European mobile operators are pushing harder than ever for more mergers, but competition regulators seem unconvinced. Is more consolidation really the answer to the industry’s ills? While operators have been banging on the M&A drum for some time, much has changed since the wave of 4 to 3 mergers that took place in the 2010s. For example, deploying 5G has forced operators to dig deep into their pockets but so far they have little to show for it.
Operators’ consolidation push: from MWC to M&A
The industry’s demand for greater market consolidation was one of the clear themes from this year’s Mobile World Congress.
"We need a reform [of the] competition policy," Timotheus Höttges, Deutsche Telekom’s CEO, said during the event. "We have to be allowed to consolidate our activities."
"There is no reason that every market has to operate with three or four operators," he added. "We should build a European single market ... because, if we cannot increase our consumer prices, if we cannot charge the over-the-top players, we have to get efficiencies out of the scale which we created."
Things have accelerated post-MWC. According to the Financial Times, European telecoms groups are working on M&A deals in expectation that the EU’s new competition chief Teresa Ribera will look more kindly on mergers. The paper also says that Telenor is exploring acquisitions, while Telefónica is open to options in markets including Spain, Germany and the U.K.
Similarly, in Orange’s Q1 earnings call, its CEO, Christel Heydemann, said that the company welcomes consolidation in all its markets in Europe. She spoke in response to an analyst’s question about possible consolidation in France and rumours that it may happen. There is also speculation that Patrick Drahi — the founder of Altice, which owns SFR — is looking to exit the French telecom market.
Over in Italy, Pietro Labriola, TIM’s CEO, has written a short book on the need for greater consolidation — The Missing Connection. In it, he says that “The real threat isn’t consolidation. It’s inertia. It’s clinging to a model that no longer works. It’s thinking that cutting prices is enough to stay in the game. That doesn’t work anymore.”
The lobbying will only intensify now that the EU Commission has launched a public consultation to obtain feedback on its review of the EU merger guidelines.
The economics of consolidation
At its heart, the industry’s interest in consolidation is a simple one. Operators have been finding it hard to generate compelling returns on capital — partly due to the struggle to monetize 5G, save for the single ray of light that is fixed wireless access (FWA). In his book, Labriola describes this issue as a “silent crisis”, while noting that “the more we [the telco sector] invest, the less we earn.”
The economics of running a mobile network are dominated by capital expenditure and fixed costs. So, the more users there are on a single network, the easier it is for its operator to turn a profit. In addition — and this is where regulators typically have concerns — reductions in competition intensity (from having less operators competing for the same customers) can lead to higher prices.
Why scale is so hard to achieve in Europe?
Unlike, say, the USA, China or India, Europe is a patchwork of relatively small countries, limiting economies of scale. While the European mobile market looks much less fragmented when you look at operator groups rather than individual MNOs, this kind of consolidation can only go so far. A strong international brand, centralized support functions and greater access to capital all help — but group ownership doesn’t mean having to build and operate fewer networks. In addition, each country has its own regulatory regime, which also works against economies of scale. As spectrum is awarded at the national level, operator groups have to take different network deployment approaches in different markets.
The UK Vodafone/3 merger — a new precedent
The recently approved ‘4 to 3’ merger between Vodafone and 3 in the U.K. and the precedent that it has created has been seized on by the pro-consolidation camp. Flush from its success, Vodafone Group has been making the case for similar willingness and flexibility from other competition authorities. In particular, it notes the CMA’s decision to place “significant weight” on the expert opinion of Ofcom (the U.K.’s telecom regulator). According to Vodafone, Ofcom recognised that increased investment to meet customers’ future connectivity needs wouldn’t be achieved under existing market conditions.
Vodafone is also calling for the European Commission to be more accepting of behavioural remedies, consider merger efficiencies over a longer time horizon and “explicitly recognise” that sector regulators “can and should play an important role in monitoring and enforcing behavioural remedies. Behavioural remedies are arguably the most appropriate option for competition authorities if they accept the argument that more consolidation is needed to drive investment in a market. After all, there is no point in trying to create a sub-scale new player if the current number of operators in a market is considered to be a problem.
In addition, to Vodafone and 3’s commitment to invest £11 billion in the combined company’s network, the merger was clearly aided by:
- Compatible market shares. The two operators’ combined market share (36.3%, TeleGeography, December 2024) is comparable to that of the largest operator — O2 (36%). This means that the merger isn’t going to create an overly dominant operator overnight.
- Unflattering international comparisons. The U.K. performs relatively poorly compared to its peers on mobile experience.
- EE’s mobile experience dominance. Arguably, users are best served by a scenario in which multiple operators are competing on network quality, but that’s not what our U.K. users have seen, with EE consistently winning the most awards in our U.K. mobile network experience reports.
The regulators push back
While the U.K. won’t be the first market to carry out a 4 to 3 merger (other examples include Germany and Ireland), it is by far the most recent example. I therefore imagine that some regulators would like to see the impact of the Vodafone/3 merger on the U.K. market before considering a 4 to 3 merger in their own markets that’s being promoted along similar lines. I can see this leading to tensions, both between telcos and regulators, but also within competition authorities and mobile regulators. Those with a data-driven approach are likely to clash with others more focused on political objectives.
The competition authorities of Austria, Belgium, Czechia, Ireland, Netherlands and Portugal recently published a joint statement that seems intended to dampen expectations. It says that “The narrative that fragmentation in the electronic communications sector, hindering investment and innovation, allegedly results from unduly strict competition rules is misplaced. In fact, lax merger control could not only undermine consumer welfare directly, but also investment and innovation.”
Looking ahead
I expect that we’ll see more consolidation over the next few years, which will boost both the mobile experience and average revenue per user (ARPU) — though the latter won’t rise to the levels enjoyed by U.S. operators, as these are due to a combination of historical circumstances — such as bifurcated technology market before 4G, which worked to suppress churn — along with smartphone subsidies, relatively light-touch regulation from the FCC and U.S. population growth.
Consolidation will not solve all the industry’s problems. As long as mobile operators are technology-takers then true differentiation will be hard to achieve. Investing in mobile experience while trying to combat churn through mobile/fixed convergence and bundled services helps but it cannot eliminate the prisoner’s dilemma that has led operators to compete heavily on price. Operators fear that if they raise prices to fund better networks, competitors will undercut them — so they’re all stuck in a race to the bottom.
Look out for another blog, in which I’ll compare those European markets with more than three mobile operators to the U.K. to see if there are any clear parallels.
Opensignal Limited retains ownership of this insight including all intellectual property rights, data, content, graphs & analysis. Reports and insights produced by Opensignal Limited may not be quoted, reproduced, distributed, published for any commercial purpose (including use in advertisements or other promotional content) without prior written consent. Journalists are encouraged to quote information included in Opensignal reports and insights provided they include clear source attribution. For more information, contact [email protected].
