Telefonica calling: why BT’s return to mobile is inevitable

Return to prominence. David Hastings, CC BY

The news that BT is in talks to buy either the O2 or EE mobile phone operators comes as no surprise. The UK telecoms market is one of the most competitive and regulated in the world and with traditional revenue streams declining; companies are seeking new ways to survive. It therefore makes sense that shareholders in Telefonica, the Spanish telecommunications company, approached BT about buying their British businesses.

The ‘quadruple play’

One recent trend in the telecommunications industry is to move into “quadruple play” – offering landline telephone, broadband, mobile and television services as a bundled package to customers. We have already seen Virgin Media, Talk Talk and EE adopt this strategy and it looks as though Vodafone is about to launch a broadband TV service next year. So where does this leave BT?

BT have a well established landline telephone and broadband portfolio, added to which is their BT Sport television service. Despite being a pioneer of the mobile phone in the UK, BT gave up its mobile business in 2005 and now has no footprint in that marketplace. A re-entry into mobile is therefore an essential and logical step if it wishes to follow the trend. A point recognised by the immediate jump of 3.6% in BT’s share price when the news of talks first broke. The question is, how best to do it?

Despite bidding and being awarded a licence to provide 4G mobile services, BT have so far done nothing with it, and building a mobile network from scratch makes no sense. Buying an existing operator is therefore the only real option open to them. And here is where the 4G market is so important, because the increased bandwidth offered by that technology has seen a large growth in the consumption of mobile video thereby making it an ideal new delivery channel for a company that has invested heavily in its own sports channel.

O2 vs EE

Today O2 is the UK’s second largest mobile provider with 25% of the market share – behind EE at 40% and above Vodafone at 22%. However, O2 has tended to pour scorn on its rivals’ move towards the quad play market and stayed focused on its mobile business. This makes O2 an attractive proposition for BT. Given O2’s focus on the mobile sector, there is little overlap with BT’s existing portfolio of services.

More importantly, in respect of 4G, the spectrum which O2 and BT have won are complementary, providing both low and high frequency coverage. And the deal makes sense because O2’s owner, Telefonica, has been battling its own debt mountain in recent years, so the sale of O2 could bring useful income and allow it to invest in potentially more lucrative global markets.

The better fit

The alternative for BT would be to purchase EE, which is jointly owned by France Telecom and Deutsche Telecom. There is already a commercial tie-up between these two because earlier in the year, EE won a contract from Vodafone to provide BT’s 80,000 staff with mobile phones under a Mobile Virtual Network Operator agreement.

The fit between BT and EE seems less attractive, however, than O2, despite the cost of the deal being similar (around £10 billion). On one hand, combining a quad play and triple play company would necessitate a restructuring and consolidation of their landline telephone, broadband and television portfolios. And, in addition, their respective 4G spectrum allocations overlap which would probably require frequencies to be released back to Ofcom.

Buying O2 would therefore seem like the more logical choice of the two. If this comes to pass then it will be interesting to see if BT chooses to retain the O2 brand which is established throughout Europe and not just the UK. Whatever happens, BT’s move into mobile is inevitable and whether it buys O2 or EE, this could signal the beginning of the end for foreign ownership of the UK mobile industry.

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