Broadband and telecoms giant BT ( EE ) has warned the Competition and Markets Authority (CMA) that a mega-merger ( here ) between rival mobile operators Three UK and Vodafone will lead to “substantial reduction of competition”, which he claims wouldfinally [result] in higher prices, poorer network quality and reduced incentives to invest.”
The merger, which would see Vodafone hold a 51% stake in the business and CK Hutchison (Three UK) retain 49%, has previously been touted by the parties as something that would be “great for customers, great for the country and great for the competition” and at the same time results in the main 11 billion pounds investment in upgrading UK 5G mobile (broadband) infrastructure and network coverage.
However, the first phase of the CMA’s investigation into the deal has previously raised concerns, not least that “may result in mobile customers facing higher prices and reduced quality” (here). The Phase 1 report states that Three UK was “generally the cheapest“of the four major mobile operators and a merger of businesses”will reduce competition between mobile operators in acquiring new customers”, resulting in higher prices.
“Competitive pressure can help keep prices down and can also provide network operators with an important incentive to improve their services, including investing in network quality,” the CMA said in March 2023. However, the authority added that the agreement “it can make it difficult” for smaller mobile “virtual” operators (MVNOs) such as Sky Mobile, Lebara and others to negotiate better deals for their own customers due to fewer suppliers.
In addition, the CMA challenged some of the data and commitments provided by Three UK and Vodafone. For example, the Authority said that “does not believe that detailed and verifiable evidence exists to demonstrate that any benefits to the customer from any accelerated 5G SA rollout would be timely, likely to occur, or sufficient to outweigh the significant dilution of competition.“
Finally, and somewhat at odds with Vodafone and Three UK’s previous statements that “subscales, unable to cover their capital costs and limited 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 without the merger“. The CMA therefore noted that if the merger did not take place, the two operators would effectively “they continue to compete with each other, as well as with other mobile operators, in much the same way as today.”
BT’s caustic response
Since then, the CMA has been busy carrying out a more in-depth Phase 2 investigation, which this week published the first of several responses from other companies and organisations. But the most important contribution came from BT ( here ), who largely agreed with the CMA’s Phase 1 findings and appeared to spare no effort in this respect.
Key points from BT’s submission
• The proposed agreement will create a merged entity [Vodafone and Three] with a disproportionate share of capacity and spectrum, unprecedented in the mobile markets in the UK and Western Europe, which will substantially reduce competition and discourage investment (Concern Asymmetry).
• In addition, BT agrees with the CMA’s Phase 1 finding that the combined entity’s participation in MBNL [i.e. the network sharing agreement between EE and Three] will lead to lower levels of investment arising from its access to commercially sensitive information (CSI) related to BT’s investment plans (MBNL CSI Concern).
• Third, BT also agrees with the CMA’s Phase 1 conclusion that the merger will result in direct harm to BT’s ability to compete through the merged entity’s holdings in MBNL (MBNL Frustration Concern).
• While each of these three concerns is significant on its own, their combination magnifies the adverse impact that the merger will have on competition in the UK mobile markets and ultimately on UK consumers.
• BT welcomes the CMA’s findings on the MBNL CSI Concern and the MBNL Frustration Concern at Stage 1 and its intention to investigate these concerns further at Stage 2. However, BT believes that the CMA’s Stage 2 investigation must also carefully consider the issue of asymmetry ie. the direct impact that the capacity and asymmetry of the merged entity will have on the incentives of competitors (and thus on the incentives of the merged entity) to invest.
• BT agrees with the CMA’s Phase 1 findings that the merging parties’ claimed efficiencies appear unsubstantiated, are not incremental to today’s market outcomes (even if realised) and will not be passed on to UK consumers in the form of lower prices or greater investment.
• Overall, BT believes that the combination of extreme capacity and spectrum asymmetry resulting from the merger, together with the unprecedented access the merged entity will have to BT’s strategic investment plans (as well as VMO2’s strategic investment plans) and the combined entity’s capabilities and incentives, will disrupt the effective functioning of MBNL will lead to a substantial reduction in competition in UK mobile telecommunications markets, ultimately leading to higher prices, poorer network quality and reduced incentives to invest – all to the detriment of UK consumers.
BT’s opposition to the deal naturally stems from its own understandable interests, as well as legitimate concerns about spectrum ownership and network sharing. But we should not pretend that they are seriously worried about consumers paying higher prices. After all, EE itself is far from being a budget operator, and if some competitors were to raise their consumer prices significantly, then that could benefit EE on some level.
It is strongly expected that Vodafone and Three UK will eventually attempt to calm these concerns with a series of binding commitments. In this case, we expect that such commitments may include an agreement to divest part of their radio spectrum holdings to competitors, as well as a commitment to protect prices for an initial period of years, support MVNO operators and address network sharing issues. .
However, it remains hard to know how strict the CMA will be on the matter when they deliver their verdict later in the year, although all signs are that they are likely to try to extract a hefty approval price – assuming there is no deal. t directly blocked. The question then will be whether Vodafone and Three UK are willing to pay such a price or not; we think they will.