Mobile services

Hutchison Offers Major Concessions to Seal 3/O2 Deal

Canning Fok, the chairman of UK mobile operator 3, has promised his company will not raise prices for at least five years, invest £5 billion (US$7.3 billion) over the same period and offer improved wholesale arrangements to MVNOs if it is allowed to acquire O2.

Three UK owner Hutchison Whampoa Ltd. (Hong Kong: 0013; Pink Sheets: HUWHY) is currently awaiting a European Commission decision on its £10.25 billion ($15 billion) takeover of Telefónica UK Ltd. , which trades under the O2 brand. But a merger between 3 and O2, which will create the UK's biggest mobile operator, has triggered competition concerns because it will leave the country with just three mobile networks. (See Telefónica Seals $15.2B O2 Sale to Hutchison.)

In an open letter that seeks to appease critics, Fok has offered to make some dramatic concessions if authorities bless the takeover.

The first of those is not to increase the price of a voice minute, text or megabyte throughout a five-year period following the merger. Fok also says that all cost efficiencies will be passed on to customers. "Like for like, customers' bills will go down," he says.

The promised investment of £5 billion ($7.3 billion) will be channeled into various quality-of-service improvements and represents at least 20% more than the companies would have invested on their own, says Fok.

Last, but not least, the combined entity promises to offer what Fok calls "fractional shared ownership interests in our network capacity" to wholesale customers (mobile virtual network operators, or MVNOs).

How this will work in practice remains to be seen, but the Hutchison executive claims the move would be "unprecedented" in the UK and do away with the "tricks some wholesalers use to disadvantage their wholesale customers."

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The measures indicate just how desperate Hutchison is to seal its deal with Spain's Telefónica amid regulatory concern about merger activity in Europe's mobile markets. (See Eurobites: Regulator Casts Doubt on O2/3 Deal.)

Rivals such as Vodafone Group plc (NYSE: VOD) and the recently merged BT Group plc (NYSE: BT; London: BTA)/complink 12730|EE} are unlikely to be happy about the last of Fok's promises, which could see a number of MVNOs entering the UK market and exacerbating price-based competition. (See BT Restructures, Boasts Best Quarter in 7 Years.)

Nevertheless, some analysts have argued the UK needs a much stronger mobile operator as a counterweight to BT/EE, which now occupies a powerful position in the country's fixed and mobile markets. (See UK Needs O2/3 to Challenge BT/EE – Analyst.)

"The combination of 3 (the smallest operator in the market) with O2 makes us able to stand up to the new leviathan BT, not to mention the old top-of-the-heap predator Vodafone," says Fok in his letter.

But Fok's concessions have been challenged by Rewheel Oy, a telecom industry strategy consultancy based in Helsinki. In an email sent to the media Thursday morning, it noted that 3 UK has, since the proposed merger with O2 was announced, "more than doubled the price of its flagship All-you-can-eat Data smartphone plan from £15 to £30," and increased other plans by "big double digit percentages," a move that puts the promise to freeze prices in a different light.

The consultancy also believes that an updated MVNO strategy could not address competition concerns in any European market where the number of network operators is reduced from four to three. "All MVNO wholesale access remedies have material limitations and are intrinsically ineffective," it claims.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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