BT triggers UK mobile industry M&A war gaming
The UK has been in the vanguard of the EU applying a single minded regulatory pursuit of ever lower consumer mobile prices. Mobile operator profits have not only been competed away and but also regulated away without regard to where the money is going to come from for substantial investments in new generations of mobile networks and new levels of universal coverage. We now have market conditions where no new entrant “national” network operator turns-up at OFCOM spectrum auctions anymore (there were 9 at the 3G auction), infrastructure competition is disintegrating under a fig leaf of infrastructure sharing and two (possibly three) of the four mobile network operators would exit the UK market…if only a sum of money is put on the table that would allow them to exit with a bit of financial dignity. Unlike the M&A bubble just before the telecoms crash of 2000, the activity today is being driven by players wanting to exit the UK mobile market rather than trying to get into it.
If this bleak analysis is right it begs the question of why BT wants to enter the UK mobile market again? And why should the other mobile operators care who owns O2, (or EE if that is whom they turn out to buy)? BT’s MVNO deal with Vodafone has not led to BT having much impact on the mobile market over the past 10 years and it is not obvious why their latest MVNO deal with EE should be any different. The conventional explanation is that this is all about “quad play” – the offer of telephone, mobile, Internet access and video content. BT’s purchase of football rights plays to this script. But Virgin has been offering quad-play for over the past 15 years and never broken the successful hold BSkyB has over the premium TV market or BT has over the fixed telecoms market. The success of Virgin mobile as an MVNO pre-dates its merger with ntl to form Virgin Media.
The insight is to look long term, where it could be argued that the incumbent fixed wireline operators are poised to capture or at least dominate the wireless access space over the next 10-15 years irrespective of which UK mobile operators takes over whom in 2015. BT has some clever people in its strategy back-room alive to this future…the acquisition of 2.6 GHz spectrum at the Ofcom 4G auction is testimony to this. The significance of BT buying one of the existing mobile operators is that this inevitable outcome could happen a whole lot sooner.
When cellular radio was in its hay-day a mobile network comprised a lot of wireless and a bit of narrow band fixed network (to link base stations to the network). 10-15 years from now it will comprise a bit of wireless (the last 100m or so) and a lot of broadband fixed network (to link a huge number of wireless tails to the network). The company with the most relevant assets will therefore be the one with a lots and lots of fibre optic cable running near to where people live (and work). In the UK there is only BT and to a lesser extent Virgin with this depth of sunk investment. There will also be much less distinction in urban areas made by consumers between a WiFi connection and a mobile broadband connection (3G, 4G or 5G). Here again BT (with its FON network) and to a lesser extent Virgin are well positioned.
The “10-15 years from now” is a time-scale I’ve plucked out of the air. It could happen sooner driven by the right sort of consolidation, say BT buying the current 4G market leader EE, it could happen later with BT buying O2 (who are less well endowed with radio spectrum) or it could happen much later if the regulators decide to intervene.
The regulatory risks are not trivial. My forecast could be completely up-ended by the regulators deciding to design a new fixed-mobile industry structure – such as fully opening-up BT’s passive infrastructure or mandating dark fibres. However one of the risks of an intervention by regulators is that the past (where they have evidence to guide them) is no guide to the future and the current exit towards the door by half the mobile industry shows a regulator can get things wrong.
The regulator is not the only hazard. One of the dangers of the M&A game is that too often it drives up debt levels…where money that should go on building better networks over the next 20 years is spent servicing excessive debt. If any merger makes real long term economic sense then paying in shares alone should seal the deal…a fair reality check.
The City scribblers and financial journalists have been pencilling in the ideal consolidation of BT buying O2, H3G buying EE and Vodafone buying Virgin Media. The regulator is no doubt dreaming that BT will buy H3G and everything else will remain as it is. The reality is that the global financial markets will decide, for all the wrong reasons, the long term shape of the UK’s digital wireless infrastructure…and the rest of the UK economy will have to live with the result. There could a lot worse fates for the UK than having BT somewhere prominent in the mix…at least…unlike a lot of Internet companies…they pay their fair share of UK taxes.
Footnote: On 15th Dec 2014 BT confirmed that it intended to pay £12.5bn in cash and shares for EE. This would create the leading fixed and mobile player in the UK. It poses a challenge for the regulator as the impact of this merger on the pure mobile market is negligible, so it comes down to what weight they put on a fixed-mobile bundle…which Virgin has already offered for a number of years.