Graeme Philipson
September 29, 2015

Vodafone left isolated by merger

Vodafone left isolated by merger

The third biggest telco, Vodafone, is looking increasingly isolated following this weeks M2 and Vocus merger

The merger of telcos M2 and Vocus comes as no surprise. It is the latest of many mergers and acquisitions in Australian telecommunications, and makes perfect sense in the wake of the recent takeover of iiNet by TPG.

After that deal the Australian Competition and Consumer Commission (ACCC) said it would be wary of any further deals, but it is hard to see it stopping the merger of the country’s fourth and fifth biggest players – combined, they will still only be number four in the market.

But the third biggest telco, Vodafone, is looking increasingly isolated. It operates in the mobile market only, while everybody else is ‘vertically integrated’.

One of the key rationales that the ACCC gave in approving the TPG-iiNet deal was that even though there would be fewer players, the newer player would be stronger and therefore better able to offer real competition to Telstra, which is bigger than the other players combined, and to Optus and Vodafone. If that was true of the TPG-iiNet deal, it is equally true of the proposed M2-Vocus deal.

The proposed deal is a true merger. Many acquisitions are called mergers, and are anything but. Vocus is the slightly larger player after its recent acquisition of Amcom, and the combined company will be called Vocus Communications Limited, but the board and the management will be taken from both companies. In the press and analysts call that followed the announcement the complementarity of the two companies, and the fact that it was a marriage of equals, was constantly stressed.

It is hard to directly compare the players in the Australian telco market. There are a number of components, all of them dominated by Telstra but then with different players in each.

Mobile telephony is one of these markets, huge and fast growing. There are three carriers – Telstra (with about half the market), Optus and Vodafone. There are also a dozen or more MVNOs (mobile virtual network operators), which resell capacity from these three. The largest, Virgin, is wholly owned by Optus. Amaysim, which also resells Optus, is also a fast growing MVNO. M2 is a major MVNO, largely through its Dodo brand.

Then there is are the retail ISP, business data and wholesale markets. Telstra is biggest in all of these and Vodafone is in none of them, with TPG-iiNet, Optus, M2 and Vocus holding various positions. The combination of M2 and Vocus will form a company almost as large as TPG (with iiNet).

Assuming the Vocus-M2 merger proceeds (and the ACCC is unlikely to stop it), the market will still be lopsided. Telstra will still be dominant, but it and Optus will be the only two players that compete in both mobile and fixed comms.

And then of course there is the government-owned NBN, which will become increasingly important as a wholesale carrier and is likely to eventually be privatised.

Throw in continued technological change, and the Australian telco market continues to fascinate. There remains room for disruptive players like ASX-listed MyNetFone, which provides VoIP telephony for businesses, for clever and innovative MVNO players (Amaysim, which recently floated, is a good example), and for what is certain to be a new slew of NBN resellers and value adders.

The merger of Vocus and M2 will not be the last major structural merger. The ACCC has indicated that it does not want a lessening of competition by the major players, but the continued existence of Vodafone Hutchison Australia must be in question.

It has arrested the disastrous ‘Vodafail’ slide in its user base, but it is still losing serious money and is unlikely to return to profitability any time soon. It joint owners Vodafone and Hutchison have continually expressed their confidence in the brand, and have matched this with real dollars, but patience is not infinite. Vodafone boss Vittorio Collao has started a global rationalisation program and expressed his distaste for joint ventures, and Hutch – like anyone – would sell if the price was right.

What if the new TPG or new Vocus was to make a bid for VHA? Stranger things have happened. Either of them is truly complementary. The ACCC may object but the regulatory environment is also changing.

“The merger will also accelerate the race between Vocus and TPG to acquire or merge with Vodafone,” analyst group Ovum’s David Kennedy told InnovationAus.com. “We are heading towards three major integrated operators in Australia.

“The addition of the Vocus backhaul network to M2’s network will give M2 better cost control and will make their products more competitive, both now and in an NBN environment.”

As history shows, in the Australian telco market anything is possible.

 

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