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O2 and Virgin Media merger - Warwick Business School experts comment

O2 and Virgin Media have announced plans to merge, creating one of the UK's largest entertainment and telecoms in the process, and experts from Warwick Business School have offered his thoughts on how this is likely to affect prices for customers, and on what both parent firms will need to make this joint venture successful.

John Colley, Associate Dean of Warwick Business School, said: "The proposed deal to merge the mobile O2 network with Virgin Media is principally about bundling services. These are marketed as being in the consumer’s best interests as a ‘one stop convenient shop’. However this is rarely the case. Most of the services such as mobile network, broadband, and fixed landline are commoditised. The desperation to bundle is to avoid direct price competition which will end in lower prices. By bundling services with virgin media content packages the true price of these commoditised services are obscured and direct comparisons can be avoided. Ultimately with content packages and other service bundles the consumer ends up being unable to make direct price comparisons and takes and pays for services and content they do not necessarily use.

"Whilst the CMA approved the merger of BT and EE in 2016 they were the first to move. A subsequent merger further limits competition and offers consumers two sets of bundled services to choose from. Whilst there are some other options still consumer choice is being progressively limited.

"This may be an opportunistic merger attempting to take advantage of the perceived change in policy from the CMA. In recent weeks it has become apparent that the CMA has become more focused on the survival of business as a priority over maintaining a competitive market.

"However O2 and Virgin Media are businesses that are benefiting from the present covid-induced state of affairs. One suspects that the CMA will take a keen interest in this merger.

"All the evidence from other countries suggests that in the telecoms and broadband market that the levels of supplier concentration directly influence profits and prices.

"Where there are three competitors, profits and prices tend to be much higher than where there are four or five competitors. It seems unlikely that customers can gain from this merger as it is unlikely that sufficient competition will remain after the merger to force competitors to pass savings on to competitors in lower prices."

Koen H. Heimeriks, Professor of Strategy at Warwick Business School, said: “The merging of the O2 and Virgin Media assets by Liberty and Telefónica is a consolidation deal of strategic importance to both firms. Essentially creating a 50/50 joint venture (JV), the deal offers the two firms several key benefits: cost savings, reduced leverage, and potential opportunities for growth when markets stabilize post-Corona.

"One key aspect, is of course that the deal offers a pathway to some cost savings and reduced debt levels. Both aspects are key to survive longer-term in a consolidation market. What’s more, the JV will be backed by 'Cable cowboy' John Malone, who has an obvious background in successfully competing in hyper-competitive spaces such as cable TV and services.

"Therefore the key to whether this deal will prove successful eventually is but one: can the combined firm yield enough growth opportunities in the U.K. mobile network domain? Eventually being able to reap joint innovation and growth synergies across the activities of firms and their parents will prove to be pivotal. Now that Virgin Media is facing its fourth owner, the ability to forge successful joint operations in the JV will be essential to have both parties perceive this as the cherry on the cake."

ENDS

Note to editors

John Colley is a former MD of a FTSE 100 company who has first hand experiences of mergers. He has also studied them mergers and takeovers since joining Warwick Business School as a Professor of Practice.

Contact:

Peter Thorley
Media Relations Manager (Warwick Medical School and Department of Physics)

Email: peter.thorley@warwick.ac.uk

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