BT Warns Three UK and Vodafone Merger to Damage Competition, Cause Higher Prices

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 give rise to a “substantial lessening of competition“, which they claim would “ultimately [result] in higher prices, poorer network quality, and reduced incentives to invest.”

The merger, which would see Vodafone hold a 51% slice of the business and CK Hutchison (Three UK) retain 49%, has previously been promoted by the parties 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, the first phase of the CMA’s investigation of this deal has previously raised concerns, not least that it “could lead to mobile customers facing higher prices and reduced quality” (here). The Phase 1 report noted that Three UK was “generally the cheapest” of the four primary mobile operators and that combining the 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 in March 2023. But the authority added that the deal “may make it difficult” for smaller mobile ‘virtual’ operators (MVNO), such as Sky Mobile, Lebara and others, to negotiate good deals for their own customers due to there being fewer suppliers.

In addition, the CMA questioned some of the data and commitments provided by Three UK and Vodafone. For example, the authority said it “does not believe that there is detailed and verifiable evidence demonstrating that any customer benefits from any accelerated roll out of 5G SA would be timely, likely to materialise or sufficient to outweigh the Significant Lessening of Competition.”

Finally, and somewhat contrary to previous statements made by Vodafone and Three UK about being “sub-scale, unable to cover their cost of capital, and constrained 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 absent the Merger“. The CMA therefore noted that if the merger did not go ahead, both operators would in fact “continue to compete with each other, as well as with other mobile operators, in a broadly similar way as today.”

BT’s Scathing Response

Since then, the CMA has been busy conducting a deeper Phase 2 investigation, which this week published the first of several responses from other companies and organisations. But the most important submission came from BT (here), which largely agreed with the CMA’s Phase 1 findings and appeared to spare no blushes in that regard.

Key Points from BT’s Submission

• The proposed deal will create a Merged Entity [Vodafone and Three] with a disproportionate share of capacity and spectrum, unprecedented in UK and Western European mobile markets, which will substantially lessen 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 arising from its access to commercially sensitive information (CSI) relating to BT’s investment plans (the MBNL CSI Concern).

• Thirdly, 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 participation in MBNL (the MBNL Frustration Concern).

• Whilst each of these three concerns is significant in and of itself, their combination exacerbates the adverse impact the Merger will have on competition in UK mobile markets and, ultimately, UK consumers.

• BT welcomes the CMA’s conclusions on the MBNL CSI Concern and the MBNL Frustration Concern at Phase 1 and its intention to further investigate these concerns at Phase 2. However, BT considers that the CMA’s Phase 2 investigation must also consider carefully the Asymmetry Concern, i.e. the direct impact that the Merged Entity’s capacity and spectrum asymmetry will have on rivals’ (and therefore on the Merged Entity’s) incentives to invest.

• BT agrees with the CMA’s conclusions at Phase 1 that the Merging Parties’ claimed efficiencies appear to be 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 arising from the Merger, along with the unprecedented access that the Merged Entity will have to BT’s (as well as to VMO2’s) strategic investment plans, and the Merged Entity’s ability and incentive to disrupt the effective functioning of MBNL, will give rise to a substantial lessening of competition in UK mobile telecoms markets, ultimately resulting in higher prices, poorer network quality, and reduced incentives to invest – all to the detriment of UK consumers.

Naturally, BT’s opposition to the deal stems from their own understandably vested interests, as well as legitimate concerns around spectrum ownership and network sharing. But we shouldn’t pretend that they’re seriously worried about consumers paying higher prices. After all, EE itself is far from being a budget level operator, and if any rivals did significantly raise their consumer prices, then that could conceivably benefit EE, at some level.

The strong expectation is that Vodafone and Three UK will end up trying to placate such concerns 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, support for MVNO operators and to fix concerns around network sharing.

However, it remains difficult to know how strict the CMA will be on all of this when they give their verdict later in the year, although all signs suggest that they’ll probably attempt to extract a hefty price for approval – assuming the deal isn’t blocked outright. The question will then be whether or not Vodafone and Three UK are willing to pay such a price; we think they will.

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