Once again, the telecom industry is awash with talk about mergers and acquisitions.
In Europe’s hypercompetitive markets, executives are plotting deals to combine operations to bolster scale and improve returns. This year, Orange and MasMovil agreed to a tie-up in Spain, and talks between Vodafone and Three in the UK are ongoing.
Both deals are significant as they are between companies competing in the same space. If concluded, they would eliminate a player from the market, which tends to set alarm bells ringing for regulators. About six years ago, the EU blocked several high-profile deals, citing concerns over reduced competition.
But things have progressed since then. The pandemic demonstrated the crucial role that connectivity plays in society. Belatedly, the sector’s efforts are now finally becoming more widely appreciated as investment in digital infrastructure rocketed up the political agenda.
All the while, Europe has slipped further behind leading technology markets such as the US and China. Customers continue to benefit from lower prices, but the fragmented market structure and its surplus of providers appears to be stifling investment and innovation. I believe it’s time for regulators to take a more sympathetic stance.
Let me be clear, though — European telecom companies should take a far closer look at themselves when deliberating why their stock prices have slumped despite ballooning usage. Too often, they’ve played the blame game without recognizing missed opportunities to innovate, invest and diversify.
And they’re not currently helping their cause with unsubstantiated claims that big technology companies should contribute to the cost of their networks. These are the same organizations they are clamouring to partner with, to upsell customers to higher-priced deals (see European Operators’ Dubious Attempt to Make Big Tech Pay).
But in my view, European operators do deserve some regulatory slack. I say this not because of their spectacular failure to generate revenue from huge demand, which has led to a prolonged period of underwhelming financial performance, but because greater scale can improve the efficiency of investment, bolstering connectivity for the benefit of all sectors of society.
For too long, the emphasis of regulation has been on very low prices for consumers; now it needs to focus on fostering the build-out of better networks. How could this happen? New ways to allocate mobile spectrum, tax breaks on network roll-out, more support gaining access to land to deploy and maintain infrastructure and — yes — greater lenience when it comes to in-market consolidation.
Of course, any merger should be assessed on its individual merits. What may be an appropriate course of action in one market may not be in another, and under no circumstances should any deal be a licence to simply raise prices.
A common argument against mergers is that having fewer players reduces the incentive to invest. But I believe markets can consolidate and remain competitive.
Just look at the US. Less than three years ago, the proposed merger between T-Mobile and Sprint hung on a knife edge as regulators weighed the potential impact on consumers. It was a protracted journey to approval but a decision that already appears vindicated.
The newly combined T-Mobile is going from strength to strength, finally putting serious pressure on complacent rivals AT&T and Verizon. As we argued at the time, having four players in the market doesn’t benefit consumers if two are dominant, one is a distant third and the fourth is struggling to survive (see T-Mobile US and Sprint Win Antitrust Approval).
T-Mobile’s network has been derided in the past over poor quality. But last month the carrier scooped high-profile 5G awards from Ookla and Umlaut, cementing its turnaround. And having quickly deployed Sprint’s 2.5 GHz spectrum, it gloated during its recent third quarter earnings call that its Ultra Capacity 5G service now reaches 250 million Americans — as many people as Verizon plans to cover over two years from now (see Instant Insight: T-Mobile US Results, 3Q22).
Furthermore, T-Mobile has now promised not to raise prices on qualifying mobile and broadband plans activated after April 2022, as part of its Price Lock promise.
So, if moving from four main operators to three can bring positive outcomes in a country with over 300 million inhabitants, surely Europe’s regulators can be more open to something similar in the region’s far less populous markets.
It’s little coincidence that Spain and the UK are among the first markets in Europe to break rank and push again for consolidation. Both are a crowded mix of challenger brands, virtual providers and established networks, unsurprisingly resulting in rock-bottom prices and cut-throat competition.
In both, I believe a smaller number of stronger players could bring positive outcomes for customers without significantly denting the competitive dynamics. And, of course, regulators still have the power to remedy any concerns over market dominance, such as through enforced divestment of mobile spectrum. This would probably be necessary should Three and Vodafone confirm their proposed UK deal.
Elsewhere, I fear for markets such as Belgium and Portugal where recent 5G spectrum auctions have seen the emergence of yet more operators. I struggle to see how any market with a population of little more than 10 million can consider three mobile networks insufficient. If existing telecom services aren’t up to scratch, regulators should surely focus on kicking established players into shape first.
One final point. Recently, the tide appears to have turned slightly against the industry’s hopes to get deals over the line. The cost-of-living crisis has thrust consumer pricing even further under the microscope. Combined with the moves of some operators to implement inflation-linked price rises, scrutiny on the impact of mergers on customers will be more intense than ever.
And further, last month an adviser to Europe’s top court said the annulment of the antitrust veto over Three’s bid to buy O2 should be dismissed, and the case reheard. It’s a major blow to merger-hopefuls after a 2020 court judgement originally said that the EU failed to prove that the combined company would harm competition or raise prices.
As authorities in Europe chop and change their minds, the region continues to lose ground on the world stage. It’s time to stop wavering and take a bolder, more positive stance on industry efforts to combine.
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