Understanding the consolidation in the UK telecoms market

Why, in just three short months, has the UK’s mobile market seen so many mergers and acquisitions – and how will this impact the UK telecoms and pay-TV market structure? Philip Carse, principal ICT analyst at intelligence service Megabuyte, explains.

In contrast to most other European telecoms markets, the UK has had a clear division between fixed and mobile services, partly driven by BT’s decision to hive off O2 in 2001. This is now changing, with BT again the catalyst as it re-enters mobile services through an MVNO (mobile virtual network operator) deal with EE.

In the space of barely three months, BT has also decided to buy EE, Three is hoping to buy O2, and Sky and TalkTalk have announced enhanced mobile ambitions through MVNOs on O2’s network. So why now, and how will this impact the UK telecoms and pay-TV market structure, and particularly Sky?

The UK telecoms market has been somewhat unique in a European context with the incumbent BT being solely focused on fixed services and the mobile network operators likewise mainly focused on mobile services and with a very poor record at reselling fixed services.

Of the other major consumer players, only Virgin Media can claim a significant foot in both fixed and mobile camps, as well as cable TV, whilst Sky is strong in DTH/pay-TV and fixed line services and TalkTalk strong just in fixed line. BT, EE and TalkTalk have also been investing in TV services.

However, there is growing evidence from other markets of the benefits of the quad play of fixed telephony and broadband, mobile and pay-TV/video in terms of lower churn rates and operating cost efficiencies.

However, the real driver for the specific fixed and mobile convergence about to take place in the UK is the technology convergence of fixed broadband/WiFi and mobile to deliver a much better in-home mobile experience in terms of call quality, as well as backhaul cost savings.

For BT, mobile is key to breathing new life into its copper fixed-line network, at a time when people are making fewer fixed line calls. BT may well also follow Deutsche Telekom (which will become a 12% shareholder after the EE deal) and use a hybrid router to combine fixed broadband and 4G mobile to offer even higher fixed broadband speeds in the home.

BT’s decision to re-enter mobile through an extensive MVNO with EE triggered what can only be described as panic among some of the mobile-only players, leading to both EE and O2 offering themselves for sale to BT.

BT plumped for EE in a £12.5bn deal whilst Telefonica is in talks to sell O2 UK to Three owner Hutchison. Meanwhile, Sky has signed an MVNO with O2, with service launched pencilled in for 2016, and TalkTalk has also agreed an MVNO with O2 that is far more extensive than its existing deal with Vodafone.

The BT/EE and Three/O2 deals will require regulatory approval, but there is EU precedent for the mobile market consolidation to three players resulting from a Three/O2 deal whilst the BT/EE deal would do no more than make BT just like its major European peers in terms of broader telecoms market share.

Assuming regulatory approval is forthcoming, these various deals will have a dramatic impact on the UK market structure. Whilst BT is by far the larger player with total revenues of £17.9bn, its actual UK-focussed Consumer and Business Retail revenues are about £7.6bn, with the remainder coming from Global Services, BT Wholesale and BT Openreach.

Sky is actually marginally bigger, at £8bn, due to its dominant DTH pay-TV business, though BT has by far the bigger fixed line telecoms business. Meanwhile the combination of BT with the UK’s largest mobile network operator EE will give the new business combined revenues of £13.9bn, or a third of the broader consumer-focused fixed and mobile telecoms and pay-TV market.

The combination of O2 and Three would leapfrog the combined business above Vodafone; however, none of these businesses will be well prepared for the BT/EE quad play onslaught as O2/Three is primarily mobile and Vodafone’s £1.6bn of fixed line revenues (out of £6.0bn total) are predominantly business focused from its 2012 acquisition of Cable & Wireless Worldwide.

Indeed, Vodafone will be by far the smaller of the three mobile network operators. For Vodafone, an acquisition of TalkTalk would help redress the balance, but there would be greater strategic logic in an acquisition of Virgin Media, or even of Virgin’s parent Liberty Global, which would bring cable businesses in several of Vodafone’s countries of operation.

So where does this leave Sky? For now the company is busy integrating its newly acquired German and Italian sister companies, whilst its new MVNO with O2 adds mobile to the product mix. It remains the market leader in pay-TV and its well-worked marketing skills should maximise the cross sell opportunity for mobile to its 15.8m UK customers.

However, there is certainly logic in pairing Sky with Vodafone or Three/O2, particularly if the BT/EE combo delivers on its quad play plans. It thus feels like the current M&A flurry may not be the last for the UK telecoms market.

Philip Carse is principal ICT analyst at Megabuyte, a company analysis and intelligence service focusing on public and private telecoms, IT and software companies.