Mobile network operators Vodafone and Three UK (CK Hutchison) have today responded to the recently raised competition concerns over their proposed mega-merger by setting out a series of commitments, which they hope will satisfy the Competition and Markets Authority (CMA) enough to approve the deal.
Just to recap. The merger would see Vodafone retain a 51% slice of the business and CK Hutchison (Three UK) holding 49%. The agreement was promoted 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.
NOTE: The combined business aspires to reach more than 99% of the UK population with their 5G Standalone (SA) network by 2034 and to push fixed wireless access (mobile home broadband) to 82% of households by 2030, among other things.
However, the CMA’s investigation (here) found that reducing the number of primary mobile operators from 4 to 3 would result in a “Significant Lessening of Competition” (SLC) that gave rise to various concerns at the retail and wholesale level, such as from consumers being more at risk of higher prices and reduced quality. Virtual operators (MVNO) would similarly have fewer network (MNO) partners to choose from, which feeds into this.
The competition regulator also questioned how much benefit an expanded 5G SA roll-out would really have and warned that, without a legally binding coverage pledge, the operators could still miss their targets and not face any consequences. Not to mention that the merged entity would be placed into a dominant position of spectrum ownership (i.e. giving them a significant advantage over rivals).
Speaking of which, some concerns were also raised about the difficulty of unpicking existing network sharing arrangements, such as between EE (BT) and Three UK. BT complained this could occur due to the merged entity gaining access to their Commercially Sensitive Information (CSI), relating to investment plans etc.
Finally, and somewhat contrary to previous statements made by Vodafone and Three UK about being “sub-scale, unable to cover their cost of capital, and constrained in their ability to invest and compete effectively“. The CMA found that both operators were in fact “viable and competitive businesses and that they would continue to invest in their networks absent the Merger“. The CMA therefore believes that if the merger did not go ahead, both would in fact “continue to compete with each other, as well as with other mobile operators, in a broadly similar way as today.”
In the past, regulators have often opposed such deals, but in recent years both the government and regulators have softened their stance, which is partly due to a 2020 ruling by the European Court of Justice (here) – this found that having only 3 operators still made for a competitive market. But crucially, that judgment was recently over-turned on appeal to the EU’s highest court (here) and a final conclusion has yet to be reached.
Finding a Remedy
The CMA then proceeded to set out a number of potential remedies, which might enable them to approve the deal. As part of the response to that, Vodafone and Three UK have today set out a series of commitments that they’d be willing to make (a few of these have been proposed before), which they hope may be enough to satisfy the competition concerns to secure approval – many of these echo the CMA’s earlier demands.
Joint Statement by Vodafone and Three UK
Vodafone and Three disagree with the CMA’s Provisional Findings. Our merger will be pro-growth, pro-customer, pro-investment and pro-competitive for the UK. It is a once-in-a-generation opportunity to transform UK digital infrastructure with £11 billion of network investment.
We continue to constructively engage with the CMA and remain confident that we can work with them to secure approval. Our response to the Remedies Notice contains several additional commitments, which we believe comprehensively address the issues they have raised.
In short, the mobile operators are proposing to make their network coverage commitments (e.g. 5G SA) legally binding – overseen and enforced by Ofcom. Furthermore, they’ve also tabled a proposal that would protect retail pricing for certain consumers (albeit only for a very limited period), divest some of their radio spectrum frequency to O2 (VMO2) and plan to provide a new reference offer to wholesale customers (virtual mobile operators / MVNO).
Proposed Commitments
➤ Our £11 billion network investment commitment will ensure UK customers enjoy one of Europe’s most advanced networks and it will level the playing field with the two larger players to drive competitiveness. We are happy for Ofcom to monitor and enforce this commitment.
➤ The merger will extend the network quality benefits well beyond the merged company’s own customer base, by extending it to VMO2’s direct and MVNO customers. This agreement will deliver better quality, enhanced capacity and greater coverage to over 50 million mobile customers across the country. On approval of the merger, Vodafone and Three have also agreed to sell spectrum to VMO2, helping to create a better alignment of spectrum holdings in the UK market.
➤ For retail customers: we will maintain tariffs at £10 or below for two years from the completion of the merger for value-focused customers on the SMARTY brand, social tariffs on both the SMARTY and VOXI 4 Now brands, and continue measures to protect registered vulnerable customers; and
➤ For wholesale customers: we will provide a reference offer that encourages MVNOs – the fastest growing part of the market – to access our additional network capacity to offer great deals to retail customers.
The last two commitments above are the newest editions, although the pledge to only protect certain retail prices does seem quite weak, particularly given how cheap some of the MVNO providers on Three UK’s network are across tariffs in the £20 to £10 range as well (e.g. unlimited data plans are often priced around £15-£16 per month via Smarty and iD Mobile, but how long will that continue post-merger? Vodafone’s equivalent plans are much more expensive).
Some of the proposed commitments, such as on retail pricing, appear similar-ish to what O2 and Three UK proposed in 2016 as part of their infamously failed (i.e. blocked by regulators) attempt to merge (here). But the regulatory and competition landscape is not the same today as it was then. Not to mention that the costly challenge of upgrading national networks to support 5G has also proven to be a significant pain point, which could be solved by such mergers.
In the past, regulators often opposed such deals, but in recent years both the government and regulators have softened their stance, which is partly due to a 2020 ruling by the European Court of Justice (here) – this found that having only 3 operators still made for a competitive market. But that judgment was recently over-turned on appeal to the EU’s highest court (here) and a final conclusion has yet to be reached.
Quite how the CMA will respond to this package of commitments is unclear, although we do think that Vodafone and Three UK could go further on the issue of retail pricing (the CMA may yet push for that). Ofcom will also be needed to judge whether the proposed divestment of spectrum to O2 is enough to placate concerns, as spectrum ownership is a very finely balanced area and EE won’t want to be put at a disadvantage.
The deadline for a final outcome is currently 7th December 2024, so there’s still time for negotiation to find a solution.
UPDATE 12pm
The full response is available here, but at 94 pages long you might need to take a day off just to get through it all.
