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CMA Warn Vodafone and Three UK Merger Risks Price Rises and Less Competition

Friday, Mar 22nd, 2024 (7:21 am) - Score 2,280
Vodafone-and-Three-UK-Merger-Image

The Competition and Markets Authority (CMA) has this morning concluded its Phase 1 investigation of the proposed mega-merger (here) between mobile operators Three UK and Vodafone, which, much as expected, has raised concerns over the reduction in market competition and the potential for consumers to pay higher prices.

The merger, which would see Vodafone retain a 51% slice of the business and CK Hutchison (Three UK) hold 49%, has been 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 push fixed wireless access (mobile home broadband) to 82% of households by 2030, among other things.

However, despite the optimism, some regulators, politicians and other groups have sounded a note of caution, particularly given the concerns over any potentially negative impacts upon competition (at retail and wholesale / MVNO) and consumer prices that may result from having fewer operators. Not to mention some fears over job losses and national security (i.e. Three UK is owned by CK Hutchison and perceived as being closely tied to China), which is currently the subject of a separate national security probe (here).

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On the flip side, both operators have argued that the deal would improve network quality, coverage, service performance and that merger related price changes are “not part of the transaction rationale, and we are not planning any increases in prices” (here). Having said that, the operators also once said they had “no plans” to reintroduce EU roaming charges, until they did.

Outcome of the CMA’s Phase 1 Probe

As we’ve said before, the reality of any complex mega-merger like this is that the CMA’s Phase 1 investigation was almost certain to raise some competition concerns and that will inevitably lead to a deeper Phase 2 investigation, which should thus be considered par for the course. Suffice to say, that is precisely what has happened today.

In short, the CMA said they were “concerned the deal, which combines 2 of the 4 mobile network operators in the UK, could lead to mobile customers facing higher prices and reduced quality.” The Phase 1 report noted that Three UK was “generally the cheapest” of the four mobile network operators and that combining these two businesses “will reduce rivalry between mobile operators to win new customers“, thus resulting in higher prices.

Competitive pressure can help to keep prices low, as well as provide an important incentive for network operators to improve their services, including by investing in network quality,” said the CMA. The authority is also concerned that the deal “may make it difficult” for smaller mobile ‘virtual’ network operators (MVNO), such as Sky Mobile, Lebara and Lyca Mobile, to negotiate good deals for their own customers, by reducing the number of network operators capable of hosting these ‘virtual networks’.

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Julie Bon, Phase 1 Decision Maker, said:

“Millions of people in the UK depend on effective competition in the mobile market in order to access the best deals for them.

Whilst Vodafone and Three have made a number of claims about how their deal is good for competition and investment, the CMA has not seen sufficient evidence to date to back these claims.

Our initial assessment of this deal has identified concerns which could lead to higher prices for customers and lower investment in UK mobile networks. These warrant an in-depth investigation unless Vodafone and Three can come forward with solutions.”

Despite these findings, both Vodafone and Three UK said they expected this outcome and “remain confident” that the transaction will “deliver significant benefits for competition, customers and the country“. The operators said they’re currently “sub-scale, unable to cover their cost of capital, and constrained in their ability to invest and compete effectively against the two market leaders” (BT / EE and Virgin Media / O2).

However, the CMA’s Phase 1 analysis of Vodafone and Three UK’s recent financial performance and internal strategic documents suggests that both operators are “currently 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.”

Vodafone UK CEO, Ahmed Essam, said:

“Having reached this important milestone, we look forward to working with the independent panel on the Phase 2 process. By merging our two companies, we will be able to invest £11 billion to help the UK realise its ambitions to be a world leader in next-generation 5G technology, and increase competition across the industry.

This transaction will create an operator with the scale required to take on BTEE and VMO2, give MVNOs greater choice in the wholesale market and is in the wider interests of customers, competition and the country.”

Three UK CEO, Robert Finnegan, said:

“The current market structure is holding the UK back, which is not good for customers or competition. By creating a third player with the necessary scale to invest, the combination of our two companies will deliver one of Europe’s most advanced networks and move the UK into the digital fast lane, benefiting customers from Day One.”

