Where telecoms meet monopoly
How Finance Drives Monopoly, Part 2, Telecoms Edition
Vodafone is on an international mergers and buying spree, which is likely to hurt a lot of hard-pressed people who already face a severe cost of living crisis following the pandemic and Russia’s botched and murderous invasion of Ukraine.
We’ve just published an in-depth report about a likely announcement to merge the UK mobile network operators (MNOs) Vodafone and the Hong Kong-based operator Three.
Drawing on extensive international evidence, our report shows that the average UK mobile user would expect to pay £60 - £300 (€70 - €360) more for their mobile services each year. Yet there will likely be no increase in investment or other payoff: in fact, a merger would likely reduce economic growth, and worsen inequality.
Our report, co-authored with Tommaso Valletti (former Chief Competition Economist at the European Commission, who gave us a fiery interview a year ago,) presents powerful evidence that a four-to-three reduction in MNOs seems to be an especially dangerous threshold to cross.
Vodafone is reportedly on a buying spree, in lots of countries, and some regulators in the UK and at the EU level worryingly seem to be softening their opposition to mergers. And the lack of critical media coverage is striking.
Well-off readers of The Counterbalance may feel they could shrug off a £5-25 monthly rise in their phone bill. Yet this isn’t true for millions of people, as these two graphs highlight.
The graph on the right (hat tip: Max Lawson), put simply, charts the rise of food banks in the UK, reflecting people who don’t have enough to eat. (We’ll be presenting a new trove of evidence of this in the coming weeks.)
The graph on the left is Branko Milanovic’s famous “elephant chart” showing the relative gain in household per capita income for households at different income levels, worldwide. For rich countries, the base of the elephant’s trunk (at B) is arguably the core political problem richer countries face: it shows a huge chunk of the population in richer countries being left behind, as they watched their richer compatriots soar ahead. Marine le Pen, Donald Trump, and the leaders of Brexit, have all tapped into this dislocation. And monopoly power1 has played a major part in creating this.
Vodafone’s costly buying spree
Vodafone has reportedly struck at least 19 ‘deals’ (read, mergers & acquisitions) in various countries since Chief Executive Nick Read took over in 2018, and it plans to achieve consolidation in many more markets. Read said:
“We feel the UK needs to consolidate to give [us] industrial scale so we can improve returns.
“We are active on a number of fronts and seeing good engagement from our counterparties . . . We are approaching consolidation with speed and resolve. . . We are engaged with multiple parties in multiple markets [to] work through the opportunities at pace.”
This steamroller is moving fast.
Price would rise after a merger for the simple reason that three companies compete less intensively for customers than four do, and thus are under less pressure to offer good prices, services and offers, or to invest more to attract customers. Clearly, “tacit semi-collusion” (as one academic report put it) would be easier too.
Below are a couple of graphs, from the commercial telecoms analyst Rewheel. Prices in telecoms have always steadily fallen, of course, as technology improves, but these graphs show clearly a steady price differential between 3-MNO markets (the black lines) and 4-MNO markets (in orange).
That gap between orange and black is, essentially, a visual representation of market power.2
Our UK results extrapolated up to 65 million subscribers would imply a £4 - £20 billion hit to UK consumers, suggesting that at a European level, this exercise in increasing market power could easily transfer tens of billions a year away from consumers, if all these mergers go ahead as Vodafone and its investors seems to want. Much of the windfall would flow to to executives and shareholders, many if not most of whom are outside the countries where the companies operate.
There would be other knock-on effects: a Vodafone-Three merger would hurt UK businesses, not just phone retailers that would be directly squashed by the merged firms’ increasing market power, but economy-wide, as costs of mobile telephony rises, with no associated benefits.
There would be winners from a merger, of course. There are the shareholders, which in such cases are heavily skewed towards the richest segments of the population - and many if not most of whom are located overseas or offshore.
Meanwhile, Read and his predecessor earned an average £6.8 million (€8 million, $9 million) a year over the last decade, and a successful monopolisation play could reap him bigger bonanzas in future.
