O2 and Virgin Media announce official merger and set sights on BT’s dominance

UK broadband giant Virgin Media and mobile phone operator O2 have today officially announced that they are set to merge, creating a new entertainment and telecoms giant that could rival the dominance of BT.

After a week of speculation, the news was announced by Liberty Global, which owns Virgin Media, and Spain’s Telefonica, which owns O2, and revealed that they had agreed on terms for a merger deal.

Liberty Global and Telefonica are entering a 50:50 joint venture, and the deal would combine O2’s 34 million UK customers with Virgin’s 14 million broadband, TV and mobile customers across the UK.

Mike Fries, CEO of Liberty Global, said: “Virgin Media has redefined broadband and entertainment in the UK with lightning-fast speeds and the most innovative video platform. And O2 is widely recognised as the most reliable and admired mobile operator in the UK.”

Telefonica’s Chief Executive Jose Maria Alvarez-Pallete continued: “Combining O2’s number one mobile business with Virgin Media’s superfast broadband network and entertainment services will be a game-changer in the UK, at a time when demand for connectivity has never been greater or more critical.”

Industry reaction

Professor John Colley, Associate Dean at Warwick Business School

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 focussed on the survival of business as a priority over maintaining a competitive market.

However O2 and Virgin Media are businesses that are benefitting 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.