The official confirmation of the merger between Vodafone UK and Three UK (owned by China’s CK Hutchison), has prompted reaction from industry experts and commentators.

The merged entity (providing it clears what could be tough regulatory scrutiny), will result in a UK operator boasting a combined 27 million mobile customers.

As of December last year, Vodafone had 17.92 million mobile customers in the UK. Three UK meanwhile had 9.5 million customers, prior to the merger.

Merger reaction

Vodafone’s newly installed chief executive Margherita Della Valle, has described the merger as being “great for customers, great for the country and great for competition.”

But what is the opinion of industry experts on the proposed merger?

Kester Mann, director (Consumer and Connectivity) at analyst house CCS Insight, noted the deal made sense if the two are to pose a credible challenge to their two sizeable rivals.

“This long-awaited mega merger represents the biggest shake-up in the UK mobile market for over a decade,” said CCS Insight’s Kester Mann. “The deal makes plenty of sense as both providers are sub-scale.”

“As separate entities, it would have been near impossible for either to grow enough organically to come close to challenging BT or Virgin Media O2 for size,” said Mann. “Inevitably however, there will be widespread fears over job cuts.”

Vodafone already announced last month it is cutting 11,000 jobs in order, saying the cuts would “simplify our organisation, cutting out complexity to regain our competitiveness.”

“An £11 billion network investment plan will seek to allay regulatory concerns,” Mann continued. “But this deal will still face a major challenge to win approval. At this stage, I believe it is too difficult to call either way.”

“The prospect the deal leads to higher prices will be a major concern for the CMA,” said Mann. “Vodafone and Three may have shot themselves in the foot by recently hiking tariffs by up to 14.4 percent.”

“My view is that the deal should be approved,” said CCS Insight’s Mann. “It is better to have three strong providers than two that are dominant and two that are sub-scale. Blocking it could thwart the long-term development of the UK’s telecoms infrastructure.”

“The recent appointment of Margherita Della Valle as Vodafone group CEO will give added impetus to the deal,” Mann concluded. “She has shown clear intent to make changes at Vodafone as she bids to turn the embattled company’s performance around. Securing approval for a tie-up with Three would be a major boost to her early tenure.”

Vodafone CEO Margherita Della Valle.
Image credit Vodafone

Spectrum holdings

James Robinson, senior analyst at Assembly Research, noted that the previous attempt to consolidate to a 3-player market in the UK failed.

But he feels that the climate this time around feels less hostile and presents the best chance of getting a deal through.

It should be noted that prior to joining Assembly, Robinson was a competition policy manager at Ofcom where he was project manager for the team, advising the CMA and EC on the BT/EE and O2/Three merger reviews.

“While the CMA has remained tight-lipped, DSIT and Ofcom have publicly expressed their openness to consolidation, recognising the challenging financial state of both operators, the investment required for 5G, the need for more resilient networks and the emerging competitive pressure from big tech,” said Assembly Research’s James Robinson.

“With the Government’s recent Wireless Infrastructure Strategy, the merger announcement, with its commitment to investment and jobs, comes at an opportune moment,” said Robinson. “Together, Three and Vodafone would be better equipped to deliver ultrafast, reliable and secure mobile connectivity throughout the UK – the exact thing the Government’s pro-investment strategy wants to see.”

“The CMA will be the decision-maker on the deal,” said Robinson. “Though the parties have made a strong case, the competition authority’s review will soon reveal how well their arguments have landed. Its assessment is likely to focus on spectrum holdings, networking sharing agreements, access for MVNOs and retail prices for consumers.”

“A combined Three/Vodafone will face calls from rivals to give up some of its enviable 5G spectrum holding,” said Robinson. “As divestment is a fairly standard mobile merger remedy, that shouldn’t be a barrier to getting the deal through. Neither should network sharing, with competition issues relating to existing agreements easier to overcome than in the past.”

“Three and Vodafone might be required to reserve a proportion of network capacity for MVNOs,” Robinson added. “This is something the parties should expect to have to offer – but it’s a far more palatable option than a carve-out of infrastructure to facilitate a new entrant, which would only exacerbate the problems the merger is trying to solve.”

“Given the cost of living crisis, the potential for higher consumer bills that a reduction in the number of competitors could bring will be a particularly contentious issue,” said Robinson. “The CMA will be keen to hedge the risk and could demand legally-binding commitments not to raise prices for several years (which only increases the need for the merger to generate efficiencies).”

“Hostility from those seeking to sever ties with China is a political consideration, rather than an economic one, and so would sit with the Government to decide whether to intervene using its powers under the National Security and Investment Act,” Robinson concluded.

