OpenSignal casts doubt over Three's prospects if Voda merger falls through

In its report, OpenSignal highlights that, compared to its rivals, Three is losing a disproportionately high number of customers relative to its market share, and that if this trend continues it will be too strapped for cash to invest in its 5G network.

This has the potential to pitch Three into a vicious circle, as customers switch to operators that can offer a better 5G experience, further undermining its ability to invest.

"Three's struggles are driven by a low subscriber base and high churn resulting from many factors including the halted expansion of its 5G network and pressure from both its own budget sub-brand [Smarty] and competitively from MVNOs such as iD Mobile that compete heavily on price and offer flexible contracts," said OpenSignal. "If these issues are not addressed they could lead to an even more precarious financial situation for Three, making it even harder for Three to resume 5G expansion if the merger were not to happen for some reason."

OpenSignal has calculated UK MNOs' subscriber loss share relative to their respective market shares. This is designed to give a clearer indication of how each one is performing than simply working out the percentage of the market's combined customer losses that each operator accounts for, since larger operators will typically lose a larger number of customers simply due to their size.

A score of less than one indicates that an operator is doing a good job of keeping a lid on churn, anything above one means there is room for improvement.

In Q1, Three lost 1.52x its fair share of customers adjusted for market share, compared to 1.13x for third-placed Vodafone. O2 is performing slightly better with a score of 0.98x, while EE is out in front, scoring 0.72x (see chart below).

Interestingly, OpenSignal also found that the proportion of Three users switching to MVNOs hosted on its own network has increased to 23 percent of total customer losses in Q2 2024 from 13 percent in Q2 2023. iD Mobile – which is owned by electronics retailer Currys – and Three's sub-brand Smarty are the two MVNOs driving this trend, OpenSignal said (see chart below).

In general, MVNOs appeal primarily to customers' wallets, offering attractive prices. Three has also built its reputation on offering better value for money, and so the fact that it is losing more customers to low-cost MVNOs – including its own sub-brand – suggests that it is struggling to win this particular battle.

The big brains at Three may well find this analysis disheartening or dispute it entirely, but whether they like it or not, it strengthens its case for merging with Voda.

In fact, even without OpenSignal's 'help', Three is doing a pretty job of talking down its own prospects.

In its most recent financials, Three reported improvements in revenue, customer base, margin, and a smaller EBIT loss – all of which are cause for optimism. However, in the comments accompanying the figures, CEO Robert Finnegan lamented Three's financial performance, highlighting negative cash flows since 2020, and the ongoing losses due to the inflationary costs of operating its network, which continue to hamper its ability to invest in its infrastructure.

Three argues that its only salvation lies in the Vodafone merger. But with the Competition and Markets Authority (CMA) extending the deadline for completing its in-depth investigation into the proposed tie-up until December, Three will have to hang on for a little bit longer.