A merger between Vodafone and Three, two of the biggest telecoms companies in the UK will drive up prices for consumers and kill competition, writes Max von Thun
Last month the UK’s competition regulator, the Competition and Markets Authority (CMA), drew a crowd after it decided to block Microsoft’s acquisition of Activision over fears it would allow Microsoft to monopolise the emerging cloud gaming sector.
While some criticised the decision for attempting to second guess the evolution of unpredictable technology markets, the CMA was right to withstand political pressure and stop yet another anti-competitive Big Tech merger. But it is now faced with another mega-merger whose harms are even easier to spot. Vodafone’s planned tie-up with rival Three, announced last Wednesday, would create the UK’s largest mobile operator, with almost half the country’s mobile subscribers.
This sharp increase in market concentration would almost certainly increase prices for consumers. It also poses a national security threat from China in the form of Three’s owner, Hong Kong-based CK Hutchison.
The deal looks like an open-and-shut case of an anti-competitive horizontal merger reducing the number of players in the market, widening profit margins at the expense of prices, service quality and innovation. It’s yet another instance of the 4-to-3 telecoms mergers that competition authorities around the world rightly take a deeply sceptical view of, including CK Hutchison’s attempted acquisition of O2 blocked by the European Commission in 2016.
According to one comprehensive academic study based on data from 33 countries over 13 years, 4-to-3 telecoms mergers increase prices by an average of 16.3 per cent per customer. Drawing on this and other similar evidence, a new report by Tommaso Valletti (former Chief Competition Economist at the European Commission) finds that the Vodafone-Three merger could be expected to raise individual mobile bills by up to £180 per year.
This would be problematic at any moment, but is all the more so at a time of rapidly rising prices. UK annual inflation – at 8.7 per cent – remains very high and above levels in the EU and US, while the number of households struggling to pay their bills has increased by over three million in just one year. This includes phone bills, with operators – including Vodafone – introducing inflation-busting price increases earlier this year. These excessive price rises already point to a potential lack of competition in the market, which the proposed merger would of course make worse.
Vodafone and Three argue that the deal will boost investment in the UK’s telecoms infrastructure, as merging telecoms operators tend to do. Yet another quick glance at the evidence puts such claims to bed. The same peer-reviewed study on 4-to-3 mergers cited above also finds that such consolidation resulted in no increase whatsoever in investment at the national level.
Similarly, another paper published earlier this year looked at investment by major telecoms operators in the US and EU, observing higher rates of investment in the less-concentrated EU market than in the more monopolistic US. In markets with less competition, companies do not need to invest as much to protect their position from challengers.
There is clearly much to be worried about on competition grounds. But the merger is also problematic from a national security perspective. Three owner CK Hutchison is closely entwined with the Chinese state, from backing Beijing’s draconian crackdown in Hong Kong to sitting on numerous government committees. The deal would give Hutchison access to information on a total of 27 million UK customers and Vodafone’s contracts with the British government, information it could potentially be forced to divulge to the Chinese government under that country’s national security laws.
In light of these serious concerns, the Vodafone-Three merger should be intensely scrutinised under both the UK’s competition and national security investment screening laws. Investment in the UK’s network infrastructure is undoubtedly critical, and the government should do what it can to enable this, including investing itself and facilitating innovative solutions such as network sharing. But waving through harmful consolidation is not the solution.