CMA Probe Fears Higher Prices After O2 and Virgin Media 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.