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CMA Probe Fears Higher Prices After O2 and Virgin Media Merger

Thursday, January 21st, 2021 (3:38 pm) - Score 2,856
virgin_media_o2_uk_merger

The UK’s Competition and Markets Authority (CMA) has published an ‘issues statement‘ on the proposed £31bn merger between mobile operator O2 and broadband ISP (inc. TV, phone) Virgin Media, which highlights the authority’s two main concerns – the risk of higher consumer prices and worse 5G connectivity for rivals.

The deal, which was first announced in May 2020 and has since been passed to the UK CMA by the European Commission (EC), values O2 at £12.7bn and Virgin Media at £18.7bn (total enterprise value). In theory, there shouldn’t be too many obstacles since the operators’ largely focus on different parts of the market.

However, part of the CMA’s job is to examine the prospect of any possible “competition concerns” and as such they’ve placed a particular focus on the markets for retail and wholesale mobile services, as well as the market for business leased lines (specifically those used to supply mobile operators / masts). The new issues statement thus gives us a better idea of the context and framing for all this.

For example, there’s a concern that Mobile Virtual Network Operators (MVNO) on O2’s network, such as Tesco, Sky Mobile and others, could face service restrictions or higher prices for access, which might in turn lead to price hikes for consumers or force the MVNO providers to change operator (i.e. a reduction in competition by the backdoor).

Focus of the CMS’s Competition Probe

We will investigate potential input foreclosure for each of the access and aggregation layers in terms of:

(a) The ability of the Merged Entity to foreclose rival MNOs. This will include an assessment of: the cost of mobile backhaul relative to MNOs’ overall costs; MNOs’ ability to switch to alternative sources of mobile backhaul (including active fibre leased lines); and any restrictions imposed on the Merged Entity by existing contracts and/or network sharing agreements;

(b) the incentive that the Merged Entity would have to foreclose rival MNOs, by assessing the likely commercial gains at the retail level (including the impact an increase in price or degradation in quality would have on affected MNOs, how this would translate into a change in their retail offering and the likely diversion of customers to the Merged Entity as a consequence), and the likely losses at the wholesale level; and

(c) the effect that the foreclosure would have on competition at the retail level. Our assessment will take into account the role of regulation as well as market developments such as the roll-out of 5G technology.

We will investigate whether the Merged Entity would have the ability and/or the incentive to engage in input foreclosure in the supply of wholesale mobile services to MVNOs, and the effect of any such foreclosure at the retail level. In particular, we will assess:

(a) The ability of the Merged Entity to foreclose by, for example, assessing the extent to which O2 refusing to supply, or deteriorating the terms or quality of its supply of, wholesale mobile services would weaken the position of MVNOs and so could affect their competitive position at the retail level;

(b) the incentive of the Merged Entity to foreclose MVNOs, including the degree to which a foreclosed MVNO’s retail customers might be expected to switch to products sold by the Merged Entity. In particular, we will consider the possibility that the Merged Entity may gain customers from fixed-MVNOs and the relative profitability of wholesale and retail services; and

(c) if the Merged Entity had the ability and incentive to engage in a foreclosure strategy, what would be the effect on customers. For example, in the event that fixed-MVNOs were foreclosed, we will assess the extent to which the Merged Entity will face competition in the provision of fixed/mobile bundles from other suppliers of fixed/mobile bundles (such as BT), and/or the extent to which unbundled services compete with bundled services.

Despite this we’d still be very surprised if the CMA created a significant obstacle for the deal, not least since some of the areas mentioned above were also covered by the merger between EE and BT a few years ago, which largely sailed through the regulatory process without causing any major surprises.

None of this is to say that some issues won’t crop up, but rather that they should be fairly straightforward to solve. For example, the CMA could extract a commitment from O2 and VM to protect competition in certain areas, although VM has already been quite vocal about adopting a pro-competition stance in the market.

Meanwhile O2 and Virgin Media said they’re continuing to work “constructively” with the CMA and remain of the view that their deal is “pro-competitive” and will achieve closure by around mid-2021. The CMA is open for feedback on all this until 5pm on 4th February 2021.

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By Mark Jackson
Mark is a professional technology writer, IT consultant and computer engineer from Dorset (England), he also founded ISPreview in 1999 and enjoys analysing the latest telecoms and broadband developments. Find me on Twitter, , Facebook and Linkedin.
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19 Responses
  1. TrueFibre says:

    The only reason why Virgin Media wants to buy out 02. it’s because Virgin Media doesn’t use there own masts they want to buy 02 out to get there hands on there equipment

    1. Caracal & serval says:

      It’s a merger they’re not buying O2.

    2. Buggerlugz says:

      which will no doubt grant them access to O2’s mast infrastructure.

    3. TrueFibre says:

      That’s what a merger is Virgin Media are acquiring 02

    4. TrueFibre says:

      Sorry my mistake a Merger is sharing resources and equipment.

