Sympathy for Vodafone, viewed over the long term, should be close to zero. This was a company that had the world at its feet at the turn of the century when it made itself global leader in telecoms via an audacious £100bn swoop on Mannesmann in Germany. A few tougher years followed but, even in 2013, Vodafone looked refreshed after the neatly-timed sale of the 45% stake in America’s biggest mobile phone business, Verizon Wireless, for the princely sum of $130bn (then £84bn).
Instead, what’s transpired is a share price that stands now near a 25-year low (Monday’s so-so trading update certainly wasn’t going to move the dial). For the past decade, the Vodafone empire has been in necessary retreat – but slowly. Margherita Della Valle became permanent chief executive in April last year promising to accelerate the deal-making and, to her credit, has announced big moves in two out of three big markets where investors were screaming for action. A disposal in Spain is happening and a merger with Three in the UK has been announced. (The Italian saga is more complicated.)
But should the Competition and Markets Authority (CMA), now taking a formal look, allow the deal with Three to go ahead? Until recently, this column’s answer would have been no. There are good reasons why regulators have generally regarded four mobile operators, not three, as the minimum required to deliver effective competition in a market.
Unfortunately, there’s now a fair argument that the “four minimum” analysis isn’t working like it used to. The state of play now in the UK is that the two biggest players, EE (owned by BT) and O2 (owned by Virgin Media and Telefonica), are earning comfortably above a 9%-ish cost of capital, while Vodafone and Three have been well below for years, according to regulator Ofcom’s report in late-2022. That picture does not look like effective competition either. The leaders can pedal softly and invest just enough to maintain their positions, while the third and fourth operators are stuck at the back.
The set-up doesn’t appear to be doing the UK much good either. The country has slipped to last place among G7 economies for average 5G download speeds, according to the research consultancy Opensignal. BT and Virgin Media, one can speculate, face stronger financial incentives to invest in their fixed-line broadband networks, where the so-called alt-nets are serious irritants. And, given Vodafone’s current sub-par returns in UK mobile, Della Valle would probably be marched out off the door if, in the absence of a cost-spreading combo with Three, she proposed a price-slashing splurge in the UK.
The counter-intuitive reality, then, is that three players might provide more genuine competition. Unlike the Three/O2 combo that was quashed in 2016, we’re talking this time about numbers three and four in the market coming together to fill their networks, the crucial first task in the economics of mobile telephony.
Meanwhile, there is more evidence than in 2016 that mobile virtual network operators, or MVNOs that do wholesale deals – think Tesco Mobile and Sky – are here to stay and serve as a brake on prices for consumers. In aggregate, the MVNOs are 17% of the market and EE and O2 dominate as providers.
Vodafone/Three would become number one with 27 million subscribers but, if necessary, regulators could always even things up by enforcing the sale of a portion of spectrum. The main imperative would be to find a mechanism to hold the would-be partners to their pledge to invest £11bn in the UK over 10 years.
It’s true that Vodafone hardly deserves a regulatory helping hand given the financial resources it had at its disposal many years ago. The CMA will also need to be satisfied that the MVNO dynamic is solid. But this may be a moment when pragmatism has to prevail. The deal is not obviously outrageous.
