BT buying EE shows that a more radical approach to telcoms regulation is needed

Through the mists… a monopoly re-emerges? tjt195, CC BY-NC

BT is planning to swallow mobile phone provider EE for £12.5 billion, a deal that will bring together Britain’s largest fixed-line telco and broadband provider with the country’s largest mobile phone network. While that looks ominous, it’s been suggested there’s still enough competition in the industry for Ofcom not to intervene.

The move probably makes strategic sense for BT and will provide operational efficiencies. But it says a lot about business when strategic moves take place by acquiring other players, instead of outmanoeuvring them through innovation. Despite massive resources and direct relationships with millions of consumers, most telcos have not been particularly good at developing exciting products and building consumer loyalty by offering value.

In fact, the old adage about telephones under state-owned providers (in the UK and US) coming in only one style, one colour and taking six weeks to get connected is generally held as a textbook example of how huge, incumbent monopolistic companies tend to drag their feet.

BT will be able to cross-sell its mobile, fixed, broadband and television services to customers, but don’t expect major consumer innovations to emerge from the deal. The voice-over-IP internet call service Skype reveals much about how the industry reacts to innovations that consumers love, but would change the traditional mode of operation.

Telcos would have rather just killed the new means of communicating rather than admit that Skype represents something telcos should have brought to their customers in the first place.

Playing catch-up

Telecommunications operators are probably not natural monopolies (an original argument of deregulation) but neither have they quite become consumer-oriented businesses in the 30 years since deregulation. Telephone and broadband services still feel like a glorified utility sold in a colourful wrapping. This is because much of what telecommunications operators do is running a utility business.

The fact they spend huge sums on marketing – BT alone spent nearly £150m on advertising in 2013 – does not change this one iota.

The telecommunications market originated in an era when the industry was by and large about connecting voice calls between fixed terminals. The objective was to keep prices in check, something which the regulator has at least (to a degree) achieved. Encouraging the sort of innovative digital services we see today – but which hardly existed then – was not on the agenda at the time the foundations for competition were laid.

Later on, so-called mobile virtual network operators were introduced to fix this problem, where companies could set themselves up as telecoms providers by renting network access from the established telecoms firms that own the infrastructure (such as BT) and adding extra services for customers.

The assumption was perhaps that there would be a lot of these virtual operators leasing network capacity and services from a few traditional telcos, effectively separating the consumer-oriented businesses from the fundamentally different utility firms that provide the cables.

The irony is that BT’s existing mobile phone provider, BT Mobile, is a virtual operator that will now consolidate with EE, the firm that operates the network infrastructure BT Mobile uses. From this perspective, the virtual operator concept has failed to free the consumer side of the business from being a hostage to the underlying utility company.

Virtual operators are today mostly branding exercises (for example, Tesco Mobile) or, as is the case with BT Mobile, tools for traditional telecommunications operators to play their strategic game. Telcos such as BT have found their way around current efforts to regulate greater competition.

More radical approach is needed

A more radical approach is needed if the market is to create diverse competition that is meaningful, rather than a situation where there are only firms buying access to the same wires and selling them to us at a price. Nationalising the utility part of the business is hardly an option and would probably not produce any greater innovation anyway. There are at least three different scenarios how the market could play out.

A more radical regulatory approach could force companies to operate either the utility or the consumer side of the business – but not both. Whether this is practical in the short, or even in the long term is another matter, and would require getting the balance between roles right.

Second, a powerful consumer technology company such as Apple or Google can enter the telecommunications market and use their massive resources to change the market dynamics. This seems very risky and therefore an unlikely strategy even for major technology companies. But it has happened before – Apple’s iPhone reinvented how we approached what a phone is capable of.

Third, a traditional telecoms company such as BT could leverage its increasingly strong position to reinvent itself as a consumer-oriented company. This also seems unlikely but is still possible and could be driven by perceived threat of the two previous scenarios.

Still, only days after the announcement and rumblings of discontent from the industry have already begun – we’ll have to wait and see what Ofcom’s view is.