The Competition and Markets Authority (CMA) has today finally granted approval for mobile operators Vodafone and Three UK to proceed with their merger deal (here), which will result in an expansion of their 5G Standalone (SA) network (broadband) coverage. But the merged company will have to comply with new legal obligations and consumer pricing controls.
The merger, which is said to be worth £15bn+ and will see Vodafone retain a 51% slice of the business and CK Hutchison (Three UK) hold 49%, has been promoted by the operators as being “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. This would also help the government’s own 5G targets.
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 CMA’s Phase 2 investigation (here) found that reducing the number of primary mobile operators from 4 to 3 would result in a “Significant Lessening of Competition” (SLC), giving rise to various concerns at the retail and wholesale level. Some examples included the risk of higher prices for consumers, reduced quality, dominance of spectrum ownership, tedious confidentiality issues with conflicting network sharing agreements (e.g. EE and Three UK) and less competition at the virtual operator [MVNO] level.
Despite the concerns, the competition watchdog left the door open to an agreement by recommending some possible remedies (here). The operators responded to that by setting out a series of commitments (here), which included making their network coverage targets enforceable by Ofcom (binding), divesting some radio spectrum bands to O2 (partly supported by Vodafone’s recent network sharing deal with VMO2 – here), providing a new reference offer to satisfy MVNO providers and limited protections for some retail prices.
The CMA finally responded to that earlier this month by finding that the deal, with a few tweaks to the aforementioned commitments, could in fact “solve [the] competition concerns identified in September and allow the merger to go ahead” (here). Both Vodafone and Three UK responded positively to those changes, and the merger has today been given final approval to proceed.
The legally binding commitments require:
➤ Delivery of the joint network plan, which sets out the network upgrade, integration and improvements Vodafone and Three will make to their combined network across the UK over the next 8 years. The group has concluded that by significantly improving the quality of the combined network, the full implementation of this plan would boost competition between the mobile network operators in the long term, benefiting millions of people who rely on mobile services.
➤ Capping selected mobile tariffs and data plans for 3 years, directly protecting large numbers of Vodafone / Three customers from short-term price rises in the early years of the network plan.
➤ Offering pre-set prices and contract terms for wholesale services (again for 3 years) to ensure that virtual network providers can obtain competitive terms and conditions as the network plan is rolled out.
The network commitment will be overseen by both Ofcom and the CMA, with the merged company also required to publish an annual report setting out its progress on the implementation of the network plan. The CMA would have responsibility for monitoring and enforcing the protections relating to consumer tariffs and wholesale terms. See the CMA’s Final Report for more details.
Stuart McIntosh, Chair of the CMA’s Inquiry Group, said:
“It’s crucial this merger doesn’t harm competition, which is why we’ve spent time considering how it could impact the telecoms market.
Having carefully considered the evidence, as well as the extensive feedback we have received, we believe the merger is likely to boost competition in the UK mobile sector and should be allowed to proceed – but only if Vodafone and Three agree to implement our proposed measures.
Both Ofcom and the CMA would oversee the implementation of these legally binding commitments, which would help enhance the UK’s 5G capability whilst preserving effective competition in the sector.”
Matthew Howett, Founder & CEO at Assembly Research, said:
“Since 2010, Europe has seen 10 attempts at in-market mobile consolidation, with the majority (seven) approved with commitments (often structural that undermined the rationale for the merger), one cleared unconditionally, one blocked and one abandoned. At the start of this process, the clearance of Three/Vodafone based on behavioural remedies would’ve appeared an unlikely route for the CMA to take, but one that over time has made sense. Approval with a structural remedy that created a new fourth mobile network operator would not have – pretty much everyone agreed on that (Italy’s expected reconsolidation points to why). The CMA itself has become more comfortable with this merger as its robust investigation has gone on, utilising expert input from industry, and crucially Ofcom (more on that later), to understand the likely impacts.
Be in no doubt – while largely a formality at this point, today’s final report, and green lighting of the merger, sets the wheels in motion for a transformation of the UK’s mobile market, and ultimately the experience for consumers. There is still a chance Sky may seek to challenge the decision, but a successful appeal to the CAT would be hard-fought, expensive and face a high bar. We expect positive implications overall, not only for investment in, and the quality of, networks (including standalone 5G), but also for the wholesale customers and consumers and businesses that rely on them.
The remedies package and headline investment commitment mean that the CMA’s work in this case is not quite over – and for Ofcom it’s just getting started. While it will be incumbent on a combined Three/Vodafone to invest and implement the requisite customer protections, Ofcom will play a vital (and new) role with respect to oversight and enforcement. Importantly, the regulator seems emboldened to assume these responsibilities. Its monitoring will need to be carried out in an agile way as possible to ensure the merged entity is living up to expectations and to minimise any risk of circumvention or market distortions that some have warned about.”
Sky UK recently threatened to launch a legal challenge (appeal) if the proposed merger was allowed to proceed (here), unless significant changes were made to the competition remedies. The final remedies appear to be much the same as we saw in the CMA’s provisional ruling, which is unlikely to go down well with Sky. But any battle, should one surface, would be a long, expensive and difficult process – while facing a high bar for success.
The CMA’s final ruling is similarly unlikely to convince the doubters, with many consumers being particularly concerned about what will happen to cheaper mobile plans once the three-year period of price protection has elapsed. The fears of future price hikes and the gradual removal of cheaper plans from the UK market are unlikely to go away anytime soon.
On the flip side, the move should help the Government to deliver on their “renewed push to fulfil the ambition of full gigabit and national 5G coverage by 2030,” which is something that Ofcom will need to ensure is delivered. At the same time, rivals will no doubt feel more pressure from the merged group, which could trigger more network investment and help to enhance services. But there will no doubt also be job losses as both of the merger parties seek a more efficient operation and to remove duplication of roles.
In addition, EE has previously raised concerns about the deal exposing some of their commercial sensitive details with Vodafone (due to Three UK and EE holding a network sharing agreement via MBNL). But the CMA “consider it is unlikely” that this information shared via MBNL would even be useful in informing the Merged Entity’s investment plans given its limitations (including, for example, how far in advance the information is shared and the scale of information shared).
Finally, it’s worth remembering that mergers of this size often take several years to go through all the motions, which means that we won’t see any huge changes just yet. Instead, the story will be one of gradual changes and no doubt plenty more headlines to come as those surface.
