Watchdog Reluctantly Blesses Vodafone-Three Merger – With Strings Attached

The UK's competition watchdog is doubtful Vodafone and Three will fulfill post-merger promises unless forced to, and wants safeguards put in place so the telcos don't hike consumer prices or water down the £11 billion network infrastructure upgrade they commited to.

The Competition and Markets Authority (CMA) disclosed last week that it was minded to approve the proposed union, so long as VodaThree comply with the remedies put forth, which aim to protect customers and ensure a more competitive mobile market emerges.

In its Remedies Working Paper [PDF], published November 5, the regulator sets out its assessment of various ways to address the likely downsides of allowing Three and Vodafone to amalgamate, plus the reasons for its provisional decision.

The pair are the third and fourth largest cellular operators in the UK, and their fusion would result in a trio of mega operators that would dominate the market. The other two – BT/EE and Virgin Media O2 (VMO2) – are already the result of previous mergers.

In its Provisional Findings, the CMA concludes that a merger would result in substantial lessening of competition (SLC) in some areas. These could result in price increases for mobile customers of the merged entity, or else reductions in data packages and service features to cut costs.

The other worry is that it may lead to a less competitive market for mobile virtual network operators (MVNOs), which don't own infrastructure themselves and instead rely on the big networks to deliver their services.

In particular, the CMA notes in the paper, reducing the number of physical network operators from four to three will make it more difficult for MVNOs to secure attractive terms, reducing their ability to compete in the retail market. This last point is deemed of key importance by the CMA, because many MVNOs price aggressively and deliver to the value end of the market.

To set against this, Vodafone and Three insists the integration of their respective networks, combined with post-merger investment in upgrades, would deliver what the CMA terms rivalry enhancing efficiencies (REEs) to offset any potential anti-competitive effects.

What this boils down to is a claim that BT/EE and VMO2 would be forced to up their game by improving their own networks to deliver a better service, or by cutting prices to stay competitive.

These REEs obviously depend on VodaThree's joint business plan, which incorporates the joint network plan (JNP), to invest £11 billion over a period ending in fiscal 2034.

However, while the CMA concedes unification might deliver some "rivalry enhancing" network improvements, it also fears that VodaThree would, if left to its own devices, pursue a range of commercial strategies in response to changing market circumstances. The latter meaning it is "not likely to deliver the full joint business plan."

In the working paper, the CMA also expresses doubts over whether even the fully delivered business plan would offset the effects of those SLCs, but says it does not need to rule on that in these provisional findings.

It is the CMA's duty to block or at least minimize anti-competitive activity, so most of the Remedies Working Paper is a long-winded assessment of the various options open to the agency to address those SLCs, including blocking the entire merger, which it notes "would represent a comprehensive solution."

The proposals from VodaThree to prevent this from happening include: a commitment to deliver the key elements of the JNP; a short-term commitment to guarantee existing retail price plans; and a wholesale reference offer to include competitive access terms for MVNOs.

The first of those is pledge to fully integrate VodaThree's two networks into a combined one of no fewer than 25,000 to 30,000 sites in the UK over an eight-year period, including a minimum number of sites in rural areas. Telco regulator Ofcom would serve as a monitoring trustee to hold their feet to the fire.

On tariffs, the commitment is to maintain the terms and conditions of all existing customers, and a pricing cap commitment across a number of tariffs.

For MVNOs, the two companies pledge to make their wholesale offer available to MVNOs for three years, and for disputes to be resolved by an independent adjudicator.

One of the options considered by the CMA as an alternative to an outright ban is a partial divestiture, meaning the post-merger VodaThree sells off certain network assets and spectrum that might allow the entry of a new mobile operator into the market.

The regulator's view, however, is that while this might enable a new fourth operator to enter the UK market, it is not clear that any such business could compete effectively.

Naturally, Three and Vodafone concur with this view, pointing out the inability of smaller operators to compete is the entire reason for their merger, and this specific remedy is likely undermine their chances of delivering the JNP and the benefits of it.

The prospective telco teamsters also suggest incorporating the proposed network commitment into the post-merger VodaThree's spectrum license(s), as doing this means the business has "strong incentives to comply" or risk losing its licenses. The CMA claims that Ofcom said it "would not have concerns about enforcing compliance" in this case.

