BT speaks out against Vodafone and Three's mobile marriage plans

Fears 'MergeCo' will snaffle disproportionate spectrum

Britain's competition watchdog has published responses to its investigation of the proposed merger of the Vodafone and Three mobile networks, varying from welcoming the move as something that will boost competition, to fears it will have the opposite effect.

The Competition and Markets Authority (CMA) said in April that it would carry out a more in-depth investigation of the tie-up after warning that the merger could result in increased prices for customers and lower investment in UK mobile networks.

The statutory deadline for this Phase 2 probe has now been extended to October 12, when the four-person inquiry group will publish its final report. Before that, the group is set to notify its provisional findings and possible remedies in August, with a final deadline for all responses/submissions from all parties in September.

Vodafone UK and Three UK submitted their own response to the CMA's initial concerns regarding their planned merger. Naturally, the pair believe the transaction will be "highly pro-competitive" and will "unlock substantial investment in a best-in-class mobile network which will deliver a transformational market-wide step change in network quality and capacity."

The two assert that the resulting "MergeCo" from their coupling would increase the competitive pressure on its rivals, and would also be incentivized itself to compete in the retail and wholesale mobile markets to win customers for its expanded capacity.

Without the merger, the prevailing market conditions will continue to deliver sub-optimal outcomes for UK consumers and businesses, they claim. The market would become increasingly bifurcated between the two big mobile operators – BT/EE and VMO2 – with Vodafone UK and Three UK as two weaker players.

The pair describe themselves as "sub-scale MNOs" that would each continue to earn insufficient returns and therefore would be limited in their ability to invest and challenge the market leaders.

BT, naturally, takes a different viewpoint. Its first concern is that "MergeCo" would have "a disproportionate share of capacity and spectrum, unprecedented in UK and Western European mobile markets," and that this would harm competition and deter investment.

"BT is rightly concerned about potential spectrum asymmetry and the impact of existing network sharing arrangements," CCS Insight director of Consumer and Connectivity Kester Mann told us. "Its tone sends a clear message to the CMA about scrutinizing these and other areas. Assuming that spectrum divestment is required to clear the deal, BT will want the best possible outcome from that decision."

Vodafone and Three are said to hold as much as 49 per cent of all licensed bands between them, while Three is also part of a network-sharing joint venture with EE called MBNL, and Vodafone is likewise part of a joint venture with O2 called Cornerstone Telecommunications Infrastructure Limited (CTIL).

A side effect of these two joint ventures is that "MergeCo" would have access to BT's and VMO2's strategic investment plans, which could give it a distinct advantage in competing against them.

"Subject to these issues being resolved, I would have thought that BT would be broadly in favor of the deal," Mann said. "Though it may not wish to declare this publicly during an in-depth investigation that will likely determine remedies from which it may benefit, it must surely recognize that removing a player from the market will cool the overall competitive intensity."

He noted that BT has itself been a major beneficiary of market consolidation, with the acquisition of EE, plus the coming together of T-Mobile and Orange to form EE in the first place.

Different perspectives

On the other side, gas distribution outfit Cadent is supportive of the proposed merger as it believes this will support its future technology plans for increased automation.

"We are keen to ensure that the mobile network is fully developed and the latest in 5G technology is rolled out across the UK where we operate, as this will improve our offering to our end customers and allow us to adopt innovative technology to drive more efficient and safe delivery of gas related services," the company CIO wrote.

As a business with a substantial field force, Cadent said it was keen to ensure there is continued competition and incentive for the main providers of mobile services to deliver value for money.

"We have recently been through a regulated procurement event for our mobile phone services, and we received only three credible bids, all of which were very similarly priced and offered us similar services," the CIO wrote.

Meanwhile, the Unite union again expressed its concerns that the merger would lead to job losses, higher prices, and "further profiteering," without delivering the promised investment.

It said that lower income consumers would disproportionately bear the costs of the merger, and claimed to have evidence that the proposed alliance merger is already driving up mobile prices, citing a report that minimum monthly prices for mobile plans with large data allowances have already gone up by 7 percent.

Unite also claimed that while mobile prices in the UK were historically lower than the average among markets with four mobile operators, this is no longer the case, and that UK monthly mobile prices are increasing while those in other 4-MNO markets are still falling.

The response from consumer champion Which? is that the two firms compete closely for end consumers, and that the merger therefore risks less competition in the market on both price and quality.

It said that an analysis of four years of Ofcom switching data showed that significant proportions of recent switchers to either Three or Vodafone came from the other company.

"We agree with the CMA's conclusions at Phase 1 that there is a substantial risk of horizontal unilateral effects leading to higher prices and lower quality for consumers," Which? wrote. "The evidence suggests the two firms provide a competitive constraint on one another and on VMO2 and BT/EE, and that this constraint will be weakened by the merger."

"Overall, this should not come as a surprise," commented Paolo Pescatore, Telecoms Analyst at PP Foresight. "The concerns were widely expected and now it is up to up the CMA to address appropriately. Concessions will need to be made in order for approval."

However, Pescatore was broadly in favour of the merger in an earlier blog, claiming that the argument for both companies joining up was strong from an investment perspective.

"Looking at the overall UK telecoms market, it is now polarised with two vertically integrated telcos at one end and two subscale mobile operators at the other. This is something that Ofcom recognises, with both Three and Vodafone deemed to be sub-scale, generating low returns and cash flows, despite outperforming the market in terms of subscriber additions," Pescatore wrote.

Mann was likewise generally in favor. "Many in the industry share my view that allowing two sub-scale providers to combine – subject to a more even allocation of mobile spectrum – will lead to more efficient investment and more effective competition," he wrote.

"The crux of the deal is likely to come down to what remedies the CMA wishes to mandate and how much ground Vodafone and Three are prepared to concede." ®

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