Geographically, then, this has the classic ‘market power’ effect - the losers are millions of mobile users spread all across the country, while the winners are a far smaller group of shareholders and executives located substantially overseas and offshore. A merger would drain billions from poorer regions and deliver it to people in wealthier parts of the country - and overseas.
This is fodder for any politician, on any part of the political spectrum, who wants it.
Finance, driver of monopolisation
Vodafone’s acquisitions strategy seems to be picking up pace, at least according to media reports. Why is this suddenly coming to the head now, in the UK and elsewhere? In January, Bloomberg gave a clue:
“Activist investor Cevian Capital AB has built a stake in British telecommunications giant Vodafone Group Plc, people familiar with the matter said.”
Cevian calls itself an activist financial investor, and according to multiple reports it has been pushing Vodafone to “consolidate” (which in large part means ‘monopolise’) the sector in many countries. The Financial Times quoted insiders as saying that Cevian:
“is particularly keen for Vodafone to be more aggressive in driving consolidation with mobile operators in some [markets].”
Recently we published Part 1 of our “How Finance Drives Monopoly” series, which focused on how private equity (PE) firms take full control of companies through majority or full stakes, then re-engineer them (including in ways that monopolise markets) — and then use financial engineering to extract wealth for the owners, often in unproductive and even damaging ways.
Cevian is somewhat different: it is not a private equity firm but calls itself an “activist investor,” which takes significant but minority stakes in firms, then engages with management.
Cevian, soothingly, calls itself a “contructivist” activist (ie working in collaborative ways with managers) as opposed to “attacktivist” activist (taking more adversarial positions.)
Whatever the relationship between investors and company management, there is nothing constructive or soothing about monopolisation. John Gapper in the Financial Times asked an interesting question about this.
“Ask whether you are dealing with a constructivist, or simply a Wall Street wolf in constructivist clothing. One test is whether the investor is more interested in corporate strategy or in gaining a rapid reward by leveraging the balance sheet and forcing a special dividend or capital return.”
Well, we shall see, but again we see worrying signals. The original Bloomberg article cited sources saying that the activist investor was pushing Vodafone not just to pursue consolidation, but “stock buybacks” too.
This latter activity happens when a firm channels its profits not into new investment (or rewarding customers or employees), but into giving their investors a payoff by shoring up the share price. Buybacks are a crucial tool that financial investors use to reap the benefits of monopolisation (and other activities). They are especially prevalent in the United States, but are also popular in Europe.
Bill Lazonick, a world expert in corporate strategy and author of the book Predatory Value Extraction, has called stock buybacks a “licence to loot”. (So much so, that stock buybacks used to be illegal in some countries, for good reason.)
According to a 2017 paper, the 348 companies in the S&P 350-Europe Index repurchased €64 billion of their own stock and distributed €284 billion in dividends in 2015, representing 110% percent of their net income. In the words of leading UK economist Andrew Haldane, firms that channel profits to shareholders instead of into investment are “eating themselves.”
Lazonick put it like this, in a recent email to The Counterbalance:
"Corporate predators (private equity, hedge funds, investment banks) gain “strategic control" over companies in which they have played no part in building, using the ideology of “maximizing shareholder value” to legitimize the exercise of power to extract value that others—including primarily workers and taxpayers—helped to create."
Having gained strategic control (as with private equity firms) or influence (as with activist investors), then the first step is to boost profits by building market power via mergers and acquisitions, — then in a second step use those buybacks (or other forms of financial engineering, as we’ve shown elsewhere) to extract that value for themselves.
Not only does our new report present extensive evidence that these kinds of mergers overall don’t increase investment, but here is also a financial investor reportedly keen to use the financial crowbar of stock buybacks that would be likely to take resources out of Vodafone’s investment pot.
The companies, of course, will disagree with our analysis, and make three main arguments why mergers are just great.
First, they claim that a merger will increase investment. For example, Robert Finnegan, CEO of mobile operator Three, said in March that the UK market with four players was "dysfunctional" and “requires a structural change to improve the overall quality of infrastructure."