    5. Chris says:

      O2 & Vodafone have a mast sharing agreement

      https://news.o2.co.uk/press-release/o2-and-vodafone-finalise-5g-network-agreement-in-the-uk/

      Meaning The masts are not solely owned by O2.

      Both VM & O2’s owners want rid of the UK businesses so they can concentrate on the more profitable for them EU parts of those businesses, they’ve been trying to sell the businesses for years and after not finding buyers have decided to sell the businesses to each other, merge in other words, to release the cash.

      This has nothing to do with vm gaining access to masts.

  2. Bubblesthefish6 says:

    Oh well, it will still be cheaper than the way out of proportion prices EE make their customers pay for an inadequate (at least in my area) service.

    1. Chris says:

      If ee are too expensive is it not sensible to swap provide to a cheaper one?

      I’ve been on three for ~12 reception is getting really bad now when it was once excellent, but at £10 a month for 12GB + unlimited calls and texts + wifi calling and I’m not exactly going anywhere it’s perfectly fine for what I currently need.

      If I needed better I’d change provider.

    2. t4n0n says:

      @Chris In my experience, most people’s problems with Three tend to come down to the cell that their phone connects to.

      As an example, I have two 4G cells near my house that my phone can connect to, one that uses Band 3 (1800MHz) and another that uses Band 20 (800MHz). Band 3 has a much higher throughput (about 20-30Mbps vs 2-3Mbps for Band 20), but much poorer signal strength, which tends to result in my phone defaulting to Band 20.

      What I do is use an app called “Samsung Band Selection” which forces the phone to lock on to a band that you can choose, which gives me much better speeds. There’s a similar piece of software for Three’s 4G broadband routers called “LTE-H Monitor”. Alternatively, you may find that you get better speeds with HSDPA+, which your phone might be able to preference in its settings.

  3. NGA for all says:

    The merger is driven by the need to converge services. Multiple devices accessing a high capacity data transport service.

    UK spectrum policy is a bigger problem than this merger.

    1. Bill Gates says:

      AMEN.

  4. Buggerlugz says:

    The problem with this merger is the fact it still continues to give Virgin the monopoly it has with its cable provision. The CMA could force the unbundling of Virgin to allow this merger to go ahead and that would provide a far better playing field and far more competition than we see in the market currently.

    To allow them to continue unbundled and also merge with 02 is enabling Virgin to continue its already monopolistic operations further still (IMHO).

    1. 125us says:

      Virgin only have a monopoly in the way that Ford have a monopoly on selling Fiestas. Other vehicles, and telcos, are available.

      Virgin’s fixed network has precisely zero relevance to the question of this merger harming competition. It’s Virgin’s MVNO that is the issue.

    2. Chris says:

      @125us

      Why is the vm mvno the issue? Vm mvno is on ee scheduled to go to Vodafone this year.
      https://www.virginmedia.com/corporate/media-centre/press-releases/virgin-media-and-vodafone-strike-new-mobile-deal

      A big part of O2’s business model is MVNO.

      This deal is effectively VM & O2 buying each other as no one else wanted to buy either business, both firms will be going to the city’s banks for them to raise the cash for the new merged entity so their current owners can get paid.

      The city won’t let the new venture start to reduce its offering to rivals nor will vom2 want to, vom2 will likely raise prices though to help pay for this thing though.

      Vm could just migrate all its customers to o2 reducing the number of mvno’s, but there are lots of mvno’s so I don’t see that as an issue.even the main carriers operate their own mvno’s I.e plus net, giffgaff, smarty, voxi,
      https://en.wikipedia.org/wiki/List_of_United_Kingdom_mobile_virtual_network_operators#Active_operators

      The real issue is that the new entity has to raise the money to pay its current owners, thus increasing its costs and therefore the likelihood it needs to raise its prices.

      If vmo2 pull vm mvno off ee/voda then ee/voda need to attract other mvno’s to them, won’t happen if they up the costs. Talk talk and sky are candidates to move from vmo2.

    3. 125us says:

      @chris – Read the article. There’s a lengthy explanation of why the mvno is a key issue.

  5. Anna says:

    I am currently with Virgin Mobile and I am out of contract – once this happens ill be leaving O2 is junk around my way

  6. JitteryPinger says:

    I agree that pricing in the market may well lose competitiveness, will also be interesting to see what becomes of budget MVNO’s.

    In reality the deal has benefits for both sides, O2 need a solid backhaul provider for its 4G and 5G network and Virgin would benefit hugely by bringing its mobile network in house.

  7. Buggerlugz says:

    I’d honestly love to know who is competitive on their pricing for home broadband today. I mean really its a case of pay the earth to get a good service, or pay the least to get a pants service, isn’t it?

    There is no in-between.

    1. Aqx says:

      It all comes to area with Virgin, up in Glasgow I have the 1Gb package and it works fine, as did my 500Mb and 350 packages. I know people in one area who have 200Mb and get poor service whilst I know people with 100Mb who get a good service. It’s all down to area and whether or not the faults team give a rats ass to even look at your problem.

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