Spectrum, national security

Meanwhile Paolo Pescatore, tech, media & telco analyst at PP Foresight, warned that “a precedence has already been set following the failed 3/O2 deal.”

“This will be a hard sale given that both companies have been outperforming the market for the last year or so,” said Pescatore.

“Let’s see if the authorities have a change of heart,” said Pescatore. “Both parties need to demonstrate that this is genuinely in the interest of UK plc, the economy, and consumers for it to have a chance of getting over the line.”

But what will be the potential impact on the UK telco market of this deal?

“A marriage of convenience makes sense,” Pescatore stated. “Scale is key to help lower costs and improve margins. It will take years before we see the real fruits of this deal come to fruition. The question is, can the UK wait that long?”

“However, convergence still remains the achilles heel if this does get over the line,” said Pescatore. “It would create a mobile champion that could increase competition in the wholesale segment of the market and become a partner of choice for MVNOs.”

“Having said this, Ofcom recognises the challenges of the UK mobile market and the need for scale,” said Pescatore. “Convincing the CMA will be the real test. Current investment levels are not sustainable in the longer term.”

“The UK telco market is now polarised with two vertically integrated telcos at one end and two subscale mobile operators at the other,” Pescatore said. “Concessions on spectrum will have to be made and the entity will have to provide solutions on areas like network sharing, rather than create another problem.”

Paolo Pescatore also weighed in the national security aspects, bearing in mind that Three UK is owned by a Chinese firm (CK Hutchison).

“There should not be any security concerns as the joint venture should be majority owned by Vodafone,” Pescatore said. “I expect the Hutchison share to reduce over time.”

“Hutchison already has an extensive presence in the UK, but this should be seen as a gradual exit from the telco market,” said Pescatore. “Having the current Vodafone UK CEO heading up the new operation is a testament to this belief. His considered approach will resonate with key stakeholders and improve any chance of getting the deal over the line.”

The current CEO of Vodafone UK, Ahmed Essam will become CEO of the combined entity, while current Three UK CFO Darren Purkis will take the role of CFO.

Customer assurances

Meanwhile Ernest Doku, telecoms expert at Uswitch.com has pointed out that customers will need assurances that the reduction of four major operators down to three, will not hurt consumers currently dealing with a cost of living crisis.

“There are potential pros and cons for consumers with any merger like this,” said Ernest Doku. “At Uswitch, we’re all about providing customers with greater choice, however with consolidation in the UK market – from four Mobile Network Operators (MNOs) down to three – there’s always the risk of reduced competition and subsequent increased prices.”

“At a time when millions across the UK are facing the highest mid-contract prices we’ve ever seen, consumers need assurances that this merger will not result in even higher household bills,” said Doku. “The pledge of a significant investment in 5G over the next decade is some solace that they will be building for a better future of connectivity, so long as it is adhered to. What we don’t want to see is customers footing the bill with further increases to pricing.”

“They should also commit to ensuring smaller virtual networks (MVNOs) who rely on Three and Vodafone’s infrastructure can continue to offer competitive value and service,” said Doku.

“Also, while the cost saving benefits for Vodafone and Hutchinson are clear, the merged company needs to ensure it delivers an upside for consumers – specifically, its promise of innovation and an advanced standalone 5G network,” Doku concluded.

Too many operators?

Nick Johnson, head of the UK Telecoms Innovation Network (UKTIN), a forum for the UK telecoms innovation ecosystem, argued that change is needed in the UK mobile sector, as both Vodafone and Three UK were already not operating their UK businesses with a healthy return on investment.

“It’s broadly recognised that successive rounds of equipment vendor consolidation have left the industry with not enough choice – a near monopoly of supply that is vulnerable to technology, security and geo-political shocks,” said Nick Johnson. “In the face of that, how can a reduction in the number of potential customers for that supply chain be seen as a good thing?”

“We can argue that the number of operators in Europe is potentially too high in the first place,” Johnson added. “The US does very well providing for a population of 350m or so with three major operators, and in contrast the UK has four to serve 60m.”

“The recently published DSIT Wireless Infrastructure Strategy observed that Vodafone and Three were already operating their businesses below what was considered a healthy return on investment, the implication being that it couldn’t continue,” said Johnson. “While there will be pain in the consolidation, we can predict the end result will be stronger.”

“Innovation is not well served where the customer’s underlying business isn’t healthy,” Johnson concluded. “Innovation needs investment and is often the first thing to get chopped when cost is the focus. UKTIN welcomes the merger of Three and Vodafone – three healthy customers is better than two.”

Tom Jowitt

Tom Jowitt is a leading British tech freelancer and long standing contributor to Silicon UK. He is also a bit of a Lord of the Rings nut...

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