UK mobile merger must ring in changes for troubled sector
Fierce competition has hammered the market’s economics
In most markets, consumers are best served when regulators foster fierce competition. Telecoms bosses have long argued that their sector should be an exception. They increasingly appear to be right.
European competition authorities have largely dismissed the sector’s pleading as self-serving twaddle. The industry and its beleaguered investors are looking to the UK’s Competition and Markets Authority — currently investigating a proposed tie-up between Vodafone’s UK operations and Three UK — for inklings of change.
It is not difficult to see why the CMA plans a full inquiry into the proposed tie-up. Together, Vodafone and Three would create a mobile operator with 30 per cent of the UK market, just behind leader BT. The larger entity, the CMA fears, might be less motivated to compete aggressively than two relative minnows fighting for survival. A less fragmented market may also result in resellers such as Sky and Tesco Mobile paying more to piggyback on their networks, leading to higher prices for consumers.
This misses one important point. Fierce competition has hammered the market’s economics. UK mobile revenues have fallen by 20 per cent in real terms in less than a decade, says Karen Egan at Enders, while data traffic is 30 times higher. Europe as a whole tells a similar tale. In Italy, the average price of one gigabyte of data fell by 85 per cent between 2019 and 2021, according to data compiled by Statista.
In that kind of market, economies of scale are the only way to eke out a decent return on investment. Subscale network operators like Vodafone and Three cannot justify pouring any more money in.
That’s a problem — for consumers and policymakers alike. Building evermore advanced telecoms networks is capital-intensive. Despite sucking in €59bn of investment last year, according to industry group ETNO, Europe’s 5G rollout is barely out of the starting gate. Completing it will require €400bn, according to the European Court of Auditors. The US and China are moving faster than Europe. The UK, in particular, is falling behind, with the worst download speeds in the group of G7 nations.
Consolidation would help. In the UK a merger between Vodafone and Three would cut operating costs, helping to nudge returns above the company’s cost of capital even absent a recovery in pricing. That would give the company an incentive to build a network that would otherwise not be available to consumers. The challenge for regulators is to ensure consolidation spurs better outcomes, rather than being a free pass.
It could even give shareholders in the sector hope that its endless cycle of capital destruction might, eventually, come to an end.