This is nonsense: all the international evidence shows that while capex investment from each remaining operator sometimes increases after a merger, the removal of an investing player from the market cancels that out: the net effect, at the country level, is zero. (And more generally, we know that monopoly power generally chills innovation.)
As Valletti puts it:
“We always see the same story coming from the industry: that we need to invest in new- generation technology, and we cannot do it if we do not consolidate. This happened with 3G, with 4G, and is now happening with 5G.”
Second, they say that overlapping coverage in sparsely populated areas is too expensive for multiple providers to serve, so mergers are needed to tackle this.
This is also a distraction. MNOs do network-sharing deals all the time, to deal with the problem - and regulators allow them. There is simply no need for a merger to achieve better rural coverage.
Third, they say they need to consolidate in order to compete with encroaching global tech monopolists such as Google and Facebook.
This, too, is nonsense. For sure, digital giants like Google and Facebook pose severe and even existential monopolistic threats to mobile telecoms companies and to many other actors across our economies.
Yet the answer is not to tackle monopolisation with more monopolisation, but instead urgently to tackle the excessive economic power wielded by the tech giants.
Good competition, bad competition
Competition is neither good nor bad: it all depends on the process and the context.
Last month, we published a major report on excess profit-making in the children’s social care sector in the UK, using data from the UK’s Competition and Markets Authority to show that large firms providing children’s social care were making staggering excess economic profits of £22,000 from care homes and fostering services. (We we especially fortunate to get significant media coverage of our report, given that news agendas were dominated by Russia’s invasion of Ukraine a few days earlier.)
One of our key findings was that competitive processes in the quasi-market for children’s social care services had been thoroughly corrupted, and was harming children.
In short, companies (usually larger ones) that use aggressive, leveraged financial techniques, and which are more aggressive on monopolisation and other unproductive strategies, will enjoy a competitive advantage in this marketplace, as they will be more profitable.
This competitive advantage will allow them both to win government bids for contracts, and also to win in the ‘market for acquisitions’ in this sector, as their heightened ability to make profits allows them to put higher valuations on target companies than less aggressive actors.
This competition is driving more responsible, children-focused actors out of children’s social care, and replacing them with more aggressive profit-focused actors.
This has a third, knock-on effect of ‘competitive contagion’ - where other actors will feel pressure to adopt more aggressive financial techniques, if they are to stay in the competitive race for acquisitions or to win contract bids.
Our childcare report shows extensive unhealthy competition in action — fed by the financial sector.
By contrast, our new telecoms report shows the opposite case of healthy competition. Four MNOs are better than three, because they compete harder to keep customers happy via lower prices, better service, and more investment.
Where are the critical voices?
In reading the many media reports on this mergers & acquisitions spree in telecoms, we have constantly been struck by the lack of critical coverage highlighting the well known dangers of monopolisation. Read any mainstream articles about it - for example, here, here, here, here, here, here, here, or (it’s exhausting) here, and you will find a remarkable lack of curiosity in the UK media about the dangers.
Instead, the focus is nearly always on the benefits for investors. Each story puts a positive spin on monopolisation. The strongest pushback in this crop was in a Guardian article, which merely noted that a previous UK regulator, Sharon White, had attacked a previous merger attempt in scathing terms.
So it is important now to push to do several things. First, regulators must stop this UK merger, and others in the offing elsewhere. Second, they must recognise how the financial sector drives monopolisation (and drives unhealthy forms of competition) and intervene to stop this.
And third, let’s not leave these debates to technocrats wielding the current pro-monopoly paradigm. Everyone in Britain has a direct personal stake in the outcome of the current merger push. It’s time to pay attention, and get involved.
We do not define a monopoly according to the dictionary definition of a single merchant excluding all others, but instead as many regulators do, as being a firm with sustained and significant market power that harms others – in this case, primarily consumers
As a side note: Rewheel’s research suggests that the difference between four-MNO markets and three-MNO markets can lead to prices “almost 2X” as high. We took a conservative view, and reined this back to 50 percent higher. If Rewheel is right, however, then then hit to mobile users would be even higher than the top of our estimate range.