The deal will help both groups as they grapple with fierce competition, regulatory pressure and the need to upgrade their networks to support growing demand from customers who access the Internet on the go via smartphones and computer tablets.
The agreement will also help O2 and Vodafone, ranked second and third respectively in Britain, compete with Everything Everywhere, which runs the Orange and T-Mobile brands, in the fight to have the best network.
“This will create two stronger players who will compete with each other and with other operators to bring the benefits of mobile internet services to consumers and businesses across the country,” Vodafone UK Chief Executive Guy Laurence said.
“This partnership will improve the service that customers receive today and give Britain the 4G networks that it will need tomorrow.”
The two groups already had a more basic sharing agreement in Britain and the deal to pool basic network infrastructure will increase their national coverage to 98 percent by 2015 and speed up the roll-out of fourth-generation services, they said.
“Faced with a host of macro-economic and sector threats, the European Telecom sector is finally addressing some of the basic business model problems they face and laying the groundwork for a much more profitable recovery,” Bernstein analyst Robin Bienenstock said.
“Today, Vodafone and Telefonica announced their intention to pool their basic network infrastructure in the UK, a country where margins remain stubbornly low and network quality persistently poor relative to other European countries.”
The announcement follows similar deals across Europe, where operators are looking to cut basic infrastructure costs while maintaining independent brands.
The two groups could extend the agreement to other European markets, but Laurence and O2 UK boss Ronan Dunne told reporters the deal was designed to meet the specific pressures in Britain, where consumers have led the move into mobile broadband services.
Analysts said the deal made sense as Telefonica in particular is under pressure to cut its debt pile and is currently stepping up plans to dispose assets.
“Exceptional customer demand for the mobile internet has challenged the mobile industry to consider innovative solutions,” Dunne said. “This partnership is about working smarter as an industry.”
The two groups will form a joint venture to run the shared grid, but they will still run independent spectrum and competing services off the infrastructure.
The agreement will be analyzed by the regulator Ofcom, but it should be welcomed by the government, which has called on mobile operators to roll out faster services to boost the economy by making the country more efficient.