Sky (Sky Mobile, Sky Broadband etc.) has today warned the Competition and Markets Authority (CMA) that they could launch a legal challenge (appeal) if the proposed merger between mobile network operators Vodafone and Three UK is allowed to proceed, unless significant changes are made to the proposed competition remedies.
The merger itself, which would see Vodafone retain a 51% slice of the business and CK Hutchison (Three UK) hold 49%, has repeatedly been promoted by the operators as something that would be “great for customers, great for the country and great for competition,” while also resulting in a major £11bn investment to upgrade the UK’s 5G mobile (broadband) infrastructure and network coverage. This would be a big help to the government’s own 5G targets.
However, the CMA’s investigation (here) found that reducing the number of primary mobile operators from four to three would result in a “Significant Lessening of Competition” (SLC), giving rise to various concerns at the retail and wholesale level. Some examples include the risk of higher prices for consumers, reduced quality, dominance of spectrum ownership, tedious confidentiality issues with conflicting network sharing agreements (e.g. EE and Three UK) and less competition at the virtual operator (MVNO) level.
The merger parties and the CMA then proceeded to negotiate a series of remedies to tackle those problems, which earlier this month resulted in the competition authority signalling its “provisional” approval for the merger (here). In return, the operators agreed to adopt a mix of retail price protections (lasting “at least” 3 years), as well as legal obligations on their network delivery plans and pre-agreed prices / contract terms to ensure that MVNO’s could obtain competitive wholesale deals.
Sky Warns of a Legal Challenge
The deal currently looks set to be given the final green light, but Sky today issued a supplementary response to the recently proposed remedies that warns the CMA against approving the merger unless further concessions are made. “The current weak remedies fall very short of this, and this exposes the CMA to serious legal risk,” said Sky, which, as one of the market’s largest virtual (MVNO) operators, will naturally carry some weight.
“Having reviewed the other responses from stakeholders, it is evident that many others have raised similar substantial concerns and if the CMA do not make several key improvements to the remedy, Sky, among possibly others, will be forced to consider appealing the decision,” said the disgruntled MVNO, before outlining a perhaps, in places, ambitious set of remedies that it says would avoid this turning into a protracted legal fight.
Sky’s Proposed Merger Remedies
Change 1: Extend the offer – so Sky and others can access it
An additional year (from three to four) will reduce the risk that the Merged Entity frustrates the process to try and exclude Sky – leaving us entirely unprotected. This extra year gives us and other MVNOs a buffer to negotiate and finalise any switch. The clock should be stopped if there is a dispute as this could be used as a further way to ‘run down’ the time and game the remedy. One extra year does not substantially increase the distortion risks, but it will make a big difference in making the protections available to the biggest MVNOs like Sky.
On a practical level, there also needs to be additional time to implement the switch (at least one year).
Change 2: Lower Unlimited pricing
The current Unlimited price is far too high to allow us to compete with other comparable offers in the market. Once you add in VAT and direct costs, just to break even – at a very minimum Sky would need to price this at £[redacted]/month. Against prices like H3G’s Smarty (at £16/month) this is too high to compete in the market (even assuming retail price increases in the market following the merger).
This immediately makes MVNOs uncompetitive with the Parties – undermining our retail position. As Sky has repeatedly told the CMA, consumers are increasingly moving to Unlimited deals. If MVNOs cannot offer these at competitive prices, they will be increasingly marginalised. To enable MVNOs to compete on a level playing field, the wholesale Unlimited price would need to be reduced – which would enable us to offer deals in line with equivalent brands like Smarty.
It also remains unclear to us how any Future Pricing Mechanism (FPM) will impact the unlimited price, as well as the standard prices. The easiest, simplest and fairest way would be to base the FPM on costs.
Change 3: Competitive standard pricing and no speed tiers
We also fundamentally disagree with the Parties’ newly proposed two-tier price – with a [redacted] premium for speeds above 150Mbps. There is no justification for any premium given there are no additional costs associated with delivering this speed – [redacted]. This is simply another way to ensure that MVNOs are boxed into lower speed segments of the market, not in direct competition.
Change 4: Option to extend (5+5 years)
While not all MVNOs may want or need a longer term, larger MVNOs such as Sky, will need the right to extend the offer for a further 5 years. [redacted].
If, contrary to what we expect, there is strong competition in the wholesale market after five years then Sky (and other MVNOs) may not choose to exercise the additional five-year extension. But that is enormous risk to take, particularly given that the Parties have already signalled that they will not allow MVNOs to roll over their existing terms. We strongly urge that this right to extend be explicitly included in the offer now.
Sadly, a lot of the details in Sky’s submission have been redacted, but it’s enough to get the gist of what they’re trying to say and there are some fair points (e.g. Change 1). On the flip side, O2 (Virgin Media) has also published its own supplementary response, which seems to indirectly criticise operators like Sky for “seeking windfall benefits from the merger clearance process“, which they say go “well beyond preserving effective competition in the wholesale market.”
The situation is particularly awkward because Sky Mobile’s service is based off a Mobile Virtual Network Operator (MVNO) agreement with O2.
Extract from VMO2’s Response
“While MVNOs are valuable wholesale customers for mobile operators, they do not invest in building, maintaining and upgrading the network and are insulated from the risks associated with such investments. The current wholesale agreements in the market strike a careful balance between enabling MVNOs to compete and earn a reasonable return, while at the same time ensuring that mobile network operators continue to have an incentive to make multi-billion pound network investments.”
Finally, O2 suggested, in a dig that seemed to echo Sky’s proposal under ‘Change 2’ (unlimited tariffs), that “some market participants appear to be suggesting that MVNOs should not bear the risks associated with the unlimited tariffs which they place on the market.”
Whatever the merits, or not, of Sky’s concerns, the CMA will need to take the issues they raise onboard before reaching a final decision, which is due by 7th December 2024.
