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UK govt identifies big reason to bless Vodafone-Three merger

A monster report from the newly formed DSIT says neither telco covers its cost of capital while ruminating on standalone 5G, 6G and the old favorite of open RAN.

Iain Morris

April 11, 2023

5 Min Read
UK govt identifies big reason to bless Vodafone-Three merger

Due process dictates the British government should not be within earshot or gesturing like a sports coach from the stands when UK competition authorities are debating whether to bless or condemn a proposed merger. But just in case the Competition and Markets Authority (CMA) hadn't considered one big reason to applaud the deal involving Vodafone and Three, the government has waved it under the wonks' noses in its latest epic treatise on wireless infrastructure.

Covering everything from Guigliemo Marconi's first use of wireless technology in 1897 to the importance of 6G, that report is the first from the newly formed Department for Science, Innovation and Technology (DSIT) – whose responsibilities were previously split between the Department for Business, Energy and Industrial Strategy and the Department for Digital, Culture, Media and Sport, both of which are now defunct – and it really is a whopper, extending to 107 pages when saved in PDF format.

The nudge-nudge, wink-wink bit about Vodafone and Three falls under Chapter 4 with its leading headline of "Strengthening the investment environment." And while it clearly stops short of urging the CMA to rubberstamp the deal, it does point out that neither Vodafone nor Three have been able to cover their cost of capital since 2018 – that is, according to independent regulatory body Ofcom.

Figure 1: Economic return on capital employed by telcos (Source: Ofcom) (Source: Ofcom)

Say no more

That reference to 2018 is critical, furnishing CMA with the justification it would need to wave through the telco plans when a previous merger attempt involving O2 and Three was shot down by the European Commission (EC) back in the Remainer paradise of 2016. This data finding comes about three years after the General Court of the European Union decided – at the prodding of Hutchison, Three's parent – that the EC had probably made a mistake in blocking the deal between O2 and Three in the first place (tough luck, guys).

Vodafone and Three, naturally, have justified their own plans by arguing neither makes a decent return, and so they will be delighted to hear the government parroting that line. Lest it be accused of partiality, DSIT notes that "strong competition from four mobile operators can also drive investment and that some – though not all – studies of mergers in other countries show a reduction in the number of mobile operators leading to increased consumer prices." The inclusion of "though not all" is an interesting qualifier here.

DSIT then goes on to say it is entirely up to the CMA to decide based on "whether the merger creates benefits to the relevant customers such as lower prices, higher quality, greater choice and greater innovation of goods and services." If there are downsides, the CMA can always "suggest remedies," DSIT helpfully advises.

All this makes it harder to imagine a deal of some kind will not go ahead. One of the immediate consequences of that would be further job losses in a sector whose workforce has been shrinking for years. Higher fees and a general worsening of competition would be an insult to customers recently hit with 14% price rises under a dodgy inflation-plus-3.9% formula cooked up by the telcos. But that doesn't mean they won't happen.

The odor of Boris

Such developments would not endear the British public to an increasingly unpopular Tory government, but DSIT has made clear that its own priority is aiding 5G investment – especially the rollout of the newer "standalone" variant, which the government wants to see deployed in all populated areas by 2030, despite not being entirely sure why.

Overall, this report will be welcomed by the telecom industry and those paid to pontificate about it. Besides attaching great importance to standalone, and regurgitating telco arguments about investment returns, it expresses sympathy for a capital-intensive industry whose sales have flatlined despite a surge in data traffic. Its language on net neutrality – a badly defined principle about fair treatment of Internet traffic – suggests it would approve of rule changes that favor the telcos.

But there is still too much of the interventionist approach that Boris Johnson brought to government along with scarecrow hair, lockdown parties and general sleaze. Most of the funding promises are too small to count – a £100 million ($124 million) commitment to 6G is tokenistic given the roughly $30 billion that Ericsson, Huawei and Nokia spent on research and development last year alone – but pledging £5 billion ($6.2 billion) for the rollout of gigabit networks in rural areas is a questionable use of public money. Why should the taxpayer cough up so that wealthy landowners in the Lake District can enjoy high-definition, virtual-reality gaming?

The government's religious obsession with open RAN is the worst example of this interventionism. Not only does it fail to see that many open RAN companies are about as open as the Democratic People's Republic of Korea is democratic. It does not seem to have dropped its barmy idea of mandating usage, proposing in the new report that 35% of UK traffic pass through open RAN networks by 2030.

If authorities really want something to worry about industrially, they could have started with semiconductors. About 90% of the world's most advanced chips now come from an island under constant threat of Chinese invasion, and the UK response – along with that of other Western governments – is to hope that nothing bad happens. If it does, open RAN will be the last thing on anyone's mind.

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— Iain Morris, International Editor, Light Reading

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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