European competition authorities have formally blocked Three’s attempt to take over O2, a move that was widely anticipated. This comes despite a number of concessions made by Three’s owners, Hutchison, designed specifically to address competition concerns. Hostility from the national regulator (Ofcom) and competition authority (CMA) coupled with an unsympathetic EU Competition Commission always made this a tricky one to get through. Although an appeal of the decision is possible, Three and O2’s attention should now turn to how they can best compete in the market against an enlarged BT/EE given the increasing propensity for convergence.

The concessions the Commission wanted went beyond what anyone was prepared to offer

Despite the concessions Hutchison offered, which included wholesale network agreements, investment guarantees, and price freezes for some customers, what the EU, Ofcom, and the CMA ultimately wanted was the creation of a fourth mobile operator. Divestment of either the Three or O2 businesses would have needed to include the mobile network infrastructure and sufficient spectrum to ensure a commercially viable fourth MNO in the UK. It is not surprising that Hutchison has not gone that far. As well as there being no obvious taker for such a remedy, in many ways, it would also have undermined the whole economic rationale of the merger and would have only set to reinforce the spectrum inferiority and capacity constraints of both operators.

Across Europe, the sentiment for greater industry consolidation started to wane following suspected price increases in markets where the number of mobile players fell from four to three, and where, as a result of the changing of the guard at the EU competition authority in 2014, a higher bar was set to win the necessary approval. That said, the EU will continue to assess each merger on its own merits, and not all attempts at consolidation will fail. In Italy, where Hutchison’s ongoing attempt to merge with rival Wind would also reduce the number of players from four to three, things could play out differently. Working in Three’s favour is the advantage the merger would bring to the fixed sector in Italy, which has largely been dominated by Telecom Italia, with limited competition from others.

Ofcom fought tirelessly to preserve a four-player market and feared losing the “disruptive” operator

It was no great surprise that Ofcom is against the deal. For a long time, it has advocated a four-player mobile market and has fought tirelessly to preserve just that. Its chief concern, much like the CMA’s, was the effect of the merger on pricing. Ofcom’s own analysis, combined with research on what happened in Austria following a similar merger there, showed that deals for consumers tend to be better where you have four players and a challenger brand. However, in Austria, it now seems that while some prices rose initially following the merger, most have fallen back to levels before the deal closed.

Central to Ofcom’s argument is how Three’s owner Hutchison has often acted as a “disruptive” operator, successfully challenging established players through innovation and low prices. In the course of the merger review, Hutchison fought back saying that it is now less of a challenger than before because of the constraints it now faces – namely a lack of spectrum. This now puts Three in something of an awkward positon, until it is able to find an alternative solution to the capacity issue.

Maintaining the status quo is not an option for either Three or O2

Neither Three nor O2 can stay as they are. First, their relative size in the UK market is too small, not only in terms of subscriber basis, but also with regard to their spectrum holdings. Second, the UK mobile market is set to become more competitive, not only because a combined BT/EE is a much stronger player, but also because Sky is set to enter the mobile market with force and TalkTalk and Virgin will be relaunching their services and introducing 4G services. Third, the UK fixed, mobile, and TV markets are increasingly interdependent, and existing as a mobile-only operator will become tougher still. Finally, Three is set to lose its unique customer proposition of free roaming because this will become available to all UK consumers from mid-2017 under the EU roaming regulation.

Addressing the lack of spectrum would require both operators to invest heavily in the upcoming award of 190MHz of spectrum across the 2.3GHz and 3.4GHz bands. However, even that will not be sufficient to rebalance market forces, and further mergers will likely have to play out. Telefonica wants to sell O2; Three has an appetite to grow. Other players in the market have declared their interest in merging. Virgin Media and TalkTalk are among them, and the next wave of M&A talks will likely include them in dealing with either Three or O2. As to what combination will prevail, it is still uncertain and will largely depend on the financial structure of the deal. One thing is certain: no combination will rebalance the mobile market in the same way that allowing Three and O2 to merge would have achieved.