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The Guardian - UK
The Guardian - UK
Comment
Nicholas Shaxson

Vodafone and Three merging would be a disaster – not least for your bills

A woman talking on her mobile walking past a Vodafone store in London.
‘The other big claim that telecoms companies routinely make when they want to merge – that investment will rise – is suspect.’ Photograph: Kin Cheung/AP

Hold on to your wallets. Vodafone and Three, two of the UK’s biggest mobile telecoms firms, want to merge – and they are making some odd claims in their PR blitz about why they should be allowed to. Make no mistake, this is a classic monopolisation play that will have classic results – higher prices, stagnant investment, poor service and job cuts – while shareholders and bosses make off like bandits.

Vodafone’s group chief executive, Margherita Della Valle, is telling an Alice-in-Wonderland story about this merger: it would, she claims, be “great for customers, great for the country and great for competition”. It’s hard to follow her logic: the merger will “create a third operator with scale” to take on the biggest firms, EE and O2, and will have wider coverage. But it is still a reduction from four to three.

Let’s look at the evidence. Together with Tommaso Valletti, professor of economics at Imperial College and the former chief competition economist at the European Commission, the Balanced Economy Project published an investigation this week drawing on the extensive academic and commercial research into what seems to happen when telecoms firms merge.

Making some very conservative assumptions, we concluded that the Vodafone/Three merger would have the potential to raise average UK mobile bills by £50 to £180 a year – equivalent to sucking up to £12bn out of everyone’s pockets, annually. And that’s just mobile bills: most people have bundled packages that also include landline, fixed broadband and TV services. So the overall hit would be bigger. This will not help with high inflation and the cost of living crisis.

Worse, though, the other big claim that telecoms companies routinely make when they want to merge – that investment will rise – is also suspect.

Take the T-Mobile/Sprint merger in the US, which took place under Donald Trump’s administration in 2019 and reduced the number of major cell carriers from four to three. It is already widely regarded as a failure, with a cosy triopoly, resulting in the jacking up of prices and skimping on investment. The only silver lining – if it is one – is that the US firms are showering bigger rewards on their shareholders.

The proposed Vodafone/Three tie-up in the UK would be another four-to-three merger. There are more mobile providers than this, but there are only four mobile network operators (MNOs) with direct access to the mobile spectrum (EE, O2, Vodafone and Three); others, such as Giffgaff or Tesco Mobile, must piggyback on their networks.

The MNO market is already pretty concentrated. Three is owned by CK Hutchison Holdings (CKH) – based in Hong Kong but incorporated in the Cayman Islands – and controlled by the billionaire Li Ka-Shing. It already tried to merge with O2 in 2016 but got slapped down by the European Commission (the case has since been bouncing around an appeals process).

In CKH’s case to the Europeans, it said it faced serious difficulties and capacity constraints and only a merger could save it. Yet, when the merger didn’t materialise, those difficulties seemed to evaporate as it powered ahead. It is making the very same claim now: Vodafone and Three “lack the necessary scale on their own to earn their cost of capital”, said a top CKH official this week.

Don’t believe the hype. We’ve heard it before: companies plead poverty, they say they need a merger and promise sumptuous benefits. Their claims, as an academic paper put it politely in January, “do not stand up to scrutiny”.

Another study, by the mobile consultancy Rewheel, found that in countries with three MNOs, prices were about double what they were in countries with four.

Since 2013, the successive chief executives of Vodafone Group plc alone have earned a total of £50m, while the chairman of CKH, Victor Li, earned HK$106m (nearly £11m) in 2022. A merger would likely result in a new bonus-fest. But remember, the winners would be concentrated in rich parts of the UK, overseas and offshore, while the losers – the rest of us – are spread all across the country. Britain’s regional imbalances will grow.

What can be done? The Competition and Markets Authority (CMA) must treat this monopolisation play with the contempt it deserves, and block it – as it courageously and rightly did in April when it blocked the global merger between Microsoft and the US gaming company Activision.

We need two more things in the long-term. First, the onus is currently on the CMA to fight in courts to prove that this merger will be harmful, against armies of well paid lawyers and economists whose job is to blow smoke and doubt around its case. We should flip the burden of evidence in cases like this, so it is the firms, not the CMA, that must prove their merger would be good for the economy.

Second, a recent research paper on this subject suggests that the optimum number of MNOs for consumers is not four, but six. We should start thinking less about mergers, and more about breakups.

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