M2 and Vocus are set to merge. Here are thoughts from Ovum’s David Kennedy , Research Director, Telecoms:

The merger with Vocus is a welcome addition of scale for both companies. M2 challenged TPG’s acquisition of iiNet with its own offer, but TPG outbid it. This showed that M2 was very interested gaining scale, as it needs to in order to compete with the leading three - Telstra, Optus and TPG – once the NBN is fully rolled out.

Vocus operates primarily in the enterprise and wholesale market, so this is when the impact will be most felt. The combined M2 and Vocus networks will provide a strong base for the provision of services to the enterprise and small business segments, and to small independent ISPs who purchase telecommunications capacity.

It is getting harder for small ISPs to find a wholesale provider who does not also compete with them in the retail market. In the mobile market, MVNOs must justify their existence by developing compelling offers in market segments and niches that the majors find hard to reach. This will happen in the fixed services market as well.

The merger between M2 and Vocus is consistent with the long-term trend towards consolidation in the telecommunications industry. However, attractive acquisition targets that can add significant scale are becoming fewer as the trend unfolds. The ACCC has warned that it will carefully scrutinise future mergers between major players. We are in the consolidation endgame.