Three Leverages First Loss in 12 Years to Drive Merger with Vodafone
The latest performance of Three UK may not satisfy investors, but they provide a perfect tragic story to support the necessity of its merger with Vodafone. After achieving 12 consecutive years of operating profits, this telecommunications company incurred losses in 2023 and quickly seized this as evidence, proving that four UK mobile networks were too numerous for all companies to generate substantial returns.
Despite a 3% increase in sales to approximately £ 2.6 billion ($3.3 billion), Three’s operating profit in 2022 shifted from £ 77 million ($98 million) to a loss of £ 117 million ($149 million) last year. Three insists that inflationary pressure is related to this. But the inflation rate in the UK was much worse the previous year. The significant increase in operating expenses – an increase of 23%, exceeding £ 1 billion ($1.3 billion) – is also particularly attributed by Three to “an increase in the number of sites”, an increase in IT expenses, and “recent higher network investments”.
Therefore, the expenditure growth occurred in the same year that Three and Vodafone agreed to merge their businesses, based on the number of customers, which may be the largest mobile operator in the UK. But this is a controversial move that will leave only three mobile networks in the UK. From the perspective of many European regulatory officials, four measures are needed to ensure that consumers are not in a worse situation.
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After Brexit, the Competition and Markets Authority is conducting a long-term and rigorous review of these plans. Therefore, Three and Vodafone are campaigning, insisting that the UK will become a fiercely competitive 5G paradise, with both happy smartphone users and profitable telecommunications companies, where mobile base stations are as dense as ancient forests.
Three CEO Robert Finnegan immediately leveraged the latest performance to drive this situation, stating, “The cost of launching and maintaining our 5G network, as well as our commitment to improving network connectivity across the UK, have impacted our profitability for the first time since 2010, with a negative EBIT report.”
He continued, “Although we have reduced our 5G investment, this financial performance is clearly unsustainable.” Given Three’s comments on “recent increase in online investment” on the previous page of the statement, the statement of “scale reduction” is ambiguous. However, Three did indeed significantly reduce its capital expenditure by 39% last year, to only 454 million pounds ($580 million).
At a press conference held in Glasgow last month, Iain Milligan, the company’s Chief Network Officer, stated that 5G network expansion had stopped by the end of 2022, when the network had already covered about 62% of the UK population. He said, “The main reason is the huge cost of deploying 5G, and there are many other things that need attention.”
The basic case of Finnegan is relatively simple, and people can understand the logic behind it. Any company must bear a significant cost to establish a nationwide network. If customers are divided into three types instead of four, even if the price remains unchanged and the number of websites increases, it will be much easier to recoup investment.
Last year, Three had only 10.6 million active users, the least among the four telecommunications companies. But according to Vodafone’s latest data, Vodafone Tree will provide services to approximately 29.2 million users. Both companies have approximately 18000 macro sites across the UK, but according to the merger plan, approximately 10000 will be phased out, resulting in a total of approximately 26000 macro sites for the new company.
However, the high cost of Three may partly be its own fault. Most UK operators use a single wireless access network (RAN) technology to carry different mobile generations on the same platform. In contrast, Three has more suppliers than several generations, using Nokia for 3G, Samsung for 4G, Huawei and Ericsson for 5G.
Huawei was launched in 2019 to replace Samsung and build a joint 4G and 5G network. But the plan had to be aborted because the British authorities blocked Huawei for safety reasons. Although Ericsson was subsequently introduced, Three is still dismantling Huawei’s equipment (the company pointed out that 350 sites were dismantled last year to comply with “high-risk supplier legislation requirements”). Milligan revealed in Glasgow that Samsung’s devices are still being used in 7000 locations.
In terms of mergers, Three and Vodafone face not only opposition from consumer groups and some regulatory officials, but also opposition from two other network operators, British Telecom (BT) and Virgin Media O2 (VMO2). As is well known, the executives of these companies are concerned about the market distortions that mergers may cause. Vodafone Tree will have a large amount of spectrum and thousands more sites than its competitors. The executives at Three clearly don’t think this is a problem.
David Hennessy, Chief Technology Officer of Three, said in a meeting with Light Reading in January this year, “I will not consider some noise emitted by other operators in the C-band or spectrum holdings because asymmetry is a good thing. Our goal is a network with nearly 26000 sites, and if this forces VMO2 and BT to invest, they may also do the same.”
Another concern is the impact on the UK infrastructure partnership. Three currently shares a network with British Telecom through a joint venture called MBNL. Vodafone and VMO2 also have similar Beacon. Therefore, the merger will have a place in both camps and may use its position to harm competitors. Hennessy is not prepared to comment on this topic. But this may be the most difficult problem to solve.