The progression to a phase 2 review was an expected next step for both operators, and in line with the timeframe for completion that we set out from the outset of the proposed merger.
In a statement addressing the CMA’s decision, Vodafone and Three reiterated their position that the transaction will deliver significant benefits to the three C’s: competition, customers and the country.
Vodafone and Three both believe the current market structure in the UK has led to the quality of mobile services lagging behind European peers.
The two operators argue they are sub-scale and unable to cover the cost of their capital as stand alone businesses. As such they are unable to invest in their networks and compete with the UK’s market leaders, EE and O2.
Both these competitors benefit from the scale of a converged telecoms offering, EE is the mobile division of the UK’s incumbent BT Group, while O2 sits as part of the VMO2 joint venture between Telefonica and Liberty Global, offering fixed and mobile services.
The merger of Three and Vodafone would create a “mobile champion” to compete more effectively with the converged operators, proponents of the deal say.
Vodafone and Three believe that combining their networks will also boost competition in the MVNO space, the fastest growing segment of the UK’s mobile market.
“This transaction will create an operator with the scale required to take on BT/EE and VMO2, give MVNOs greater choice in the wholesale market and is in the wider interests of customers, competition and the country," Vodafone UK CEO, Ahmed Essam, said.
James Robinson, a senior analyst at Assembly Research isn’t convinced the CMA has bought this argument.
“The CMA is concerned by the merger reducing the number of operators competing to host MVNOs,” he said.
“The CMA might consider seeking commitments to protect retail competition, e.g. reserving capacity or better terms for MVNO access, including for those MVNOs already in the market with some scale”
“A marriage of convenience makes sense,” Paolo Pescatore a TMT analyst at PP Research said. “Scale is key to help lower costs and improve margins. It could take years before we see the real fruits of this deal come to fruition if it goes ahead. The question is, can the UK wait that long?”
Vodafone and Three disagree with Pescatore’s assessment.
“Millions of customers across the UK will benefit from day one, thanks to a step-change in network quality, speed, and coverage,” the operators said in their response to the CMA’s decision.
A phase 2 investigation will see the CMA “scrutinise every aspect of the deal, including its potential impact on customer choice, innovation, pricing and service quality,” Kester Mann, an analyst at CC Insight said.
“One of the CMA’s biggest concerns will be the threat of higher prices. In the coming days, Vodafone and Three plan to raise the cost of many contracts by 7.9%, an ill-timed move that may not sit well with the Competition Watchdog,” he continued.
Robinson agrees “the CMA believes the merger may lead to higher prices and lower investment in network quality”.
“While it may not be a fan of behavioural remedies, the CMA could push for binding commitments, particularly on not raising prices for a given period,” he said.
Both Mann and Pescatore agree that to get a deal over the line Vodafone and Three are likely to have to make concessions on mobile spectrum.
There is precedent for this in Europe. Last month in Spain Orange and Masmovil were required to offer national roaming and spectrum access to a rival provider, Romania’s Digi, to get their merger over the line.
