23 Jan 2015

Does Three + O2 = lower prices?

A few years back I had to renew my phone contract. I found a deal on the website of a well-known phone shop, so I called up to order it. The salesman who answered said: “I can beat that deal!”, and immediately knocked a fiver off.

It was bewildering. Despite the fact he worked for the same company, the salesman told me he frequently tried to undercut the website.

It’s this kind of rampant competition that’s given UK consumers a pretty good deal on mobile contracts over the years (so long as you stay within your minutes and stick to wifi abroad). Is today’s announcement that Three’s owner is in exclusive talks to take over O2 going to bring those days to an end?

There’s several factors at work, so here’s a list of some of them in no particular order:

–  Firstly, the intense competition I witnessed has eaten into the margins of phone companies (indeed, Three was one of the most aggressive fighters in this price war).

–  However, secondly: 4G has allowed the mobile companies to give their turnover a temporary boost as they sting customers for contracts around the £30-a-month price point (a big increase on what people had got used to paying for 3G).

– Thirdly, there’s a sense that just being a mobile provider doesn’t promise a rosy future, and that wise companies should instead get into what’s called “multi-play” (bundling up TV, broadband and phone into a package).

Why? You can charge more for a start, and then upsell on the different services (which is why multi-pay subscribers get phonecalls from salespeople eager to sign them up to more TV channels, more data, etc). Virgin Media already fights in this space, as does BT since its takeover of EE. Three buying O2 would give them the UK’s biggest customer base; but expect a move into multi-play to follow.

–  That’s because, fourthly, providing multiple services protects mobile companies from the big shadow looming over them: Wifi. As availability of wireless internet spreads (both Google and Facebook  are working on earth-orbit transmitters), the mobile companies face an existential threat.

So what’s the answer? Does 3 + O2 = lower prices? Here’s my prediction: short term, no change. Medium term, gradual creep-up of mobile contract prices. Long term, mobile-only contracts will be expensive as the companies try to push us into multi-play deals.

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