Vodafone and Three merger looks shaky after BT's latest attack

BT draws attention to the unworkability of behavioral remedies and says the only effective structural one is prohibition.

Iain Morris, International Editor

October 8, 2024

6 Min Read
Vodafone headquarters in Newbury
Vodafone, whose headquarters are pictured above, is fighting to merge with Three.(Source: Vodafone)

Telcos don't instinctively raise loud objections from the back of the church when their rivals agree to marry. If mergers lead to a natural easing of competition in a tough market environment, they can be a happy event for everyone. But this is clearly not how BT, the UK's biggest operator, sees a proposed tie-up between Vodafone and Three, which operate the smallest two mobile networks. After grumbling about the arrangement earlier this year, BT was hollering from the pews by the end of September in a 27-page submission to the Competition and Markets Authority, the contents of which were published last week.

"Prohibition," it demands, sounding like a law enforcer in 1930s Chicago. Vodafone and Three might not be gangster allies, but their joining of forces would badly hurt consumers, it argues, referring to the CMA's own estimate, which measures potential harm at a cost of up to £1.1 billion (US$1.4 billion) each year. The CMA has made BT's job easier by exposing its concerns in grisly detail. BT "agrees" that prohibition is the "only effective structural remedy," said the operator. And the unconventional behavioral remedies look unworkable, it added.

BT's opponents, Vodafone and Three among them, will regard all this as the predictable reaction of an incumbent worried it will no longer be top dog in 5G. Energized and financially strengthened by their tie-up, Vodafone and Three have promised to spend £11 billion ($14.4 billion) over ten years to give the UK a nationwide 5G network based on "standalone," a souped-up version of the standard. BT will suddenly face a more vigorous competitor and simply doesn't like it.

The problem for the CMA is that allowing a merger to go ahead without demanding any remedies would be hard to justify. Only a few years ago, it blocked Three's attempt to merge with O2 (now Virgin Media O2, or VMO2), the UK's other mobile network, on competition grounds. It's not obvious the mobile market has changed enough since then for the CMA to arrive at the opposite conclusion about the latest proposal. Vodafone and Three insist they would struggle to fund network improvements if their merger is blocked. The CMA has already publicly disagreed, believing they would remain "viable and competitive businesses" as separate companies.

Structurally unsound and behaviorally suspect

Meanwhile, both the CMA and the merger hopefuls do not like the idea of structural remedies. Other than blocking the deal outright, these could include divestments of spectrum and network assets, possibly in a carveout for a new entrant. This would undermine the rationale advanced by Vodafone and Three, which effectively says there is one too many mobile networks in the UK. They have offered to sell an undisclosed amount of spectrum to VMO2. They will also decommission some of their sites once the networks are combined under the cost-saving plan. But they do not want to go any further.

The CMA undoubtedly knows that any onerous structural remedy would be a deal breaker for Vodafone and Three. It doubts a partial divestiture would create a sustainable competitor and does not think it practical. That's partly because Vodafone and Three rely on infrastructure they do not directly own, including MBNL, a network-sharing joint venture between BT and Three. As it makes clear in its latest submission, BT would be against the substitution for Three in MBNL of an unknown third party – one, it says, that might have "a questionable long-term commitment to the UK."

If structural remedies (apart from prohibition) are not quite off the table, they have been pushed to the edge of it. That leaves the CMA with the alternative of behavioral remedies, which always looked dubious. While more attention has been given to the possible monitoring of prices charged by Vodafone and Three, the most risible – and the one the merging operators would seemingly most welcome – is the proposed supervision by Ofcom, the UK telecom regulator, of their investment commitment. It is hard to disagree with BT's view that such a remedy "would be too simple to be effective, or if sufficiently designed would be too incapable of being monitored or enforced effectively."

There were problems with this investment commitment even before the CMA weighed in. Vodafone and Three have implied the £11 billion would go wholly toward the rollout of a nationwide 5G standalone network. But this is not true. As the small print shows, it is merely a reference to headline capex invested by the new entity over a ten-year period. That would mean an annual investment of £1.1 billion, which would not be a substantial increase per site on what Vodafone spent last year.

A damn good thrashing

Simply ensuring Vodafone and Three meet this commitment would therefore be a waste of Ofcom's resources. "Measuring capex is an input. What the regulator needs to measure is the outcome or the output," said James Crawshaw, a principal analyst with Omdia (a Light Reading sister company), on a recent Telecoms.com podcast. "What's the benefit for the consumer? The amount of capex is the wrong thing to be looking at. It could be fudged. You could be spending that capex on Nvidia GPUs [graphical processing units], if you wanted."

Inviting Ofcom to be a monitor of the investment commitment and the merged entity's pricing is also curious. As BT points out, the regulator "has never previously been asked to regulate retail prices," a lack of experience that would surely disqualify it from performing that job in a proper meritocracy. If Vodafone and Three fall short of their spending pledge, what would be the penalty? A Basil Fawlty-style thrashing? A crippling fine or revocation of licenses would hardly accelerate UK 5G. For that reason, the investment commitment looks unenforceable.

All this is likely to explain why Vodafone and Three seem to have no problem with this specific behavioral remedy. In BT's words, "the Merged Entity may suspect that the regulator will be reluctant to impose penalties at a level sufficient to be dissuasive, since paying these could reduce resources available to invest in its network or ultimately be passed through to consumers."

None of this necessarily means the merger would be a bad thing for the UK's 5G market and its various users. Omdia's Crawshaw is among numerous analysts who believe three mobile networks is enough to preserve a good level of competition. After their merger, Vodafone and Three would have to invest in 5G to avoid losing customers to BT and upsetting shareholders, according to others. With improved returns, the tie-up would be in a stronger position to fight back, they say. Unfortunately, some of the possible concessions held out by the CMA risk doing more harm than good.

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About the Author

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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