Both Vodafone UK and Three UK now have five working days to respond with “meaningful solutions” to the CMA, otherwise the deal will be referred to a more in-depth Phase 2 investigation. But as we’ve said before, the expectation from the very beginning is that this would always proceed to a Phase 2 probe and the operators themselves also acknowledge that.

NOTE: The CMA is solely focused on the competition side of things, which means they cannot consider other areas such as employment, access to personal data or national security.

Historically, Phase 2 probes have tended to end up reaching broadly similar conclusions, which network operators then typically try to placate via a series of binding commitments. In this case, we expect that such commitments may include an agreement to divest some of their radio spectrum holdings to rivals, as well as a pledge to protect prices for an initial period of years and support for MVNO operators.

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In addition, an agreement would also need to be reached on network sharing, since Vodafone currently has a network sharing agreement with O2, while Three UK has one with EE – both of which will need to be carefully unpicked. But none of these issues are insurmountable, although the devil will be in the detail and how high the CMA decides to set the bar.

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), which means a final conclusion has yet to be reached.

The government also sees such a deal as being able to help them achieve their goals for mobile coverage improvements (i.e. the ambition for “all populated areas to be covered by ‘standalone’ 5G (5G-plus) by 2030” (here)). Suffice to say, we expect the CMA may set the bar for approval quite high, but perhaps not block the deal outright.

Summary of the CMA’s Key Phase 1 Findings

The CMA found that the Merger raises significant competition concerns based on three theories of harm (ie hypotheses about how the Merger could harm competition):

(a) First, as a result of horizontal unilateral effects in the supply of retail mobile services to both consumers and businesses in the UK.

(i) In general terms, the concern under horizontal unilateral effects essentially relates to the elimination of a competitive constraint by removing an alternative that customers could switch to. The CMA’s main consideration is whether there are sufficient remaining good alternatives to constrain the merged entity post-merger. Where there are few existing suppliers, the merger firms enjoy a strong position or exert a strong constraint on each other, or the remaining constraints on the merger firms are weak, competition concerns are likely.

(ii) In the present case, the CMA is concerned that the Merger would eliminate competition between two major players in the supply of retail mobile services, whose smaller scale – in particular 3UK’s – relative to the other MNOs currently gives them a strong incentive to compete aggressively for new customers. This is because the CMA believes that smaller MNOs have stronger incentives to increase their revenue, either through competing aggressively to achieve subscriber growth or seeking to find additional revenue streams, in order to be able to maintain and invest in their network. Evidence seen by the CMA suggests that 3UK, although the smallest MNO, is also the lowest priced MNO, and in the last four years has been pursuing growth strategies while improving its network quality and investing in 5G capability. Evidence seen by the CMA suggests that VUK has a strong brand, sustained network ambitions – including in relation to 5G – and a strategy to position itself as a converged challenger to VMO2 and BTEE, by offering both mobile and fixed telecommunication services.

(iii) Combined, VUK and 3UK would become the largest mobile operator by revenue with a share of more than 30%, in a concentrated market. The CMA believes that due to its increased size, the Merged Entity may have less incentive to compete aggressively compared to each Party on a standalone basis, and in particular 3UK. The CMA believes that this may, in turn, reduce the competitive pressure faced by other mobile operators, in particular BTEE and VMO2, and that the remaining competitive constraints, including those posed by MVNOs (which are individually very small and some of which serve niche segments of the market), are insufficient to offset this loss of competition. As a result, the CMA believes that the Merger may lead to higher retail mobile prices for consumers and businesses, and MNOs investing less in network quality.

(iv) The CMA’s competition concerns in the supply of retail mobile services are compounded by the loss of competition at the wholesale level – on the basis that the ability of MVNOs to compete effectively at the retail level depends on competition between MNOs at the wholesale level – and disruption to network sharing arrangements resulting from the Merger. Regarding the latter, the CMA is concerned that the Merged Entity may have the ability and incentive to disrupt the effective functioning of the two network sharing arrangements which could have the effect of limiting the constraint exerted by BTEE and VMO2.

(b) Second, as a result of horizontal unilateral effects in the supply of wholesale mobile services in the UK.

(i) As noted above, the concern under horizontal unilateral effects essentially relates to the elimination of a competitive constraint by removing an alternative that customers could switch to.

