNO can afford to make all investment needed in the radio network on their own! The economics just do not work. Now EE, sorry BT, with the Emergency Services Contract safely tucked away its back pocket, may change that but this is all the more reason we why we need effective competition to the new monumental kid on the block. We believe that 03 would have provided that necessary competition and without its promised new investment, we will all be worse of in the long run.

So what does happen next after this ruling? Hutchison may appeal the decision and ask for judicial review but that is a long drawn out process and not cheap to do either. Hutchison had said that following approval of the deal they would invest £10bn in the new combined network. Exactly what we do need to see happening. Does the EU Competition Commission believe that Hutchison will stick to this now? And what of Telefonica? The parent back in Spain seems determined to sell its UK business to reduce their own enormous debt burden. That’s doesn’t sound like they will be making big investments in their UK business. Perhaps others will now circle 02 and make a bid. That is possible and as long as the bidder is not an existing UK MNO, it should sail through the regulatory waters just as BT did with EE. Or perhaps others will look at the UK market now and realise that any further consolidation is out of the question for many years to come and think that this doesn’t look like a good place to piling in millions of pounds of new investment.

In our view this decision boiled down to whether three strong MNOs was better than four, inevitably, smaller ones. The EU has opted for the status quo hoping that will provide their desired outcome of more investment and deeper price competition. That old saying, be careful what you wish for, springs to mind and Ofcom, the CMA and the EU have all got their wish. Now they need to start praying!