Broadband and telecoms giant BT (EE) has warned the Competition and Markets Authority (CMA) that the mega-merger (here) between rival mobile operators Three UK and Vodafone would trigger a “significant reduction in competition“, which they claim that “finally [result] in higher prices, poorer network quality and reduced incentives to invest.”
The merger, which would see Vodafone own a 51% share and CK Hutchison (Three UK) retain 49%, has previously been promoted by the parties as something that “great for customers, great for the country and great for the competition”, while also resulting in a major £11 billion investments to improve the UK’s 5G mobile (broadband) infrastructure and network coverage.
However, the first phase of the CMA’s investigation into this deal has previously raised concerns, not least that it “could result in mobile customers experiencing higher prices and reduced quality(here). The Phase 1 report noted that Three UK “generally the cheapest” of the four main mobile operators and that combining the companies “will reduce rivalry between mobile operators to win new customers“, resulting in higher prices.
“Competitive pressure can help keep prices low, but can also provide an important incentive for network operators to improve their services, including by investing in network quality,the CMA said in March 2023. But the authority added that the deal ‘can make it difficult” for smaller mobile ‘virtual’ operators (MVNO), such as Sky Mobile, Lebara and others, to negotiate good deals for their own customers because there are fewer suppliers.
In addition, the CMA questioned some data and commitments from Three UK and Vodafone. For example, the authority said: “does not believe there is detailed and verifiable evidence showing that any customer benefits from an accelerated 5G SA rollout would be timely, likely to materialize, or sufficient to outweigh the significant reduction in competition .”
Finally, and somewhat contradictory to previous statements by Vodafone and Three UK regarding “are unable to cover their capital costs and are limited in their ability to invest and compete effectively“, the CMA found that both operators were in fact “viable and competitive businesses and the like they would continue to invest in their networks without the merger“. The CMA therefore noted that if the merger did not go ahead, both operators would effectively “continue to compete with each other and with other mobile operators, in a largely similar way to today.”
BT’s scathing response
Since then, the CMA has been busy conducting a more in-depth Phase 2 investigation, which this week published the first of a number of responses from other companies and organizations. But the main submission came from BT (here), which largely agreed with the CMA’s Phase 1 findings and seemed to spare no shame in that regard.
Key points from BT’s submission
• The proposed deal creates a merged entity [Vodafone and Three] with a disproportionate share of capacity and spectrum, unprecedented in the UK and Western European mobile markets, which will significantly reduce competition and deter investment (the Asymmetry Concern).
• In addition, BT agrees with the CMA’s Phase 1 conclusion that the merged entity’s participation in MBNL [i.e. the network sharing agreement between EE and Three] will result in lower levels of investment due to access to commercially sensitive information (CSI) relating to BT’s investment plans (the MBNL CSI Group).
• Third, BT also agrees with the CMA’s Phase 1 conclusion that the Merger will lead to direct harm to BT’s competitiveness, through the Merged Entity’s participation in MBNL (the MBNL Frustration Concern).
• While each of these three concerns is significant in its own right, their combination exacerbates the negative impact the Merger will have on competition in the UK mobile markets and, ultimately, on UK consumers.
• BT welcomes the CMA’s conclusions on the MBNL CSI issue and the MBNL frustration issue in Phase 1 and its intention to investigate these issues further in Phase 2. However, BT believes that the CMA’s Phase 2 investigation should also must carefully consider the asymmetry problem, i.e. the direct impact that the capacity and spectrum asymmetry of the merged entity will have on competitors’ incentives (and therefore on the merged entity’s incentives) to invest.
• BT agrees with the CMA’s Phase 1 conclusions that the merging parties’ claimed efficiencies appear unsubstantiated, are not incremental to current market outcomes (even if achieved) and will not be passed on to UK consumers in the form of lower prices or larger investments.
• Overall, BT believes that the combination of extreme capacity and spectrum asymmetry resulting from the Merger, together with the unprecedented access that the Merged Entity will have to BT’s strategic investment plans (and also to VMO2), and the ability and the Merged Entity’s incentives to disrupt the effective operation of MBNL will give rise to a significant reduction in competition in the UK mobile telecoms markets, ultimately resulting in higher prices, poorer network quality and reduced incentives to invest – all to the detriment of British consumers.
Of course, BT’s opposition to the deal stems from their own understandably vested interests, but also from legitimate concerns around spectrum ownership and network sharing. But we shouldn’t pretend that they are seriously concerned about consumers paying higher prices. After all, EE itself is far from a budget-level operator, and if rivals were to significantly increase their consumer prices, that could benefit EE on some level.
The strong expectation is that Vodafone and Three UK will eventually seek to address such concerns through a series of binding commitments. In this case, we expect that such commitments could 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 for MVNO operators and the addressing concerns around network sharing. .
However, it remains difficult to know how strict the CMA will be on all this when they make their judgment later this year, although all signs suggest they will likely try to charge a high price for approval – assuming the deal is done . t completely blocked. The question will then be whether Vodafone and Three UK are prepared to pay such a price; we think so.