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Ofcom: Mobile contracts could go up by 20% if Three merges with O2

Tuesday, March 15th 2016 by Phil Wilkinson-Jones

The cost of mobile phone contracts could increase by up to 20% if the merger of Three and O2 goes ahead, new research suggests.

An Ofcom report looking at the impact of ‘disruptive’ firms on mobile markets found that prices could go up by between 17.2% and 20.5%.

The proposed merger of Three and O2 – two of the UK’s biggest mobile providers – is currently the subject of an in-depth investigation by the European Commission.

The deal, which would create the UK’s biggest mobile network, was criticised by Ofcom last month, with CEO Sharon White warning that it would lead to higher prices for consumers.

The regulator’s latest study, ‘A cross-country econometric analysis of the effect of disruptive firms on mobile pricing’, reveals the extent to which prices could increase.

In the report, Ofcom says prices are between 17.2% and 20.5% lower on average in countries where there are four or more mobile operators including a disruptive firm.

“By implication, this may suggest that removing a disruptive player from a four player market (as is proposed in the H3G/O2 merger in the UK) could increase prices by between 17.2% and 20.5% on average, all else being equal,” the report states.

Ofcom says Three acts as a disruptive firm in the UK by “competing aggressively and innovating by being the first to offer unlimited data plans and free roaming to some other countries”.

It says the company’s market share is also consistent with that of a disruptive firm – and a desire to increase market share is what drives companies to be disruptive.

The report adds that once a such a company has won enough customers, it may have little incentive to remain disruptive.

A combined Three and O2 would create the UK’s largest mobile network with a 41% market share, compared to EE’s 32% and Vodafone’s 24%.

Last month, Ofcom CEO Sharon White said competition between the four providers is what gives UK consumers some of the lowest prices in Europe.

“Ofcom, the UK communications regulator, aims to maintain that progress through competition," she added.

“So we are concerned that the smallest mobile network, Three proposes to become the biggest by acquiring its rival, O2.”

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