Yahoo Finance Why Vodafone made a new deal with Virgin Media O2
In the next 24 hours we will have a new Government. Whoever enters 10 Downing Street will have severely limited fiscal headroom. The over-riding priority will be economic growth.
To drive growth, we need best in class 5G infrastructure. One thing the Labour and Conservative party manifestos had in common is a commitment to ensure the UK has a nationwide 5G network rolled out across the UK by 2030. A commitment we fully agree with.
Just over one year on from our merger announcement, I am even more convinced that combining Vodafone UK and Three UK will be a significant contributor to that growth agenda.
Creating a third strong player will be a catalyst for a new pro-investment environment in mobile, with all the benefits that brings for consumers and country. Improved network quality and capacity on the enlarged network will cause competing operators to react by investing further in their own networks and by offering competitive pricing to retain customers.
This intensity of competition is further enhanced by our announcement today that we have extended Vodafone’s network sharing agreement with Virgin Media O2 for more than a decade. Should the merger be approved by regulators, Virgin Media O2’s customers and the customers of Vodafone and Three, will benefit from the extension of our network sharing agreement which will underpin investment and ensure that the market remains competitive.
We estimate that as a result of the merger and enhanced network sharing agreement over 50 million mobile users in the UK will benefit from significant network improvements including more choice, better quality and greater coverage across the country. This includes not only Vodafone, Three and Virgin Media O2’s customer bases, but those of the mobile virtual network operators (MVNOs) they support.
We will also make a significant transfer of spectrum to Virgin Media O2, subject to regulatory approval of the merger. This will enhance the operator's network position from its current spectrum holding today, levelling the playing field and incentivising all players in the UK mobile market to compete and invest.
I am delighted that Virgin Media O2’s CEO, Lutz Schüler, has said the agreement ensures that mobile network choice, performance, coverage and competition is enhanced to the benefit of millions of consumers, businesses and MVNOs.
MVNOs really matter – their market share has jumped to around 20 per cent – and as readers will know, they offer competitive pricing. We will actively seek out contracts with MVNOs to make use of our increase in network capacity.
Today we have two larger network players and two sub scale players in the mobile market. It is far better to have a third scale player with the Vodafone and Three joint venture, and a strengthened Virgin Media O2, than the status quo.
For us, the network sharing agreement, also matters because it underpins and supports our £11bn network upgrade and integration plan.
Today, investment in mobile infrastructure is not fit for the needs of our customers and this country. And this is becoming all the more important when looking towards the future.
Take Standalone 5G. It is different from the 5G network of today, which is built on top of the existing 4G core network. Standalone 5G will enable ultra-reliable low latency communications with very high responsiveness, connecting people and devices everywhere, powering use cases like self-driving vehicles and remote healthcare.
Standalone 5G is not being rolled out at speed because the market leaders do not face sufficient competitive challenge. Under BT/EE’s best network for 12 years, the UK has slipped to now rank 22nd in Europe for mobile coverage.
The UK mobile market is stuck in a low investment cycle. Vodafone and Three UK are not able to earn a sufficient return on their cost of capital and therefore to compete effectively. This has led to a bifurcated market structure that, absent the deal, will not change.
The increased competition the merger and the extended network sharing agreement brings more than outweighs the loss of a fourth player. Competition is not driven by the number of competitors. Scale is everything in mobile due to the high cost of building nationwide networks.
We have a once in a lifetime opportunity to build the networks the country deserves.
Ahmed Essam is CEO of European Markets at Vodafone