Turning to the views from third parties, BT/EE reiterate blunt opposition to the merger, saying it has no faith the network commitment would address the CMA's competition concerns (SLCs), even if fully delivered. It argues that it might be too complex or costly to monitor the entire country-wide infrastructure of VodaThree to ensure it is meeting promises of better network quality.

BT/EE, the UK's largest telco, says the effectiveness of the network commitment is also dependent on the plan provoking a competitive response from itself and VMO2, although that seems likely.

In contrast, VMO2 believes the network commitment will, inevitably, substantially increase its own competitiveness and "thereby increase competition in the retail and wholesale markets."

However, Reg readers may note that VMO2 stands to gain extra wireless spectrum from VodaThree under the so-called Beacon 4.1 Agreement, should the wedding go ahead, and this will contribute greatly to increasing its competitiveness.

Enders Analysis advises the CMA to strike a balance between enforcing the network strategy, and allowing VodaThree to respond to shifting demand, as well as changing market and technology developments.

• UK watchdog hints Voda-Three merger will likely pass
• Game of phones: Voda-Three merger left rivals dialing for help
• Three and Vodafone: We need to merge because our networks are rubbish
• Three, Voda promise £10-a-month or below mobile tariffs in bid to sway CMA on merger

Two unknown respondents (identities redacted) are quoted in the working paper as saying the network commitments need to be supplemented by additional remedies to address the competition concerns identified, while Honest Mobile believes it should be subject to independent monitoring by Ofcom.

Another redacted respondent suggests that Three and Vodafone should provide a roadmap of the plan for the next eight years, and commit to a half-yearly update with key statistics and performance indicators on progress that could be monitored.

On price protections, BT/EE warns that time-limited protection of tariffs are likely to be "ineffective" and simply raise the risk of market distortion.

Partly, its argument seems to be that other operators will want to raise prices in line with inflation. This is echoed by a redacted respondent, who said it is not in support of time-limited retail market customer protections as these are not sustainable in the long term and lead to retail market distortion.

Elsewhere in the working paper, consumer group Which? points out the obvious flaw in time-limited protection, in that prices will simply be increased by VodaThree once the remedy period expires. It advises the CMA to consider flexibility of contract term length and offering (i.e. roaming, etc.) and any retail protection must apply to all customers.

Another third party says a more efficient way to protect the vulnerable from price rises is via a time-limited retail protection of social tariffs.

On the wholesale offer for MVNOs, BT/EE claims that any remedy must to be in place permanently in order to be effective.

In contrast, VMO2's view is that no wholesale remedy is required as the extra spectrum it gains would deliver "substantial benefits" to the largest MVNOs (Tesco and Sky Mobile), both of which just happen to have long-term agreements with VMO2.

However, Sky Mobile itself reckons that pre-agreed wholesale access terms are not an effective remedy to any loss of competition.

Others are largely in favor, with Community Fibre saying the network commitment with capacity-based wholesale protections could be effective, while Honest Mobile insists that wholesale market remedies should ensure MVNOs can access networks on fair and non-discriminatory terms and with transparent pricing.

One redacted respondent proposes that the offer cover a proportion of VodaThree's network capacity and be available for a minimum of five years, and also that disputes regarding the terms could be dealt with by Ofcom.

Enders Analysis says it didn't consider the wholesale reference offer necessary, and this could cause inefficient use of spectrum and resources.

Getting to the summary of the CMA's decision, the regulator identifies two potential remedies to the likely loss of competition from the merger: an outright ban, and the remedy package of network commitments supported by time-limited protections.

The working paper includes a lengthy discussion on proportionality, ending with the CMA saying it must select the least costly and intrusive remedy it believes to be effective. As an outright ban would be more intrusive, the other option is more proportionate and so given provisional approval.

However, the CMA warns this is dependent on the two telcos being prepared to offer an undertaking giving effect to the network commitment and time-limited protections as described, or it will not hesitate to impose an order prohibiting the merger.

The deadline for responses to the remedies working paper is 1700 UTC today, so anyone with concerns should get writing quickly. Representations about any competition issues are to be emailed to Vodafone.Three@cma.gov.uk.

The deadline for the CMA's decision is December 7. We suspect it is a shoe-in. ®