UK Edition
Virgin snubs Three to stick with BT on wireless contract
The mobile operator Three has been dealt a fresh blow after it was pipped to a major contract to provide the network for Virgin Media’s wireless arm.
The cable giant has instead signed a new five-year deal with BT, the owner of its current mobile wholesale provider EE, industry sources revealed.
The new terms will allow Virgin Media to build what is known as a “thick” virtual network, expanding on its current “thin” operation.
A thick virtual network means the company will have control over all elements except the mobile masts and signals, including Sim cards, billing and the broadband links between masts.
It will mean an investment of hundreds of millions of pounds in new systems and will pit Virgin Media against Sky’s new mobile service, which was commercially launched last week as Britain’s first thick virtual network.
The rivals both plan to use greater control of their networks to integrate them more tightly with broadband and pay-TV, allowing them to compete better with full network owners BT and Vodafone as the market shifts towards more bundled services.
Mike Fries, the chief executive of Virgin Media’s parent company Liberty Global, told investors last week it could mount a multi-billion takeover bid for O2. Spanish owner Telefonica is currently preparing to float part of the operator after an attempt to sell it to Three last year was blocked by competiton watchdogs.
“There are acquisition opportunities like O2,” Mr Fries said. “Virgin Media really has complete optionality.”
The decision to stick with BT for now comes after fiercely contested bidding, in which Three sought to poach the contract to serve Virgin Media’s 3m customers.
Three, Britain’s smallest network owner and part of the Hong Kong conglomerate CK Hutchison, targeted the process as an alternative route to boost scale following the failure of its £10.3bn bid for O2.
Watchdogs said it risked damaging infrastructure competition and consumer choice. Dave Dyson, Three’s chief executive, has said gaining millions more customers is crucial to the viability of the operator.
Three has only around 9m customers, less than half the number of operator Vodafone, but faces comparable costs for running a national mobile network. Hutchison has ploughed more than £12bn into Three since 2003 to build it up but is yet to see a return.
The addition of Virgin Media’s wholesale contract would have provided a boost, although Three sources the operator needed more spectrum to be a “credible” wholesaler.
Three lost out in part because of the one-off cost and risk the cable operator would have faced switching networks.
Three is now focused on attempting to convince Ofcom to intervene in auctions of radio spectrum to improve its share of the airwaves, to give it capacity to add more customers.
It has 14pc compared with BT’s 42pc. Rivals argue it should pay the market rate for the scarce resource.
The decision to stay on EE represents a compromise by Tom Mockridge, Virgin Media’s chief executive.
When BT made its £12.5bn swoop on EE in 2015, the cable operator attacked the Competition and Markets Authority for waving the takeover through without any competition remedies. Virgin Media claimed that its biggest broadband rival could raise EE’s mobile wholesale prices to make it tougher to compete.