Ad blocking debate has potential to shape the telecoms market of the future, says expert

If more telecoms companies embrace technology that allows customers to block adverts from being displayed then it could have an impact on the business models of content providers that rely on telecoms networks to reach consumers, said telecoms regulation specialist Diane Mullenex of Pinsent Masons, the law firm behind Out-Law.com.

Mullenex was commenting after Three said it plans to offer ad blocking software to its customers later this year.

"Many so called 'over-the-top' content providers rely on revenues from advertising as a major source of finance," Mullenex said. "Many content providers and advertisers warn that the rise of ad blocking could see consumers having to pay or pay more for content they currently can access for free or at low cost. However, there has been a long-standing argument from telecoms operators that they should not have to foot the bill for the cost of running networks that support others' data-heavy communication and content services."

"Telecoms operators are under pressure to invest in and build the next generation of infrastructure to handle the increasing volume of data being transferred over networks. However, they are facing a squeeze on previously reliable revenue sources, such as from calls, text messaging and data roaming, as a result of competition from new communication providers and EU regulation. In this environment, and to obtain the economies of scale they deem necessary to afford to invest in new infrastructure, some companies have explored merger opportunities. However, many have faced opposition to those plans from competition regulators," she said.

"The ad blocking debate adds a new dynamic to the discussion. If ad blocking is found to be legal – there are cases being prepared before courts in Europe to say otherwise – then it could force content providers to come to new managed service agreements with telecoms network operators. Those deals could see advertising restrictions lifted, and smooth delivery of content to consumers delivered, in return for content providers paying more towards the maintenance and development of networks. The agreements would have to be in line with new EU net neutrality legislation," Mullenex said.

"Those arrangements might go some way to resolving telecom operators' concerns about a lack of capital for investing in new networks and reduce calls for competition rules to be relaxed to enable greater consolidation in the telecoms market," Mullenex said.

Last week Mats Granryd, the new director general of Global mobile operators' association the GSMA, said that consolidation was necessary to ensure telecoms companies had the capital required to invest in infrastructure, according to a Bloomberg report.

"Consolidation is duly needed in Europe,” Granryd said. "Consumers are important, but we need to make sure the business is thriving and able to put money into the networks."

Granryd said it is "almost a no-brainer" for regulators to allow the number of major mobile network operators within national markets in the EU to fall from four, as is typical in most countries, including the UK, to three, such as like in Austria and some other countries.

Last autumn Danish telecoms businesses Telenor and TeliaSonera stepped back from their proposed merger after failing to reach an agreement with the European Commission on how they could address concerns the Commission had about the potential impact on competition in the Danish market as a result of the deal. The Commission, responsible for assessing major M&A deals in the EU, had opened an investigation into the proposed deal in April 2015.

At the time the merger was called off the companies said that the deal they had planned would have created a mobile operator "with the scale and ability to compete and invest would ensure that customers and businesses would benefit from better quality, speed and coverage". However, it said that its discussions on the merger with the Commission had "now reached a point where it is no longer possible to gain approval for the proposed transaction".

In response, the Commission defended its approach and confirmed that the companies had not been able to "fully address" its "competition concerns".

EU competition commissioner Margrethe Vestager said: "EU merger control has to make sure that company tie-ups do not lead to reduced innovation, higher prices or reduced choice for consumers and do not restrict competition in the internal market. I believe that ensuring that markets are competitive is key both to spur much needed innovation and investment in European telecoms markets, as well as to offer affordable prices to consumers."

"Every case has to be assessed on its own facts and merits. In this specific case, based on the Commission's in-depth analysis and evidence gathered, we are convinced that the significant competition concerns required an equally significant remedy. This means the creation of a fourth mobile network operator.  What the parties offered was not sufficient to avoid harm to competition in Danish mobile markets," she said.

The European Commission is currently investigating Hutchison Whampoa's plans to buy O2 in the UK from telecoms giant Telefónica. The Commission has said it is concerned the proposed £10.25 billion transaction "could lead to higher prices, less choice and reduced innovation for customers of mobile telecommunications services in the UK".

In a speech last October, the chief executive of the UK's telecoms regulator Ofcom, Sharon White, questioned whether telecoms companies need to grow through mergers and acquisitions to be able to invest in next-generation infrastructure. White said that "competition, not consolidation, drives investment and delivers low prices".