The European Commission argued that, as the merger would have reduced the number of UK mobile carriers from four to three, it would have reduced market competition, discouraged innovation, raised prices and reduced consumer choice. Three, which has disrupted the market with cut-price offerings, would no longer be nipping at its larger rivals' heels. Indeed, combining with O2 would give it over 30m customers - more than 40 per cent of the total - as well as footholds in two of the UK's largest mobile networks (Three shares a network with EE, while Vodafone (VOD) shares with O2).
Moreover, the status quo is far from terrible. The UK's mobile prices are among the lowest in Europe and there's extensive coverage of high-speed 4G wireless.
The counter-argument is that Three is currently sub-scale, and a deal would have provided it with the clout and capacity to effectively compete with BT. The mobile market is also rapidly converging with the broadband, television and landline markets, creating more competition for the group. And the collapse of the deal gives BT a clear shot at dominating the lucrative 'quad-play' market with its bundles of TV, broadband, landline and mobile services.
CK Hutchison, the Hong Kong conglomerate that owns Three, argued a tie-up would have allowed it to invest £10bn in network infrastructure, boost coverage and network capacity, increase speeds and improve price competition for consumers. It tried to force the deal through by offering to freeze prices for five years, make hefty network investments and share some of its capacity with Sky (SKY), Tesco (TSCO), Virgin Media and others. However, it balked at the European Commission's proposed concession: the creation of a fourth mobile provider.
The next steps for O2 and Three are unclear. Analysts at CCS Insight suggest Three could broaden its product range and compete more effectively by acquiring TalkTalk (TALK). The broadband and television provider employs a similar strategy of selling cut-price services and, following its security breach in November, it could be snapped up for a bargain price.
Meanwhile, debt-laden Telefónica, which owns O2, may well consider alternative offers. Analysts think a private equity suitor is likely, but US cable giant Liberty Global (US: LBTYA) - which owns Virgin Media - and French carrier Iliad (FR: ILD) have also been touted as potential bidders.
Liberty Global recently partnered with Vodafone to launch a joint venture in the Netherlands, so it may look to secure a similar arrangement rather than pursuing an expensive acquisition. Sky might also mull a bid, as it plans to launch a mobile service using O2's network later this year. But it may prefer to test the water first before diving fully into the mobile market.
Regardless, the UK telecoms sector will be worth watching in the coming months.