(ii) In the present case, the CMA is concerned that the Merger would reduce the number of MNOs competing to host other mobile operators on their networks from a maximum of four to a maximum of three (in circumstances where not all MNOs compete for all opportunities to host an MVNO on their network). Evidence seen by the CMA also suggests that both 3UK and VUK are regarded as credible wholesale suppliers and constrain each other when competing for tenders.

(iii) The CMA therefore believes that the loss of 3UK and VUK as independent competitors would diminish prospective and existing MVNOs’ ability to leverage competition between MNOs, thereby placing them in a weaker negotiating position to obtain favourable wholesale access terms.

(c) Third, the Merged Entity may gain access to its competitors’ commercially sensitive information through its participation in both MNO network sharing arrangements.

(i) Compared to the current situation, whereby each of VUK and 3UK are only party to one of the two MNO network sharing arrangements in the UK, the Merged Entity would be party to both network sharing arrangements. Although information sharing protocols exist, the CMA is nonetheless concerned that by participating in both network sharing arrangements, the Merged Entity may gain access to commercially sensitive information of both its remaining MNO competitors. This could include data on investments, information on deployment plans, technical specifications, or any other commercial strategy information.

(ii) The CMA is concerned that in the context of a concentrated market with only three remaining MNOs, the Merged Entity may be able to use this information to compete less aggressively because, for example, it may be able to predict its MNO competitors’ commercial strategies and therefore tailor its own commercial strategies in response, such as by reducing its network investment to the minimum necessary to match its rivals. This may in turn deter the Merged Entity’s rivals from making significant network investments, adversely affecting consumers.

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Mark-Jackson
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 X (Twitter), Mastodon, Facebook and .
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29 Responses
  1. Avatar photo RightSaidFred says:

    Thinking further down the line, surely there will be some consolidation between the mobile networks and the fixed line networks at a wholesale level.

    Given that we’re only really expecting 3 to emerge on the fixed network (FTTP), with one of those being VMO2, then surely that means we see OR-BT/EE, VMO2, and Vodafone/Three-CF as the end point.

    If that is the end point, given that CF are the weaker player in the fixed network market, allowing a Vodafone/Three to be the largest in the mobile market seems about fair.

    Yes, I know, there’s no guarantee that and merged Vodafone/Three would wish to acquire City Fibre, but that just seems like what they’d have to do.

    We’d end up with 3 competing network operators at a wholesale level, with competition at the ISP/MNVO level (as we currently already see).

    1. Avatar photo No Name says:

      I would put good money on VF buying CF at somepoint in the next 6 years.

    2. Avatar photo Anonymous says:

      I really hope not. Same old dinosaurs that should be extinct by now.

    3. Avatar photo Jason says:

      People inside Cityfibre told me that they are getting flooded with management from BT now and are becoming more and more like the openreach enemy…

  2. Avatar photo Paul says:

    Good balanced article, as always. Just one point: you refer to the ruling of the EU’s General Court which over-turned the Commission’s decision to block the proposed O2/Three merger. The judgment you linked to was over-turned on appeal to the EU’s highest court – press release here: https://curia.europa.eu/jcms/upload/docs/application/pdf/2023-07/cp230120en.pdf
    The General Court now has to rule again, so the jury’s still out on the effectiveness of 3 player markets.

    1. Mark-Jackson Mark Jackson says:

      Good spot Paul, I hadn’t seen that development.

  3. Avatar photo Big Dave says:

    Looking at the comments from the CEOs and to paraphrase Mandy Rice Davies “Well they would say that wouldn’t they?”.

    1. Avatar photo Tim Fargo says:

      I still think it will go through.

    2. Avatar photo Ed says:

      Their next argument will probably be something along the lines of “if we can’t merge then at least one of us will go bust and you’ll end up with a reduced marketplace whether you want it or not”.

    3. Avatar photo Anonymous says:

      They’ll try every cry story in the book to get their way.

  4. Avatar photo anon says:

    I don’t understand this. When they first proposed the merger, everyone was saying how it will reduce competition, make the prices go up etc. And unless im 100% crazy (distinct possibility) then i’m totally sure the CMA said that there would be no reduction in competition and no reason to think prices would increase. Now here they are telling us that what we knew would happen actually will happen. They must think we’re idiots.

