Network consolidation: good for telcos – better for customers?

The Vodafone-Three merger is on – provided the pair can convince regulators that the deal will not stifle competition in the UK telecoms market. Do network consolidations mean better service for customers, or does fewer providers guarantee higher bills?

What will the name of the UK’s newest, biggest telco be – Vodathree, Threedafone, or Vodafon3?

Yes, Vodafone and Three have agreed on their long-gestating merger, creating the UK’s largest mobile operator with around 28 million customers – provided that regulatory authorities approve.

We can only assume that the deal went something like this:

The merger couldn’t have come at a better time; Three has experienced strong financial and consumer growth in recent years, strengthened by its move into the lucrative B2B space, but it lacks the clout to earn back the cost of capital expenditure it’s sunk into building the UK’s largest 5G network. In contrast, Vodafone’s recent underperformance has led the company to slash 11,000 jobs across its global workforce.

It’s one of many large operators across Europe seeking to merge with rivals, while scaling back on international efforts and focusing on building 5G in domestic markets as overheads grow and revenues shrink. Spain’s Orange and MásMóvil finalised their own merger earlier this year, creating the country’s second largest telco after Telefónica, and ahead of Vodafone.

This has been helped in no small part by an easing of the aversion to big mergers, which regulators have long been sceptical of in the name of market competitiveness. Previously, the European Commission (responsible for approving mergers pre-Brexit) slapped down Three’s merger with O2. Orange-MásMóvil will be the first big test of whether this relaxed attitude pays off for customers and for the wider telecoms market.

Ofcom similarly announced a recent softening of its stance on mergers, reviewing deals on their individual merits rather than simply doing the sums on the number of operators left. Ultimately though, the Vodafone-Three decision will rest in the hands of the UK’s Competition and Markets Authority (CMA), who earlier this year blocked the massive, $68 billion merger of Microsoft and Activision Blizzard in a widely criticised move.

Conventional market wisdom dictates that less competition means higher prices and less choice for customers – who, given the recent price rises, will have little appetite for any more. However, research suggests that having fewer operators increases the quality of networks. As things currently stand, there’s not enough revenue being made, and what is being made is spread around too many providers.

In fact, some have argued that the UK’s mobile market, with four major providers and several more MVNOs, is too crowded, and is begging for some consolidation. Major incumbents remain too comfortable in their position to bother offering better customer service or innovative new products, and it’s harder for new entrants to meaningfully shake up the market, owing to licensing constraints and the massive undertaking that is erecting networks of masts and underlying infrastructure.

The GSMA reports that “four-player markets in Europe have been characterised by lower concentration levels and profit margins over the last decade. From 2015, four-player markets in Europe also experienced lower investment levels compared to three-player markets, and did not improve service quality.”

In their 2002 book The Rule of Three: Surviving and Thriving in Competitive Markets, Jagdish Sheth and Rajendra Sisodia posit that, as a result of “natural competitive forces,” any sector inevitably becomes stratified between large providers who cater to the mass market, and specialist providers who cater to a niche of high-end or low-end customers; any providers caught in between cannot survive on their own, and will be acquired or simply go out of business.

This hypothesis has proved prescient in the telecoms space; look at how AT&T, Verizon and T-Mobile dominate the US market, bolstered by the latter’s merger with Sprint in 2020. To satisfy the Department of Justice’s competition concerns, T-Mobile sold Boost Mobile, Sprint’s prepaid mobile subsidiary, as a sacrificial lamb.

Only time will tell if regulators approve the Vodafone-Three deal or not. Overall, fewer providers could benefit customers in the long run if it truly does translate into better service; to prove this though, the remaining telcos must commit to reasonable mobile prices and more value-added services for consumers, while continuing to invest in delivering next-generation connectivity.

Update [16/05/2024]: A report from Finnish management consultancy Rewheel on the state of mobile and broadband pricing has argued that T-Mobile’s purchase of Sprint in 2020 has negatively affected customers and "helped keep US mobile prices high."

Update [05/12/2024]: Vodafone and Three have had their merger approved by the CMA, provided they invest billions more into the country's 5G network, and cap mobile tariffs for at least three years. You can read more on the CMA's decision here.