Obviously the government of the day wanted to sell the depots off so London ended up with route by route tendering and for quite a long time there were enough bidders to ensure value for money so it wasn't considered an issue. If London was starting from scratch today, however, they would probably do the same as what is being done in the north.
I would say London did try a proto-area franchising in a couple of areas early on and it was never repeated largely, it would appear, because every one needed to be bailed out before the initial contract term ended - the caveat is that all those operations were LT owned at the time (Harrow Buses, Bexleybus, Kingston Bus & London Forest) with the first 3 set up as pseudo low-cost operations so it may have been more down to LT getting their sums very wrong but it does mean TfL still shy away from large area contracts due to the risk of failure.
The problem London has with getting new entrants is largely down to how price/contract terms adjust during the life of the contract (essentially the inflationary increase is not tied to actual operating cost increases so it is difficult to have a price that will be profitable at the end that is low enough to win it at the start). The London business model effectively relies on operators making a profit on the contract in the first half to cover losses over the back end of the contract term which makes it difficult for new entrants to enter - if you get enough volume at the start to support an operation it is difficult to get the same volume into the operation in following years to bring the profit in for new contracts to cover the loses on the old ones.
Maybe, maybe not. But even if they did want to build up capital and scale, most have never realistically been in a position to do so.
Tesco analogy is actually a good one, because it shows how unfair markets can be for smaller or niche businesses. A corner shop might be perfectly competent at what it does, but that does not mean it can suddenly compete with Tesco. On price, scale, buying power or risk. That is not a moral failure of the corner shop. It is just how concentrated markets work.
There are lots of small operators who have successfully grown against big groups, many later sold out for large amounts of money as the owners got to an age where they wanted to retire early but they weren't distress sales (there are fewer now because of various government related risks & threats, not the least being franchising taking your business for no compensation, mean that the long term prospects for investment are weaker). There is a long list of successful independents who grew successfully at the expense of big companies and just to name a couple of current ones there are Centrebus/D&G, Stephensons of Essex, Compass Bus in Sussex & Central Connect at scale and slightly smaller people like Grant Palmer, Vision & Connexions in Harrogate.
It does depend on your definition of succesful competition, the on the road and head to head stuff is less common but that is as much the political climate (local politicians are less keen on this sort of "over bussing" and why risk drawing negative attention that could result in your business being taken away when there are other gaps & options), but I would certainly consider operators winning contracts & taking on marginal services commercially that big group operators are reducing as successful competitive actions by smaller operators.
Quality is factored into the bidding process, but it still will not necessarily favour independents. That is the structural problem. It is not a reflection on their morals or commitment, but many simply do not have the newest fleets, the spare vehicle depth, the engineering resilience or the financial capacity to absorb problems over a long contract. A small operator relying on life expired second hand vehicles can be perfectly decent day to day, but if they suffer a long-term VOR issue, there is far less slack in the system.
Quality considerations on these sort of tenders are far more about box ticking certain criteria & requirements than an actual promise of real world delivery and that is why smaller operators struggle more. They don't have the resources to get the accreditation that help tick those boxes nor do they have the Head Office resources that also help tick diversity and social boxes. I was told by someone who was aware of the situation that TfGM contracts did require companies winning contracts had to have a Health & Safety Manager & a dedicated Contract Manager (seperate from Depot, Department or Company managers) regardless of the size of the contract won which are more expensive/complicated for smaller operators but easy to provide by larger groups.
The big issue for SMEs in regards to these large area franchises as employed/proposed by all the Combined Authorities at the end of the day is the financial risk aspect of having all your eggs in a single complicated basket (& if you only ever owned 20 or 30 buses then a contract for 20/30 buses is a big contract for you). If a big group gets their sums wrong they have plenty of other operations & assets than can be used to cover losses incurred short term and financial mechanisms to cover indemnities, if you are a SME then there is no (or very little) other income to cover even a small miscalculation which could not only lead to complete company failure but due to the sort of financial guarantees that these sort of contracts carry in case of issues (to prevent operators just cutting and running when things get hard) mean you could see your entire family bankrupt & homeless if it goes badly. It just isn't worth the risk as a business and even more so if, like many of the Combined Authorities, they have a reputation/history for officiousness or inflexibility in terms of contract issues. The West Yorkshire suggestion, even if only around the edges in that case, of awarding some routes under traditional tendering mechanisms & terms would offer an established structure to award work in a way that SMEs can be suited for to keep local businesses in the market (& so keeping some money locally rather than awarding all the cash to national or multi-national businesses where profits don't stay locally) whilst allowing the big volume core networks to be managed at volume effectively alongside.