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How challenger Three plans to keep momentum following O2 merger collapse

Written by Noah Bethilda

Where to now for the UK’s two smaller operators, Three and O2?

Both are still reeling from the European Commission’s decision in May to block Three owner Hutchinson Whampoa’s purchase of the Telefonica-owned network O2, on the basis that this would reduce choice and raise prices for UK mobile customers.

O2 has been mulling a number of options, with Telefonica confirming on 5 September that an IPO of O2 was a possibility.

As for Three, the company has launched a new PR offensive to secure the mobile spectrum that it said is essential to stopping it from “stagnating”.

The O2 buy was “fundamentally about scale”, CEO Dave Dyson said at a press event on 6 September.

Due to the heavy fixed costs involved in running a mobile network, Three believed that merging with O2 would allow the company to increase its efficiency. The deal would have allowed it to quickly acquire new customers and compete with the new behemoth BT-EE, while fending off Sky as it enters the mobile market.

The fundamentals haven’t changed, said Dyson. The company will continue to pursue the same strategy in order to grow organically.

Dyson said that blocking the merger was the “wrong decision” and said that UK customers have been “robbed” of what could have been the best mobile network in Europe.

He said explicitly that there is not another acquisition or merger in the pipeline, however, although he said the company is open to the possibility.

Three’s approach remains focused on introducing new business models in areas where it feels the incumbent has been slow to innovate: “moving the profits that are hidden” in the industry.

Dyson did not pull any punches in his criticism of the industry Three is trying to challenge: he said that the industry is “pretty mediocre” and believes that if Three can compete it will be able to take market share from the incumbents EE and Vodafone.

For example, in the Pay As You Go (PAYG) market, Three has recorded big growth compared to the industry norm, based on a low price structure which differs from normal PAYG offerings that Dyson said are aimed at pushing customers towards signing up to contracts.

It has also been building its Feel At Home roaming offering, which now covers 80 percent of customer trips.

But having the right strategy is not enough, Dyson said.

It is here where the collapse of the O2 deal has been perhaps most damaging: Three failed to gain access to the additional spectrum that it believes is needed to meaningfully compete, a problem which Dyson said is now the biggest barrier to the operator’s success.

It is this barrier that will define Three’s PR strategy in the near future. The operator is lobbying Ofcom to demand that the next spectrum auction is handled in a way that will level the playing field.

The solution, Three argues, is for Ofcom to impose a cap so that no network can own more than 30 percent of the airwaves post-auction.

This would mean BT, for example, would have to sell existing spectrum to buy new spectrum. The cap would primarily disadvantage the two largest operators; between them, Vodafone and EE control 70 percent of total available UK spectrum.

Three believes that the 2014 auction may have involved strategic bidding, with the incumbents using their “deep pockets” to buy spectrum purely to prevent it going to the smaller rivals. Currently both EE and Vodafone are "sitting on" (holding but not using) what Dyson claimed would be enough spectrum to launch a fifth operator.

Prior to 2G liberalisation, spectrum in the UK was shared fairly evenly, but recent years have seen the advantage accrue to the larger operators at the expense of both Three and O2. Subsequent to 2G liberalisation and the 2014 spectrum auction, Dyson said that the UK now has the most imbalanced spectrum allocation of any developed country.

Three is clear that this is the big obstacle it faces, but how optimistic the company is of achieving these concessions is less clear.

The regulatory regime will be crucial, with Dyson acknowledging that all of Three's current spectrum holdings have been attained through regulatory intervention.

However, Dyson is sceptical of Ofcom’s track record. While he said that Ofcom does a good job within the parameters available, he is deeply critical of these parameters. He suggested that Ofcom is cowed by the large legal teams of the big operators into taking fewer risks.

For example, efforts to reform issues around number portability, which would allow customers to switch more easily between networks, have been mired in battles with the big operators.

There are positive signs in Ofcom’s submissions to the European Commission over the O2-Three merger.

“I’m confident that there will be some competition measures, but not confident that they will stick their neck out enough,” said Dyson.

Ultimately, though, he would like to see a far more powerful Ofcom.

Whether Ofcom takes heed or not, we can expect to hear a lot more about spectrum from Three as the operator prepares to continue on its own, solitary, path.

The post How challenger Three plans to keep momentum following O2 merger collapse appeared first on Computer Business Review.


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