Business Technology

Sunday 31 August 2014

Rise of WhatsApp casts doubt on future benefits of 3/O2 deal

Technology

Adrian Weckler

Published 27/02/2014 | 02:30

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WhatsApp Chief Executive Officer and co-founder Jan Koum speaking at the Mobile World Congress in Barcelona

How many O2 Irelands could you buy for the same price as one WhatsApp? Eighteen, estimates 3 Ireland, which earnestly tried to persuade the European Commission on Tuesday to accept its bid of €780m for Ireland's second-largest operator.

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O2 Ireland employs around 1,000 people. WhatsApp employs 55. O2 Ireland has a physical network in place. WhatsApp has a few servers.

And yet the gap between the value of O2 Ireland – or any Irish operator – and services such as WhatsApp is growing by the month. In fact, Mark Zuckerberg told an audience I attended in Barcelona's Mobile World Congress this week that WhatsApp is probably worth more than the $19bn (€13.8bn) that Facebook paid for the messaging service.

Looking around at the thousands of exhibitors and tens of thousands of attendees at Mobile World Congress – from where I am writing this – it seems that the tide is with Zuckerberg.

While giant operators such as Vodafone, China Mobile and Telefonica (O2 Ireland's parent company) are in attendance here, their stands are dwarfed by the mega-structures of digital and tech firms. Walking through 100,000 square foot enclosures of Samsung, LG and others bears physical testimony to a change in market conditions for traditional telecoms firms.

It is not clear whether European Commission regulators – just 1,060km up the road – fully appreciate the speed at which the market is changing. No one knows exactly whether Competition Commissioner Joaquin Almunia thinks that the WhatsApp deal simply represents a 'tech bubble'. But if he does, it might explain why the Commission appears to be hardening its stance against a reduction of network operators in European countries and, hence, why it might block the 3 Ireland/O2 Ireland acquisition.

Five years ago, when there was no WhatsApp, Viber or Snapchat, more mobile operators generally meant more competition and lower consumer prices without anyone going to the wall. Back then, it was generally a good thing to prioritise a proliferation of operators over other industry concerns. To boot, the European Commission has a decent track record in standing up for consumers: give us these guys over malleable America regulators any day.

But in telecoms, the tide has swung a completely different way – one that the Commission, respectfully, may not fully have accepted.

Four hundred and fifty million people switching from SMS to one outfit's (WhatsApp) messaging services alone isn't a fad or a glitch. It's a new industry.

While no one should shed any tears for mobile operators – especially those in Ireland that have been making duopoly-level cash over the last decade – the interests of mobile phone users cannot be separated from the change in communications that has happened in the last five years.

So if the 3 Ireland/O2 deal falls because of a structural principle of disallowing four operators reducing to three, this is probably a short-sighted decision.

Forcing telcos into a corner – as 3 Ireland owner Hutchison Whampoa will be with their €50m per year losses here – may also have other unforeseen disadvantages down the line, too.

For example, telecom operators have long been whingeing over web companies' getting "a free ride" in relation to internet access. By rights, they have argued, companies such as Google and Amazon and Dropbox should be paying premiums to operators for "clear" access to services on those networks. This dilution of 'net neutrality' would be a poor one for citizens and general business development. And, because they have largely operated in a healthy, profitable industrial climate, operators have not pressed the matter unduly.

But in Europe and the US, telecoms companies are not in a healthy climate anymore. And their options are getting more desperate. Just this week, we learned that Netflix has agreed to pay US cable giant Comcast extra for better access to its network. Is this the kind of thing that we want to see in Europe? I don't think so.

If the Commission does block the 3/O2 deal, Hutchison may decide to leave the Irish market. That would lead to another player – possibly UPC, with which 3 is in negotiations about a virtual operator setup anyway – buying 3 Ireland's network. But given the economics involved, it is unlikely that that buyer would be a cash-rich player willing to invest against the rise of WhatsApp, Facebook and Snapchat. So the Commission should be careful about what it is hoping for.

The era when a country like Ireland might support four 4G-investing networks may have passed with the rise of WhatsApp.

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