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Vodafone, a global telecommunications company, is working towards streamlining its operations by merging its UK business with smaller competitor Three. This move follows a similar merger between the two companies in Australia in 2009, which was ultimately unsuccessful.

The Australian merger, referred to as “Vodafail” by the locals, experienced mishandling and a network meltdown that led to a significant loss of customers. This setback highlighted the challenges of running a company that ranked third in a three-player market. Despite its failure, the Australian merger served as a model for other telecom markets, including the US, Germany, Italy, and Ireland, where regulators believed that consolidation would create stronger mobile telecom players capable of investing in new 4G and 5G networks.

This trend of consolidation, known as the “four-to-three” model, signaled a shift away from the global aspirations of telecom companies that were spread across diverse locations. The cost and bureaucracy of managing networks on a global scale became overwhelming, leading to a focus on consolidating within individual markets.

While other countries have embraced this trend, Britain has been slower to adopt it due to the blocked merger of O2 and Three in 2016 based on competition grounds. The proposed merger between Vodafone and Three, along with the merger of Orange and MasMovil in Spain, will test whether regulatory attitudes towards consolidation have evolved in Europe.

Vodafone has learned from its past Australian experiences and will retain a 51% stake in the merged UK business, ensuring control over its network in the home market. Analysts argue that the combination of Vodafone, Three, and TPG did not lead to a significant increase in telecom costs in the Australian market and even preserved competition.

Interestingly, the concentration of telecom players in Australia benefited incumbent company Telstra, which has seen its market value grow substantially. In comparison, the entire Vodafone Group now has a market value of £20bn, while its British counterpart BT is valued at £11bn.

While Vodafone and Three initially held a 26% market share after their Australian merger, the percentage has dwindled to 18% due to the impact of the COVID-19 pandemic on tourism and international students. Telstra remains the dominant force with 50% of the market, while Optus, owned by Singtel, holds 32%. However, only Telstra manages to cover its cost of capital, raising concerns about profitability for the other players.

Moreover, increasing competition from cloud players like Amazon and Microsoft, as well as upcoming threats from low-earth orbiting satellite companies like OneWeb and Starlink, adds further pressure on mobile-only players in the telecom industry.

With these factors in mind, regulators may need to reconsider whether there is enough room for three players in the market, let alone four. The ongoing discussions between TPG and a Macquarie-owned rival to sell its fiber assets reflect the challenges faced by companies in finding their place in an evolving industry landscape.

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