Back in December, I mused over the likelihood Three would be a target for merger.
At the time Robert Finnegan was doing a round of interviews which suggested it was open to all options. Well today, the option has been confirmed as Vodafone, which would have a 51% stake in a JV. It would create the biggest operator in the UK with 27 million subscribers, compared to VMO2 with 24 million and EE, owned by BT of 20million.
Given the size, the big question is will it go through?
Ultimately, and as early press reports state, the CMA will have its say on whether becoming the biggest operator in the UK is good for consumers, and whether it creates a player with significant market power; it could fall two ways in my opinion.
Now that Virgin Mobile has completed its merger with O2, many would say it sets a precedent. In fact, that looks to be the case Vodafone is already presenting. But I see it slightly differently as that merger combined a provider of fixed telecoms and a mobile operator, so the risk to consumer choice was diminished.
There are other market moves to consider too, such as TalkTalk being a target for VMO2. To manage that context and the risk of merging two operator brands, the regulator might impose terms.
That’s what happened when Three merged with O2 in Ireland. In that case, the regulator forced Three to issue additional MVNO licences with specific commercials to drive competition. I think we can expect to see conditions such as giving back spectrum – its estimated the merger will result in ownership of 46% spectrum so its only natural competitors will rally to counter this.
However, given the current economic challenges, and the increased investment all networks are having to make in 5G, and in coverage to reduce the digital divide, my inclination is that this will be approved with limited intervention.
Why a joint venture?
There are several benefits for both entities:
- They are largely complementary; Vodafone is a more premium brand than Three and it has a strong enterprise base compared to Three’s limited one.
In consumer land, Three has a more youthful brand than Vodafone and it appeals to younger data hungry consumers who are less likely to be found on the Vodafone base. Swings and roundabouts.
- Spectrum(the motorway down which voice and data travels) is the lifeblood of telecoms. Why is it of interest? Three has a big holding for a relatively small base. That will be very appealing to Vodafone because the more spectrum you have the faster the 5G service you can supply. In particular, Three has big blocks of contiguous spectrum, which would really enhance the mobile data experience for customers of a merged entity.
It is likely that the new entity will have more spectrum than needed for macro network activities. This is appealing too; Both entities have been building and demonstrating enterprise private networks (a big growth area), so additional spectrum means they can hive off some for private networks for large corporate customers.
But, as I’ve said above, it’s going to be a bone of contention for competitors.
- Economies of scale, both companies can optimise their equipment, their sites and drive economies of scale, efficiencies and potentially improve services for customers.
Right now, 5G investment is significant across the market, the world even, so running one network where previously you would have run two brings huge savings and efficiencies on kit, rent, servicing and people. That said, it will take longer to merge the technology than set up the joint venture so investors will need to be patient.
What about consumers?
If approved, I think initially the impact will be limited. However, there is a risk that consumers find there is less competition over time. It all rests on the virtual operator partnerships being maintained, and how much effort the JV puts into providing a better network experience and then to passing on the savings.
To put this into context, Three was always a challenger brand – the first to offer unlimited data, always focused on value, delivering far more GB for less. Vodafone is not and will want to curb the ARPU decline. In the medium term, I would expect Three customers to get less value after the deal.
This might prompt the base to look elsewhere. However, commercially that won’t be a loss to the JV. Both networks have an extensive MVNO portfolio including iD Mobile, Asda Mobile, Lebara, Gamma, and there will still be the sub brands of TalkMobile, VOXI, SMARTY offering better value SIM only deals. Overall this means there will still be revenue to be had from the price focused brands that consumers could switch to.
Long story short, if the wholesale / MVNO market is sustained, consumers will still have choice because there will still be challengers in the market.
Overall verdict – is it good, bad, or neutral? Long term probably good as there’s potential for a better user experience, but in the short- to medium- term I wouldn’t expect fireworks.
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