Industry folk are chattering excitedly about the possible UK marriage of Vodafone to Three. It's a wedding former European Union (EU) authorities would undoubtedly have ruined by effectively standing at the back of the church and shouting all sorts of objections. But Brexit gives the UK a Henry VIII-like freedom to bless the tie-up. And if it does, current EU mandarins more sympathetic to the plight of their telcos might see it as a precedent for a more laissez-faire approach on the continent.

But it first requires UK officials to show their philosophy has changed. In 2016, before Brexit, the Competition and Markets Authority (CMA) wrote a grumbling letter to the EU about the proposed merger between Three and O2, then a wholly owned mobile subsidiary of Spain's Telefónica. Not long after the deal was blocked, a spokesperson for the CMA scoffed at Light Reading's suggestion a market could have "too much competition."

That's worrying. Last year, research from Barclays showed that Germany is the only one of Europe's five big economies – the others being France, Italy, Spain and the UK – that covers its cost of capital in the telco sector. It's also the only one that hosts as few as three mobile networks, if you discount new entrant 1&1, which, at the start of this year, had a grand total of three sites in commercial use.

Figure 1: A merger between Vodafone and Three needs a U-turn by authorities.
(Source: l_martinez / Alamy Stock Photo)

Even Ofcom, the UK telecom regulator, has acknowledged that a market generating such lousy returns is probably in peril. "If ROCE [return on capital employed] was to fall, or was expected to fall, below the cost of capital for a sustained period of time for any MNO [mobile network operator], this could dampen its incentive to invest," it said in a report last year.

This would not matter so much if these networks were ordinary high-street businesses as opposed to critical infrastructure. It is not denigrating such important services as pubs and hairdressers to argue that underinvesting in them would be less problematic. You can still get sloshed at home (without spending as much, too) and there was plenty of DIY shearing amid the pandemic, even if much of it left heads looking like a badly mown lawn.

Networks, we are repeatedly told by the powers that be, are the foundations of the modern online economy, and so ensuring they are healthy is presumably important. Obviously, nobody wants to revert to a state-run monopoly, but the opposite could be even worse. In a market of ten nationwide networks, some companies would have to settle for a tiny share of customers and revenues without being able to avoid the same equipment and spectrum costs as the biggest. That's not sustainable.

Orwellian dogma

The trick is finding the right balance between securing investment and safeguarding competition. But the Barclays data suggests four mobile networks is too many, despite the Orwellian "four networks good, three networks bad" credo adopted by EU and UK authorities. So sacrosanct is the number four that authorities have carved out positions for new players on the rare occasions they have blessed mergers. In Germany, that company is 1&1. In Italy, it's Iliad, after Wind and Three were forced to sell assets to it as a condition of their deal.

But the CMA has an unenviable job. Mergers inevitably lead to job losses and price rises and this tie-up would come during the worst cost-of-living crisis in years. Nor is there any cast-iron guarantee that operators will invest more in their networks if a merger is allowed. Plowing a quarter of sales into capital expenditure last year, BT already has the highest capital intensity in Western Europe. It's the challenge from dozens of altnets building full-fiber networks that has spurred this investment.

That said, Ericsson, the region's biggest vendor of 5G network equipment, is persuaded that fewer networks would be a good thing for its business, judging by the remarks of Christian Leon, its head of networks for Europe and Latin America, on a recent Telecoms.com podcast. The Swedish company has long insisted that Europe trails China, South Korea and the US, all three-player mobile markets, on the rollout of 5G in higher (and more lucrative) spectrum bands.

Better than fair share

Whatever gets decided, this is an eminently sensible debate about a more investor-friendly setup compared with the daft one on "fair share," the idea of charging big Internet companies for the use of networks. The premise is doubly flawed – that these giants, and not the telcos' own customers, gobble network capacity, and that Big Tech needs telcos more than telcos need Big Tech.

Mmm … imagine the likes of Amazon and Netflix don't exist and then ask what the average consumer's incentive is to buy higher-speed network services – something operators desperately want so they can shut down older platforms and save money. Netflix might as well demand payment from a telco for all the funds invested in content.

Any fair share legislation would seem to flout rules on net neutrality, which prohibit blocking, throttling and discrimination when it comes to the network's treatment of Internet services. Under those rules, operators have already been forced to abandon the practice of "zero rating," whereby some Internet services do not count against a user's monthly data allowance while others do. Charging some video-streaming companies but not others for network access is hardly different. Unless, to paraphrase Orwell again, all Internet services are equal but some are more equal than others.

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— Iain Morris, International Editor, Light Reading