Think back to November and we were speculating on the implications of the wholesale deal Virgin and Vodafone were progressing.

It was going to change the market. Of that there was no doubt, and moreover, it was a very interesting way to forge a partnership that brought mutual benefits, and still swerve the regulatory and CMA review.

But Friday’s news about a potential merger between Virgin and O2 completely changes the game and the market dynamics. Let’s look at the players:

O2 – a problem child

We know that Telefonica has been trying to work out what to do with O2 after the regulator and CMA blocked the merger with Three.

As a by stander, I found it all rather perplexing because previously the regulator had waived through a deal between BT and EE creating a huge telecoms market leader. How was this different? One can only assume, that at the time, the regulator did not grasp the fact that fixed, mobile and media were all rapidly converging.

So, O2’s needed to change tack, and as a result it’s been making some bold strategic moves. Only a month ago it pulled out of its partnership with the indirect reseller Carphone Warehouse, who, by the way, still sell all of Virgin’s products.

You can read more about my full analysis of that decision here, but what’s important to know is that the move opened up a gap – and Virgin is well placed to fill it.

A perfect match for retail, business and the channel

O2 has no broadband customers, nor a TV offer (if you don’t include Netflix and Disney et al) to offer retail consumers, so in partnering with Virgin it can move hook, line and sinker into multi-play.

In business, both organisations have established business sales channels and again the offering is largely complementary. I’d assume O2 takes the lead on mobile and private networks, and Virgin drives the fixed connectivity. This will be good news to the dealer channel too.

A more detailed look at the segments and why the deal makes sense

If we use the Graystone Strategy segmentation to look at the consumer profiles they both attract, then an interesting story pans out, namely they both over index in different segments.

Virgin Mobile has more than its fair share of ‘Service Seekers’, ‘Budget Balancers’ and ‘Settled Seniors’. Whereas O2 over indexes on ‘Digital Devotees’ and ‘Technology Trail Blazers’. It’s clear that there’s an opportunity for both parties to gain access to different segments and hence acquire incremental customers.

In broadband and TV there is opportunity too. O2 has more than its fair share of ‘Digital Devotees’ in its base and currently no TV or broadband offer to sell them.

Looking at the market at large, Sky over-indexes on ‘Digital Devotees’ too, for both TV and broadband. This means that a multi-play O2 / Virgin deal could win over Sky customers pretty swiftly. It also suggests that the O2 / Sky deal may have been cannibalising the O2 base moving O2 customers with a Sky account to Sky Mobile.

Virgin can take advantage of the network economies

In a merger, Virgin would benefit from full network economics – something that the Vodafone wholesale deal is unlikely to have unlocked, unless it was viewed as a highly strategic partnership and had some type of quid pro quo commercials in place.

Vodafone left in the cold

So, what of the wholesale partnership with Vodafone? If the O2 / Virgin deal goes ahead then obviously the Voda partnership will be voided. But I would be surprised if there would not be a pretty punitive cost to Virgin in tearing up the contract.

In some respects, the timing of this may be because Virgin needs to resolve this one way or another before it goes too far down the integration path. And of course, they won’t want to move their wholesale supplier from BT to Vodafone and then to O2. That would be far too much change and impact on customers.

Who will be the winners and losers?

We are many months off a competition review, but already we can make some assumptions about who are going to be the winners and losers in the market.

Losers:

1. Net loser – Vodafone, as it sees Virgin deal unravel…

Vodafone is likely to be a net loser. It had won a significant wholesale contract with Virgin, but as it unravels, even if there are clauses that allow them to recoup some of the margin, it will be worse off than they could have been. And I’d wager that’s even if the resultant impact on other MVNOs allows Vodafone to pick up some new customers.

2. …BT remains a loser

BT continues to be a long-term net loser. The biggest wholesale contract it had has walked away, and now, Virgin, as one of its biggest competitors has the potential to get access to MNO economics.

It also has the potential to give O2 / Virgin the number one spot in terms of mobile subscribers. O2 has always had a strong wholesale business, and a very effective wholesale strategy, and, in terms of wholesale and retail SIMs combined, they have been market leader. This would allow O2 to challenge the number one spot for retail customers as the Virgin and O2 customer bases would likely merge.

There may a short-term upside for BT. If the deal goes ahead, then migrating Virgin customers away from BT to O2 may take longer than it was going to take to migrate them to Vodafone. This gives some upsides in terms of wholesale revenues, and possibly a chance to take a premium! But it is really just sugar coating on the bitter merger pill.

3. … Three lagging their competitors with no fixed infrastructure

There’s no understating that Three will come out of this a loser. It’s the smallest mobile operator and only operates meaningfully in consumer, although it does have business and consumer MVNOs in their portfolio.

If the deal goes ahead then it further highlights Three’s biggest challenge: it does not have any fixed infrastructure and no major play for the home. Yes, the 5G mobile broadband offer mitigates this a bit, but it is far from mass market right now.

4. Sky probably a loser. Could it sell up?

It’s likely Sky will have clauses in its contract with O2 to safeguard change of ownership and potentially ‘exclusivity of category’. If true, it means they might seriously consider moving away from O2 pronto. That will not have been in its plans and will absolutely be a significant upset to its long-term strategy that will impact customer numbers.

Knocking on the door will be Vodafone, BT and Three, all keen to engage and encourage a move to their networks. This of course, could drive more favourable terms and bring an edge to the competition in the longer term, but it will also require a big change project.

Alternatively, and it’s a real longshot, but it’s not unthinkable that Sky might even sell its mobile base to O2. It’s not hard linked to broadband or TV but a move like that comes with some real risk specifically that any Virgin / O2 venture would seek to convert those acquired customers to Virgin TV and broadband.

Neutral:

5. TalkTalk could come looking for a deal

TalkTalk, is probably neutral at the moment. It walked away from mobile a while back, but it may be time to put on its best bib and tucker and see if there’s a partnership or acquisition option for it too. Definitely a space to watch.

Winners:

6. O2 and the consumer

O2 is very clearly a winner. It moves from being a mobile only operator in the market to join BT, which offers mobile, fixed and TV, and Vodafone with its mobile and fixed offer.

Consumers really luck out in the short term. There’s more choice for multi-play for sure. And with fewer organisations in general to buy mobile from, I suspect retention and acquisition offers will be good. But long term, I think it will shift to a more neutral position for consumers.

Virgin brand in flux

Let’s not forget this has ramifications for the Virgin brand full stop. With sell offs happening all over the place, it screams for another piece of analysis on the future of the brand, so look out for that soon.

How should the market respond?

In the meantime, bearing in mind the regulatory hurdles, I’d be advising all operators to be taking a good hard look at their segments, and analysing how well their propositions attract the bullseye and compete as the dynamics shift. We now know O2 is up to something so if this doesn’t pass, you can expect it won’t be dissuaded from trying another strategy. Either way change is coming and preparation will be everything.

If you want to talk the implications through further, specifically for your business, or re-evaluate your segmentation then get in touch. I’m not going anywhere for the foreseeable!