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The perils of the Vodafone-Three merger

We have just issued a new report looking at the prospects of an apparently imminent merger announcement between Vodafone and 3/Three in the UK, which would reduce the number of mobile network operators (MNOs) from four to three.

Our report, prepared with Prof. Tommaso Valletti, head of economics at Imperial Business School (and a former Chief Competition Economist at the European Commission), draws on seven different international studies and estimates that this this merger will increase mobile prices in the UK considerably – by £5 – £25 a month on average for every user in the UK.

Yet the extensive international evidence also shows that such a merger would not lead to increased investment, as company bosses like to claim.  The evidence also strongly suggests that the transition from four to three MNOs is an especially dangerous threshold to cross.

This graph, drawn from one of the seven studies, highlights the clear trends of the perils of consolidation.

This uses a measure of market concentration called the Herfindahl-Hirschmann Index (admittedly a flawed measure in itself, but the trendline is meaningful, as this paper and our report explains.) The more concentrated the market, the higher the price of mobile phones. On this particular measure, the Vodafone-Three merger would increase prices, conservatively estimated, by 30 percent, or by £10 – £15 a month for every subscriber in the UK. Another commercial study estimated that the effect of a merger could be much larger:

“The median monthly price of 4G and 5G plans with at least 1000 minutes in four-MNO markets was a little over a half the price of equivalent plans in three-MNO markets.”

This merger, if it goes ahead, will worsen the severe cost of living crisis, weaken UK businesses (and especially smaller businesses,) and result in an estimated £4 billion – £20 billion being drained from the pockets of UK people and businesses much or even most of it to the benefit of investors based overseas. It will also, for reasons we explain, undermine the government’s ‘leveling-up’ agenda to benefit the UK regions.

At the same time, it will deliver large rewards to Vodafone executives and shareholders, including its new activist financial investor Cevian that has reportedly been pushing hard for Vodafone to pursue multiple acquisitions, in multiple countries.

The report is here.