Speaker’s corner: the winners and losers in the Virgin-O2 merger

Graystone Strategy director James Gray looks at the implications of the proposed merger

The announcement that Virgin Media and O2 plan to merge will have come as a surprise to many in the market, not least because six months earlier Virgin had struck a deal with Vodafone. If it goes ahead, it will really disrupt the industry and give competitors cause for concern.

It’s clear that O2 became a bit of a problem for parent company Telefónica after the regulator and CMA blocked a merger with Three. That was a surprise in itself because the deal with EE and BT had been waved through.

O2 needed to do something. A pivot in strategy has clearly brought a new option to light. And it’s shrewd. Now Virgin can fill the gap left by O2’s decision to leave Carphone Warehouse, and take advantage of network economies, and at the same time O2 can offer the services it lacks like TV and broadband. As the customer bases merge, so the new entity would become the market leader for subscribers.

That’s a big deal. And that’s before you look at the pair’s strong business channels with which they can galvanise dealers – O2 can take the lead on mobile and private networks, and Virgin can drive the fixed connectivity.

The deal also makes sense because of the segments the companies serve. Virgin Mobile has more than its fair share of customers who look for a quality service known as ‘Service Seekers’, people who want to make their money go further referred to as ‘Budget Balancers’ and older people who want value, service and straightforward products otherwise known as ‘Settled Seniors’. Whereas O2 over-indexes on those who live their lives digitally  – the ‘Digital Devotees’, and those who have to have the latest technology otherwise known as ‘Technology Trail Blazers’. Virgin’s broadband and TV appeals to both segments.

Impact on Sky and BT

Interestingly, Sky also over-indexes on ‘Digital Devotees’ for both TV and broadband. So, an O2/Virgin multi-play deal could see Sky customers switch. Consumers really will be the winners. More choice and more competitive offers as the incumbents do all they can to compete.

And compete they must, as a merger like this really does change dynamics especially for Sky Mobile and BT. That said there is a good chance that O2 may lose Sky Mobile as an MVNO. Sky Mobile has been growing fast on the O2 network, and BT may be an alternative home for it.

There may also be a short-term gain for BT. Migrating Virgin customers away from BT to O2 may take longer than it was going to take to migrate them to Vodafone. This gives some wholesale revenue benefits and possibly a chance to take a premium.

Another higher risk but not unthinkable strategy for Sky would be to sell its mobile base to O2. It’s not hard linked to broadband or TV but a move like that comes with some real risk specifically that any Virgin/O2 venture would seek to convert those acquired customers to Virgin TV and broadband.

Vodafone, Three and EE – a bidding war on the cards?

There’s no doubt Vodafone is a loser in this, as even with penalty payments from Virgin, it will be worse off. In my mind, there aren’t enough customers for Vodafone to mop up from other MVNOs or acquisitions to make up for the revenue and margin they were banking on from the Virgin deal.

Then there is Three which could also fare badly as it would be the only MNO with no play for the home. Three may have fixed broadband 5G on the horizon, but it will be at a distinct disadvantage until the majority of consumers want to cut the cord and take mobile-only connectivity in the home.

There is, however, an opportunity for Three with Sky – and also one for Vodafone and EE. It’s likely Sky will have clauses in its contract with O2 to safeguard change of ownership and potentially ‘exclusivity of category’. If true, it means Sky will seriously consider moving away from O2. A bidding war between operators to pick up Sky’s wholesale business could force some interesting market dynamics.

TalkTalk – left in the cold

Whatever happens, it will be interesting to see how TalkTalk responds. It left the mobile market a while ago, but these moves leave it in the cold and could be just enough to entice it back out, or at the very least seek a mobile partner to allow it to compete in the multi-play market. The obvious partner is Three, which lacks the fixed connectivity that TalkTalk has.

There are of course regulatory hoops to jump through, but O2 has shown its hand. It’s up to something and I imagine regulatory lawyers at all MNOs will be working around the clock on this to influence an outcome. No doubt they will be exercised by the maths that indicates a combined subscriber base of 38.1 million, an approximate 41 per cent market share of mobile customers for the proposed merged entity.

All operators need to take a look at their segments, how the market will change things, and re-assess how well their propositions meet customer needs. Whether it will be approved is still to be seen, but either way change is afoot and operators, MVNOs and the channel would do well to get ready.

James Gray is director at Graystone Strategy, a business consultancy. He has over 25 years of telecoms experience, having worked in senior roles at Vodafone, Carphone Warehouse, and iD Mobile, among others.