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Opinion What would a merger of Vodafone and Three mean across the UK telecoms market?

Dr Catarina Marvão examines the merits of a possible merger of two UK telecoms titans.

THE COST-OF-LIVING CRISIS has placed immense pressure on household finances. Many costs have increased, including mobile and broadband. In Ireland, recent announcements indicate that mobile and broadband prices will rise, in April, by around 7.5% for Vodafone and Eir customers, and by 4.5% for Three customers.

While households can avoid some of this increase by switching providers and taking advantage of new customer deals, the number of options is limited.

Perhaps even fewer options will be available soon. Vodafone and Three, two of the Big Four mobile operators in the UK, have proposed to merge. If this merger is approved, should we expect lower prices and better service or the reverse?

The proposed merger will create the largest mobile operator in the UK (with 51% owned by Vodafone and 49% owned by Three), with around 27 million customers.

In the UK, only four operators have direct access to the mobile spectrum (Vodafone, Three, BT’s EE and Virgin Media-O2). This means that other operators such as Tesco Mobile and GiffGaff must rely on the Big Four for access. Therefore, this four-to-three merger would result in a well beyond “highly concentrated” market, which means fewer options for consumers and often, higher prices coupled with less innovation.

In Ireland, Vodafone and Three hold 65% of the mobile phone market and 76% of the broadband market. While Three UK and Three Ireland operate independently, Vodafone appears to be going through several mergers: Zegona Communications recently purchased Vodafone Spain (5 February) and Iliad (Eir’s owner) is in negotiations to acquire Vodafone Italy. It is not clear what impact this appetite for mergers will have on Vodafone Ireland. 

To understand the pros and cons of this merger it is important to consider its effects on competition and customers’ options and prices. I discuss some of the main pro and anti-competitive concerns below.

Pro-competitive effects

The two operators have created a website to promote the merger’s benefits. These rely on three main pro-competitive arguments: investment in the 5G roll-out, effective market competition, and better coverage.

First, Vodafone-Three proposes to accelerate the roll-out of 5G in the UK, by investing £11 billion over 10 years. Considering how difficult and expensive it is to roll out 5G, this is certainly of benefit to consumers.

Andrea Dona, development director of Vodafone UK, added “We’ve done a study that shows that can bring up to a £15 reduction in the bill a month… by simply having an alternative to what today is just fibre to the home”. This study does not seem to be readily available online, so it is unclear how the £15 figure has been calculated, or when this saving can be expected, given that the 5G rollout will be done over 10 years.

Second, Vodafone-Three argues that it needs to “level the competitive playing field, increasing competition to the two largest converged operators” as well as large tech monopolies. Ofcom’s 2022 report does note that Vodafone and Three’s returns are lower than those of EE and O2, which makes it difficult to recover the cost of capital and hinders investment.

Finally, the merger proposes to increase network coverage and reliability for no extra cost, mainly by eliminating the overlapping coverage by the two operators in sparsely populated areas.

Potential concerns

Although Vodafone and Three have outlined the potential benefits to consumers from this merger, these are uncertain. Previous mobile operators’ consolidation has often resulted in what economists call the “Profit Paradox”: higher prices, stagnant investment, poorer quality and service and job losses, accompanied by increased profits for the market players. As an example, the 2019 four-to-three merger between T-Mobile and Sprint in the US is already viewed as a failure.

(1) Flawed pro-competitive arguments

The parties’ first argument is additional investment. However, evidence from previous four-to-three mergers suggests that, although investment may increase, removing an investing player from the market, has a net zero effect on investment, at the country level.

Second, the parties argue that they need to consolidate to compete. While the threats posed by dominant firms and monopolies, such as Google, are worrying, the appropriate response should not be to consolidate to compete, moving toward monopolisation, but rather to reduce the monopoly power of the dominant firms (this is a job for the regulators, not firms).

The third argument relates to overlapping coverage of sparsely populated areas. On this, network sharing agreements can tackle this issue without the need to merge. This is the case in many EU countries, including Ireland, where O2 and Eircom only recently ended a 10-year network sharing agreement.

(2) Higher prices

A study by the former Chief Economist at the European Commission, Prof. Tommaso Valleti, suggests that prices will increase by 15% to 50% post-merger, in stark contrast to the £15 monthly reduction in bills advanced by Vodafone-Three.

The estimated 15-50% price increase would lead to an increase of up to £300 in yearly mobile bills. For the estimated 65 million mobile users in the UK, this translates into a £4 billion to £20 billion additional expense for consumers.

(3) Job losses

In June, Vodafone acknowledged that some jobs may be lost. Yet, it recently argued that the merger may create up to 12,000 jobs.

However, given the recent trend of job losses in the telecom sector, the past experience with (mobile) consolidations, and the recently announced cut of 11,000 Vodafone jobs, in May 2023, more job cuts at both companies are likely to emerge, given. The “Unite the nation” trade union estimates a loss of 1,600 additional jobs.

Now what?

The proposed merger was announced on 14 June, and the UK Competition and Markets Authority (CMA) issued a call for comments, in October, regarding the potential impacts of the merger.

The CMA started a formal Phase-1 investigation, on 26 January, to examine the potential pro- and anti-competitive effects of the merger. The deadline for this initial stage of the merger review process is 22 March (40 working days), so we will have to eagerly wait for its outcome.

It is hard to predict what will happen. O2-Virgin Media and BT-EE were allowed to merge in 2021 and 2016, respectively, but the CMA blocked a merger attempt between Three and O2, in 2016.

Although this proposed merger promises to significantly benefit 5G rollout across the UK, the potential for higher prices, stagnant investment in the sector, poorer quality and service and job losses are worrying. Drawing on international evidence from similar mergers, the overall effect of this merger is likely a significant increase in market power and thus, in the cost for customers.

Eventually, if the merger is approved, UK customers will likely be able to leave their contract with no exit fee, as the contract will have changed significantly. However, it is hard to say if moving to a different operator will be beneficial at all.

Dr Catarina Marvão is a Lecturer in Economics and Finance at TU Dublin. 

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Dr Catarina Marvão
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