  5. Avatar photo Anonymous says:

    Cue a Tory minister to wave it through then after opening a stuffed brown envelope.

    1. Avatar photo Me says:

      It’ll be a Labour MP opening the fat brown envelope by the time it reaches that stage.

  6. Avatar photo Yatta! says:

    When Three Italy merged with the mobile network Wind, (temporarily) reducing the number of Italian mobile networks from 4x to 3x, the Italian regulator required the combined WindTre to release spectrum and provide preferential infrastructure access to a new player.

    This allowed the newcomer Iliad to enter the Italian mobile market which ultimately increased competition and reduced prices.

    If the CMA / OFCOM required similar in the UK, I have no issues with Vodafone and Three’s merger.

    1. Avatar photo Ed says:

      *IF*…

    2. Avatar photo Ivor says:

      it actually doesn’t make any sense to do that though. 3 has a (mostly stable) network and a customer base. how is the consumer served by reducing their choice and replacing it with a new entrant with neither of those things. you end up with three networks and one basketcase.

      we’re seeing how this is turning out in the US, where dish network was given the right of first refusal to buy spectrum from t-mobile in exchange for the latter’s purchase of sprint. No serious person is using them as their main network.

    3. Avatar photo Yatta! says:

      @Ivor.

      Certainly made sense in Italy, Iliad has over 12% market share and now Italy has the cheapest mobile data rates in Europe, second cheapest in the world, 95%+ 5G coverage and near ubiquitous 4G coverage.

      Compare and contrast that with the UK.

    4. Avatar photo Ivor says:

      coverage figures can’t really be compared between the UK and sane countries that don’t have rampant NIMBYism that tries to block everything.

      That said, I can’t say I remember the last time I saw 3G (now gone on EE anyway) or 2G on my phone here in the UK.

    5. Avatar photo Jason says:

      Same when O2 and E-Plus merged in Germany… The new player 1&1 is totally behind schedule with opening its 5g network, though

  7. Avatar photo Sanford Charles says:

    Do I need to complain to OFCOM about my £745.79 owed by Vodafone since May 2021. Is Vodafone that desperate to be fighting for this small amount money for three years.

    And determine to offer only part of the take with à deadlock, fait accompli!.

  8. Avatar photo Ian says:

    None of those comments are significant enough to block the merger, its just pre-positioning for what remedy might need to be applied for it to wave through.

    1. Avatar photo Barney Olam says:

      CMA will block this merger, I know this for a fact.

    2. Avatar photo I work at MI6 says:

      They won’t.
      I know this for a fact.

  9. Avatar photo james smith says:

    Barney O Your proof of concept is what please?

    1. Avatar photo Barney Olam says:

      I work at Three, there are some other serious issues that are not public knowledge.
      Vodafone would have to 100% aquire Three for this to be acceptable to the CMA and Govt.

    2. Avatar photo Jason says:

      Sounds like the issues are mostly of national security nature?

  10. Avatar photo SneakyGreedyPeople says:

    Prices will go up? CMA stating the obvious lol

    I dont know how this can go ahead as its blatent anti competition.. Vodafone wants to eliminate a competing network. The merger is a backdoor route to take over/ buy out Three.

  11. Avatar photo Me says:

    The merger is all but guaranteed to go through, Hutchinson have already stated they will leave the UK market of the merger doesn’t go through, which will leave only three players anyway and their is nothing the government can do about that.

    At least with a merger they can have an organised way to move network and customers and staff. Then we will see if they remain or leave. They will most likely be forced to give up bandwidth as well.

    1. Avatar photo Anon32 says:

      I doubt Hutchison would just close it down when it could be sold for £5 billion plus. They stated they would leave if the merger with o2 didn’t go through and guess we’re still waiting. The merger is in no way guaranteed to go through and Hutchison would still own 49% of Vodafone UK. Voda can buy up the stake later if they want but I’m sure that politically would have to sell to Voda for cash. There is a rat somewhere here. Sky could buy three and there would be no network reduction. Or maybe 3 could merge with cityfibre and then floated on the LSE. The truth is Hutchison is in no rush.

      When t-mobile and orange merged to EE they are now one of the most expensive networks going. I’ll await to see what happens. Any speculation said in here is just pure bluster and nonsense

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