18 March 2024
In June 2023, Vodafone and Three UK announced their intention to create the UK’s biggest mobile network operator.[1] The proposal is still under investigation by the Competition and Markets Authority (CMA) to determine whether the deal will be allowed, and if any remedies should apply.[2]
The impact of the deal on the UK mobile market has been widely discussed and both parties have outlined the synergies they expect. However, what impact could the merger have on the fixed telecoms market?
The fibre market in the UK – a cycle of consolidation
The UK market has seen large fibre investments over the last five years. Ofcom reported a significant increase in full-fibre connections (Ofcom’s equivalent of FTTP)[3] – 17.1 million residential premises (57% overall) having access to a full-fibre broadband network as of September 2023, an increase of 4.6 million connections compared to September 2022.[4] Thinkbroadband report that this has further increased to 19.5 million residential premises as of January 2024.[5] This investment is driven by incumbent Openreach as well as an increasing number of ‘AltNets’ (alternative network operators, i.e. smaller fibre operators with a smaller footprint).
These AltNets are now covering ~9% of the 19.5 million UK residences with FTTP,[4] but are struggling with the necessary take-up rates to provide a return on investment. Rising interest rates will increase the cost of financing further rollouts and many are suggesting that this indicates the beginning of a ‘consolidation cycle’ – either by AltNets consolidating to form a larger conglomerate or by a larger player (such as possibly the newly constructed ‘NetCo’ by VM02) acquiring smaller players. Such a development would change the shape of the fibre market, which has led us to look into how the Vodafone / Three merger would further influence this dynamic.
How will a mobile market merger affect the AltNets?
We have identified three disruptive scenarios for the UK AltNet market, depending on the strategy adopted by the Vodafone-Three – in each of these cases, the AltNets will face continued challenges in executing their core strategy, which is likely to accelerate the consolidation cycle.
Fixed Wireless Access competition emerges
Aetha previously wrote about the potential for FWA services here.
Should the merger complete, Vodafone-Three will hold nearly 50% of mobile spectrum (subject to any remedies) – more than any other operator in the UK. In particular, Vodafone-Three would have access to 300MHz of the mid-band TDD capacity spectrum, which is crucial in serving large volumes of data traffic.[6]
While FWA does not compete head-on with (premium) FTTP data rates, its offer is sufficiently attractive in the low-/ mid-market segments, i.e. those segments currently being unresponsive to the fibre rollouts and not taking up FTTP services. Moreover, FWA is typically priced aggressively and much simpler for the end customer to set up than fibre services as it does not require an engineer to visit the premises.
Even with some spectrum divestments, Vodafone-Three would be able to sustain FWA services for a longer period than either operator could independently. For AltNets already struggling to convince households to pay for FTTP services, this would only increase competition, especially if such competition emanates from already well-established and familiar brands. This would pose a further challenge to low take-up rates and could accelerate the consolidation cycle.
Eased competition for mobile services
The UK mobile market has been impacted by pricing competition over the past decade – and Three’s strategy of offering larger data bundles for similar prices to the other three MNOs has contributed to this. Naturally, it remains to be seen how the pricing strategy for Vodafone-Three evolves after the merger. Some industry experts[7] and academics[8] suggest that the result could be an increase in prices – whereas a study commissioned by the merging parties indicates that such a trend has not been observed internationally.[9]
In case there would be eased pricing pressure in the mobile segment, this could open opportunities for integrated telecoms operators, such as VM02 or BT, to put more focus and money into the fixed market to strengthen their positioning as converged operators. Such a shift in competitive focus could cause problems for the AltNets – again accelerating the pressure to consolidate in order to gain scale and become more competitive against the established brands and operators.
A gap in the mobile market: MVNO opportunities
The Vodafone-Three merger would create a three-player mobile market in the UK. It also has the potential to create space in the more price-conscious segments for a new player. Establishing a foothold as an MVNO is a tried-and-tested recipe for fixed players – however, having near-national scale would be very useful for more effective marketing. Again, to establish themselves as strong MVNOs and benefit from such an opportunity, the AltNets may be strongly incentivised to consolidate into one larger, more marketable, near-nationwide brand.
Entering the market as an MNO would be less plausible as it would require a significant amount of investment in spectrum and access to infrastructure (RAN, towers, etc.) and may detract from the core fibre business that the AltNets have been investing so heavily in.
The cycle of consolidation seems set to continue
UK AltNets are currently fighting to establish their position in the fixed market, with the focus being on improving take-up rates after a series of heavy investments. Already from the current situation, the market is expecting a series of acquisitions or consolidations, and larger players are lining themselves up for this. The merger between Vodafone and Three may further fuel these dynamics, as all three of the developed scenarios highlighted (differing) incentives for consolidation.
Figure 1: Summarising three disruptive scenarios from Vodafone-Three merger
It thus seems evident that consolidation will continue – with AltNets needing to navigate increasingly complex strategic challenges.
References
[1] BBC News, ‘Vodafone Three deal to create UK’s largest mobile firm’, Jun 2023. Accessed at https://www.bbc.co.uk/news/business-65842845, Mar 2024.
[2] Competition and Markets Authority, ‘CMA launches formal investigation into Vodafone / Three merger’, Jan 2024. Accessed at https://www.gov.uk/government/news/cma-launches-formal-investigation-into-vodafone-three-merger, Mar 2024.
[3] Ofcom, ‘Tackling consumer confusion about broadband technology’, Mar 2023. Accessed at https://www.ofcom.org.uk/news-centre/2023/tackling-consumer-confusion-about-broadband-technology, Mar 2024.
[4] Ofcom, ‘Connected Nations UK report 2023’, Dec 2023. Accessed at https://www.ofcom.org.uk/research-and-data/multi-sector-research/infrastructure-research, Mar 2024.
[5] thinkbroadband, ‘The State of Broadband’, Jan 2024. Accessed at https://www.thinkbroadband.com/broadband-report/january-2024, Mar 2024.
[6] Excluding the 84MHz of shared 3.8GHz spectrum licensed to Three’s UK Broadband.
[7] Rewheel/research, ‘The 4 to 3 Vodafone / Three mobile merger in the UK will lead to substantial 26% to 51% monthly price increases’, Feb 2024. Accessed at https://research.rewheel.fi/insights/, Mar 2024.
[8] C Genakos, T Valletti, F Verboven, Evaluating market consolidation in mobile communications’, Jan 2018. Accessed at https://academic.oup.com/economicpolicy/article-abstract/33/93/45/4833997, Mar 2024.
[9] Compass Lexecon, ‘Do four-to-three mobile mergers harm consumers?’, Nov 2023. Accessed at https://www.compasslexecon.com/the-analysis/do-four-to-three-mobile-mergers-harm-consumers/11-28-2023/, Mar 2024.
