Analysts on BT/EE: light at the end of regulatory tunnel but quad-play success not guaranteed

Following BT’s successful negotiations with Orange and Deutsche Telekom to acquire their subsidiary EE, the UK’s biggest mobile operator, Telecoms.com sought to suss out the possible implications of the deal if it was to be approved by regulators. Analysts seem to think the deal has every chance of becoming reality but said BT needs to carefully position its new quad-play offer for it to succeed.

Apart from the biggest hurdle of getting the proposed acquisition regulatory approval, BT’s biggest task is to get a clear integration strategy in place. “The transaction has completed as expected and outlined by all parties,” industry analyst Phil Kendall from Strategy Analytics told Telecoms.com. “Now comes the challenging part of refining strategies and creating some real synergies in the business.”

“Some of those challenges will include plotting a path for the TV business, with the fledgling EE TV service expected to make way for BT TV. However, EE TV has some better features in terms of smartphone/tablet interaction with the TV, so it would be good to see those rolled into the BT TV proposition.”

Lately there has been plenty of talk about multi-play, and it is clearly a growing trend in the industry. If the EE acquisition is approved, BT will re-enter the mobile market it exited over a decade ago with an offering consisting of four different services: fixed-line, mobile broadband and TV services.

“This move by BT is a major statement of intent regarding its multi-play aspirations, and it serves as a clear warning to UK rivals, notably Vodafone, Sky and Virgin Media,” Paolo Pescatore, an analyst at CCS Insight said.

“These companies will be forced to review their position as the market for convergence in the UK rapidly comes to the boil. And more importantly however, it removes a converged rival from the market; BT will now face one fewer competitor.”

However, according to Kendall making quad-play attractive to customers is more than just discounts and a single bill. “There is a good opportunity here for more joined-up services- like EE TV- and even just pushing connectivity trends forward. Shared plans have made relatively slow progress at EE, so there is still a big opportunity to build propositions around the family that bring more devices onto the network [such as tablets and smart devices].”

BT has made it clear it intends to target the entire combined customer base of the two companies. But as it could take some persuasion to get EE’s existing customers to sign up for BT’s other services, it might be a while before it really becomes a competitive quad-play force. “BT expects to generate revenue synergies by providing a full-range of communications services to the combined customer base,” the telco said in a statement. “This includes selling BT’s broadband, fixed telephony and pay-TV services to those EE customers who do not currently take a service from BT.”

It will also be a challenge for BT to ensure EE’s 4G doesn’t diminish the appeal of a home broadband connection. “Perhaps BTEE [a fictional name for the merger] needs to focus on a personal broadband idea: that always best connected message where it’s all about the quality of experience irrespective of underlying access technology,” Kendall said. “But it is going to need a hook- why 4G plus fixed broadband is greater than the sum of its parts.

“Deciding whether to continue with BT’s previous ‘inside-out’ 4G strategy, where it had talked about adding 4G to broadband gateways in the home/office. That’s much less of a priority now, but there are scenarios and segments where it would still be worth pursuing the idea.”

Ernest Doku from consumer comparison site uSwitch.com said: “So many different bundles available for different products mean it can be trickier to compare deals across providers, and subsequently to know if you are getting a good deal. It will be down to BT and EE to ensure all packages are clear, transparent and competitively priced for customers if quad-play is to succeed.”

As for the likelihood of the acquisition being approved by competition authorities, we will have to wait and see. “BT anticipates that the transaction will need to be cleared by the Competition and Markets Authority (CMA),” Matthew Howett from Ovum Research said. “Depending on whether or not remedies are required, that process could last between eight and 32 weeks. The operator does not expect clearance from the EC [European Commission] to be required.”

Although this move wouldn’t reduce the number of mobile operators in the UK (a key consideration for Ofcom), BT is more than likely ordered to make some concessions. “At this point in time, things generally look promising and the green light is likely to be given, albeit with concessions needed,” Howett said.

“One of those is likely to address the combined entity’s spectrum holding. BT was particularly successful in the 2013 4G spectrum auction, acquiring spectrum at 2.6GHz, and the inquiry is likely to assess what adding this to EE’s already sizable lot will mean.”

Another regulatory string to be attached could mean the divestment of BT’s network maintenance arm, BT Opeanreach. “There has been some suggestion that UK regulators could demand its [Openreach] sale as a condition of approval for the tie-up with EE,” Ken Odeluga, a market analyst at City Index said.

“With Openreach constituting about 28-30% of [BT’s] total revenue, it is likely Openreach brings in £1.2 billion per annum. So whilst the view of a forced regulatory disposal probably represents the more ‘fringe’ side of regulatory outcomes, the suggested enterprise value of Openreach in view of those revenues could make its sale an idea shareholders latch on to.”

According to Howett, Ofcom could also ask BT to transfer all of its products currently provided by its wholesale division over to Openreach. “Other UK mobile operators are already calling for guarantees that the wholesale products BT currently provides for backhauling traffic will be offered on a non-discriminatory basis, Howett said.

“…[Openreach] is already obligated to provide access on a non-discriminatory basis. This solution is on the radar, and Ovum understands that Ofcom has been considering it since November of last year. Given the importance of these inputs to other mobile operators, a firm guarantee will be needed.”

Although the outcome of the proposed acquisition is still months away, BT’s possible return to consumer mobile and entering of the quad-play market is sending ripples across the market. This is evident in the recently confirmed negotiations between the owners of 3 UK and O2 (Hutchison Whampoa and Telefónica respectively) over the possible sale of UK’s second largest operator O2.

“As the only pure-play mobile operators remaining in the UK, 3 and O2 are in a vulnerable position,” Paolo Pescatore, industry analyst at CCS Insights said. Our survey data shows that there’s a clear consumer appetite for multi-play so BT’s move opens the market up for further potential consolidation involving these companies as well as others.

“One scenario sees Vodafone buying Sky – another one of our predictions. It would give Vodafone a firm place in the fast-moving pay-TV world, which offers many revenue opportunities in the growing multi-play services area.”

With its recent MVNO agreement with O2, it seems Sky is very much thinking it needs to have a mobile offering too. “In the UK, Sky does not offer mobile and Vodafone lacks a strong consumer broadband and video service,” Pescatore said.

“In Germany Sky offers only pay-TV and Vodafone is making an aggressive push into fixed line services and needs to strengthen its pay-TV service. In Italy, Sky offers only pay-TV and Vodafone has broadband and mobile.”

Given the fact that a merger between BT and EE wouldn’t reduce the number of mobile operators in the UK, it seems likely the bid is approved. But not without BT having to give up on some of its existing assets. Judging by the recent new rules on the margin between BT’s wholesale and retail fibre network pricing, it also seems Ofcom has already started putting some safeguards in place to ensure healthy competition in the future. Nevertheless, the proposed acquisition marks a distinct push to multi-play within the UK telecoms sector.