5G rollout slowed while mobile operators await merger approval. Case in point: the slow rollout in UK

Mobile operators around the world would like to merge 4 mobile networks in their respective nations into 3. This would improve the business case for investment by eliminating duplicative administration, improving spectrum synergies, and upgrading customers to better networks. Strand Consult has studied mobile industry consolidation since 2000 with the groundbreaking case of South Korea merging 5 operators into 3 and being first in the world to 3G. South Korea has remained at the forefront of mobile industry innovation, investment, and rollout ever since.

Strand Consult updates this analysis with its report Understanding 4 to 3 mobile mergersto ensure its customers can access valuable merger knowledge quickly. The departure of European Union Vice President for Competition Margrethe Vestager marks the end of an era for the EU; her reign is marked by a series of rejected mergers which had they been approved, could have brought needed productivity and efficiency to the beleaguered region. The new European Commission has signaled a shift toward growth by releasing a report from former Italian prime minister and central banker Mario Draghi calling for more consolidation.

There is no requirement that EU Competition authorities justify their merger decisions empirically. Only occasionally are official post-mortems issued examining whether their decision was right. Generally, such reports conclude that prices remain low. However, in a world in which mobile prices are flat or falling anyway, a merger rejection is not needed to ensure competitive prices. Competing voice technologies like WhatsApp and Telegram drive down mobile prices, as do the competitive wireless offerings by fixed line providers.

Notably few, if any, competition authorities have studied how the length of merger review impacts network investment. When companies request permission to merge, it’s as if time stops. Operators must hold back on critical capital decisions while authorities assess the merger request.

In the United Kingdom, some have blamed poor mobile coverage on new restrictions placed on Huawei and ZTE. This is nonsense. Operators across the EU have switched and upgraded to trusted equipment vendors without impacting coverage. See TDC Denmark, Telenor and Telia in Norway, T-Mobile in the Netherlands (Odido), and Proximus in Belgium.

The UK has had two recent mobile merger attempts: O2/Hutchison (2015-2016), which Vestager blocked in May 2016. The parties sued the Commission and won in 2020. However, the EC appealed and won in 2023. By that point, the issue was moot as the UK had left the Union. Most competition authorities don’t care that their review of transactions can take years, but markets do. Few companies can afford to tie up so much capital for so long, and fewer still can afford to challenge such decisions when they are unfavorable. Hence the Draghi report is on to something.

Vodafone and Hutchisonhave tried to merge since June 2023. Upon leaving the EU, UK merger decisions were restored to local authorities. The UK Competition and Markets Authority is likely to issue a favorable decision by 7 December.

Slow merger review process is almost as bad as a merger rejection. Before firms announce a merger, they have done their internal due diligence, perhaps over 12-18 months. Once submitted, a merger review can take 12 to 24 months. If approved, the merger can take another 18 to 24 months to implement. This process can take from 36-66 months from start to finish. This period of planning, submission, review, merger, and implementation puts network investment on hold. The numbers speak for themselves in the UK.

• In UK, Hutchison’s capex fell from £876 million in 2021 to £743 million in 2022 and to £454 million in 2023. Vodafone, however increased from £685 million in 2021 to £738 million in 2022 and to £786 million in 2023. Parts of decrease and increase can be attributed to investments in large internal IT projects.
• In the same period, Virgin Media O2 and BT’s capex have been stable. However, VM02 and BT’s figures also reflect investments in fixed infrastructure.
• In Denmark and Norway, where operators have also replaced their Huawei equipment with equipment from trusted vendors, 98,4% of the households in Norway have access to 5G; in Denmark, it is 99%.
• Norway and Denmark rank at the top of mobile network speed measurements according to Opensignal. The UK ranks 27th.
• Reportedly, Everything Everywhere (EE, a merger of Orange and T-Mobile in 2010 and BT in 2015) provides the UK’s best 5G coverage today. The conclusion is that if you are lucky enough to get your merger approved and can survive those years, then you can invest and upgrade your network.
• Moreover, synergies can be maximized during technological shifts. Operators are wise to time their merger with transitioning generations, e.g. 4G to 5G, when equipment must be replaced anyway. However, don’t count on competition authorities necessarily being sympathetic to technological change or the time pressure of the market.

It is important to remember that merger review has little to do with economics, and that it’s mainly about law and statute. The relevant information on the value of the merger exists with the merging parties, not the regulators. When it comes to mobile industry mergers, the selection of authorities which review the merger will depend on headquarters of the parties, even if they are locally regulated by a telecom authority. So, if the one of the merging parties is from abroad or another EU nation, the European Commission gets involved. However, the local competition authority makes the decision if both operators are based in the same country as the merger.

