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Vodafone – TPG merger

While I would have loved to see TPG entering the mobile market to bring some good competition to it, in the end business sense has prevailed and Vodafone and TPG have decided to look at merging the two companies. The market has long been dominated by egos and that has made it difficult sometimes to make rational business decisions. In this  case it is indeed a very rational decision, but we will have to wait and see how it will be implemented in the market. It won’t be easy.

While it has been fairly clear for decades that telecoms, in the way the major telco players bring it to the market, is largely a commodity product – in spite of the fact that the telcos and the investment industry have always talked it up as a technology market, with potentials like the Googles, Facebooks and other over the top telco (OTT) operators.

However from the very beginning the telcos have been unable to make any headway in these markets beyond the basic services. Their overriding business position has always been to protect its existing business for as long as possible, and moving into the OTT would mean cannibalisation. To address this they built their so-called ‘closed content gardens’ both in relation to internet-based services as well as mobile content services. In all these attempts they have failed miserably and every time it once again became clear that they are good at running a utility, but beyond that was a different ball game altogether.

This, of course, has put them further behind in the overall market, where the OTT players have not only taken possession of the value-added market, but have also made inroads into basic telecoms services, which are now largely provided by companies such as WhatsApp, Skype and Facebook.

On top of this Vodafone/Hutchison has had a very checkered history in the mobile market.  At the very beginning (1990s) they failed to start with what at that time was the prevailing 1G mobile generation service. Optus, for instance, started to resell the Telstra 1G services and as such was able to build up a customer base they could migrate to their 2G network when that was ready to be launched. In the 20 years since that time Vodafone has never been able to close the mobile market share gap with Telstra and Optus.

Hutchison started to build a GDPR mobile data network, which never really took off as 3G was at that time enough for most users using mobile data. In all, they lost perhaps $2 billion before they merged with Vodafone.

And then there is the latest disaster with Vodafone, shortly after the smartphone was introduced in 2007/2008. They had totally underestimated the demand for mobile data and their network collapsed in a spectacular fashion. It took them years to get on top of this. In the process they lost over a third of their customers and it is nearly impossible to win these customers back in such a competitive market.

So the merger with TPG will boost the overall subscriber numbers again. At the same time TPG faced the reality that building out a new mobile network after they acquired the spectrum for it is a very costly exercise and it was, for obvious reasons, very difficult for them to negotiate access with the other operators. So this merger is going to save them lots of money, something the share market already likes.

In that respect it is a win-win situation for both companies. However, it will not be without problems. The big fear in the market was that TPG would start a real price war in the market. This will become less likely now, as in the merged situation they wouldn’t want to cannibalise the Vodafone customer bases – that would lead to an immediate decline in revenue. Telstra and Optus will be delighted with this as competition will now be less severe.

While there certainly is synergy between the two companies, at the same time the positioning of their products, their branding and their marketing are very different. It will be very interesting to see how this works out. Will they maintain two different entities with two different brands? Time alone will tell.

And obviously the ACCC will also have a say in this, so there will be interesting times ahead for both companies and indeed for the telecoms market as a whole.

Paul Budde