Vodafone and Three Merger: The Right Call

If the UK is serious about having state-of-the-art telecom infrastructure, it should allow the proposed merger between Vodafone and Three to go ahead.

After months of discussions, the two companies finally announced today that they are to join forces. CCS Insight clients can read our detailed take on the merger here.

But reaching an agreement is the easy part. Now both sides need to convince the Competition and Markets Authority (CMA) — the UK’s competition watchdog — that combining the country’s third- and fourth-placed mobile operators will bring greater overall benefits to customers. A lengthy review process will scrutinize the potential impact on pricing, service quality, innovation and customer choice.

Although it looks like being a tight call, I believe the right decision would be for the CMA to approve the deal, subject to a fairer allocation of mobile spectrum among the UK’s network operators.

My view is that it’s far better to have three strong providers than two that are dominant (BT and Virgin Media O2) and two that are subscale (Vodafone and Three). As separate entities, Vodafone and Three would never have grown enough organically to come close to challenging BT or Virgin Media O2 for size. This could have bred complacency at the UK’s two biggest providers, threatening investment and innovation. A major new rival will keep them much more on their toes.

Look at the US. Just over three years ago, a merger of T-Mobile and Sprint hung in the balance as regulators dissected its potential impact. Now, the combined carrier is going from strength to strength, finally putting serious pressure on complacent rivals AT&T and Verizon.

T-Mobile’s network in the US has been derided in the past for its poor quality. But it has recently scooped a host of awards in 5G, cementing its turnaround. In its 1Q23 results, it gloated that its geographic 5G coverage is greater than that of AT&T and Verizon combined.

Granted, US consumers pay much more for mobile and broadband than their counterparts in Europe. But that was already the case before T-Mobile and Sprint palled up. And from where I see it, the US carriers have tried even harder to attract customers since the merger than at any time before.

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.

At this year’s MWC in Barcelona, the CEO of Deutsche Telekom, Tim Hoettges, pointed out that 5G population coverage in Europe is only 73%, compared with 96% in the US and 90% in parts of Asia (see: Insight Report: MWC 2023: Telecom Operators).

He’s right that Europe’s highly fragmented markets, with many small and medium operators, are holding back network roll-out and stifling innovation. Customers in the region have long benefited from very low prices, but network quality simply isn’t as good as in other parts of the world. That’s partly because there are dozens of providers chasing too few customers, squeezing margins and hindering investment.

I’ve argued before that it’s time European operators were cut some regulatory slack. Granted, they’ve been hopeless at turning demand for connectivity into hard cash and too hesitant to commit to innovation. I’m no fan either of their preposterous idea that big technology companies should be forced to contribute to the cost of deploying networks.

But a more lenient line on mergers is now well overdue. Telecommunications is a scale game and bulking up should mean more-efficient investment, bolstering connectivity for the benefit of all sectors of society. Post-Covid, no-one’s in any doubt how important that is.

I believe Vodafone and Three are currently getting less out of their infrastructure investments than they’re putting in, a clearly unsustainable position. Neither are blameless for this predicament of course, but it was worrying to hear Three’s CEO Robert Finnegan recently suggest it might have to scale back 5G roll-out if it’s not allowed to merge. In an Ofcom discussion paper earlier this year, the regulator appeared to sympathize, stating that poor sector returns could dampen operators’ incentive to deploy network infrastructure.

Dissenters will argue that consolidation is just an excuse to raise prices. But the UK would still be highly competitive with three strong network operators, supported by a vibrant market of virtual providers including large challenger brands like Tesco Mobile and Sky Mobile.

Today, Vodafone and Three made a host of commitments designed to convince the CMA of the merits of the deal. The headline promise was an £11 billion network investment plan that will see standalone 5G technology reach 99% of the population by 2034, delivering a sixfold increase in average data speeds by the same date. It will also offer fixed wireless access to 82% of UK households by 2030, bringing renewed competition to the broadband market.

Ofcom believes the outcome of a particular merger should be assessed on the effectiveness of the resultant competition, not the number of providers remaining. For me, that position alone convinces me that the deal should get a green light.