This means it can be a mixed bag depending on who reviews your merger, and that you will need to consider many rules and regulation as a condition of being a telecom operator, including who has the power to allow, deny or condition your merger.

In theory, merger review is based on the merits and is judged by the competent authority. However, political factors can weigh heavy on merger decisions. Moreover, the review process can be protracted. While reviews are supposed to be quick (25 working days), it is not uncommon to see mobile mergers taking 25 months.

In USA, it’s a wonder that the merger of #3 T-Mobile and operator #4 Sprint happened at all. Depending on the asset and transfer, telecom merger review can include the Department of Justice, the Federal Communications Commission, the Attorneys General of the 50 states and other gatekeepers, all of whom want to extract concessions from the transaction. While there are fewer authorities in the case of Vodafone and Hutchison, it still takes time.  

With the Sprint acquisition, T-Mobile wanted to create an operator to compete at scale with AT&T and Verizon. Today the merger is an unqualified success; customers have gained access to a better network, while T-Mobile today has grown the muscle to compete head on with AT&T and Verizon.  Notably the imposed remedy to support a fourth operator DISH has had no meaningful impact.

Look at the uphill battle in UK. Vodafone with 16.4% market share and Hutchison with 7.6% market share want to compete with BT’s EE (35.6% market share) and VMO2 (28% market share). If Vodafone and Hutchison get their merge approved, they still be the smallest mobile operator in UK with a combined market share of 24%.

Strand Consult has followed these issues for years and has published many research notes and reports highlighting the challenges. However, if the merger is approved, operators’ problems are far from over.  Major challenges still remain like access to spectrum and recovering cost for network usage from large traffic generators (LTGs). No broadband telecom operator can match for the market power of any of the global trillion-dollar behemoths like Alphabet, Meta, Apple, Amazon, Microsoft, Netflix, TikTok and others. This handful of companies drives 80 percent of the world’s internet traffic and enjoys essentially no limit on the ads and video they can pump into telecom networks; ads alone comprise as much as a quarter of mobile network traffic.

Strand Consult detailed how Meta exploits the EU’s net neutrality rules. At the height of the pandemic, Meta breached a 10 year-contract with DT Germany designed to ensure network capacity for Meta’s users. It took DT four years to secure judicial redress for Meta’s breach, during which time DT kept its network investment up while Meta’s traffic exploded to a greater share of DT’s network, even though the number of Meta users is falling on DT’s network. Meanwhile Germany’s broadband prices have been flat or falling. 

The Caribbean is a microcosm of Big Tech’s digital colonialism.

The situation is even worse in the Caribbean, a region of two dozen nations with 45 million people and roughly $135 billion in gross domestic product (GDP), equal to Meta’s annual turnover and less than half of Alphabet’s. These “Big Tech” firms pay no tax in the Caribbean, nor registration fee nor regulatory license. They employ no one locally nor have offices. All the same, this handful of megafirms enjoys some $12 billion annually in Caribbean revenue without paying a penny to use Caribbean networks. Such political control and economic exploitation is the definition of digital colonialism.

Strand Consult’s new report Gigabit Caribbean: Closing the Investment Gap in Fixed and Mobile Networksis the first of its kind to detail both mobile and fixed line investment challenges in the Caribbean. It details the cost to upgrade networks to both 5G and fiber to all people of the Caribbean, one-third of whom today who are not connected to the internet. The average mobile revenue per user in the region is just $10 per month. Defenders of the status quo smugly claim that no one in the Caribbean would subscribe to the internet if not for the services of the handful of LTGs. However, the people of the Caribbean use telecom networks for many reasons including disaster relief, work, school, health care, and public safety from local enterprises.  What neither Caribbean end users or operators can control is how much network capacity any LTG devours; Netflix or YouTube can consume as much as half of total broadband network capacity sending traffic to a handful of users. Netflix’s adaptive bit rate technology expands to whatever bandwidth is available, crowding out other services that users want, and consuming the bandwidth that non-Netflix subscribers could otherwise enjoy.

These problems could be solved by market pricing, but LTGs claim that it has no obligation to negotiate or pay for the use other’s network property, and they have the market power to force a free ride on broadband telecom networks. It should be no surprise that the world is missing $2 trillion in network investment and that one-third of world’s population remains offline for lack of broadband affordability. The growing market power of Big Tech only exacerbates the challenges for mobile operators which seek consolidation to cover cost.

To learn more, check out Strand Consult’s library of knowledge on Consolidation.You can also buy Strand Consult’s signature report Understanding 4 to 3 mobile mergerswhich contains extensive valuable information on the topic. 

To find out more and review the table of contents, contact Strand Consult.