Vodafone-Three merger concerns aren't resolved by deal with VMO2

A spectrum sale to Virgin Media O2 would still leave a big C-band imbalance, and network sharing remains an issue.

Iain Morris, International Editor

July 3, 2024

4 Min Read
Man using tablet
Vodafone says the UK will fall behind in 5G unless it can merge with Three.(Source: Vodafone)

Should Vodafone and Three be allowed to merge their UK operations, the enlarged telco will straddle the country's two network-sharing joint ventures (JVs): MBNL, an arrangement between BT and Three; and CTIL, which today includes Vodafone and Virgin Media O2 (VMO2). It would also sprawl across the midband spectrum that telcos use to provide their 5G services.

Both are sore points for BT, the current market leader, as well as the Competition and Markets Authority (CMA), the UK body investigating the merger. Vodafone, then, has today announced a deal with VMO2 to address some of the concerns. But there is no guarantee it will have the desired effect.

BT's concerns were spelt out in May when it published its detailed objections to the planned merger. Without remedies, Vodafone-Three would have a "disproportionate share of capacity and spectrum," it said, arguing the imbalance would "substantially lessen competition and deter investment." The newly created operator might also "have significant visibility as to the network upgrades and/or launch of new technologies planned by BT and VMO2," BT complained. Such knowledge of rivals' plans could be damaging, as the CMA has recognized.

But if the CMA gives a thumbs-up, Vodafone, with a 51% stake in the venture, has now promised to sell some of its vast spectrum estate to VMO2. In its words, this move will create "three scaled mobile network operators each with better alignment of spectrum holding."

No symmetry without BT

What is not stated in today's press release is just how much spectrum Vodafone-Three would be prepared to relinquish. Combined, they would currently hold about 46% of all sub-6GHz spectrum licensed to UK telcos, according to the CMA. In the important C-band range around 3.5GHz, their share rises to 59%, leaving BT and VMO2 with about 20.5% each. 

The trouble is that C-band symmetry cannot feasibly be established without involving BT, which is not a party to the new deal. Together, Vodafone-Three and VMO2 would have about 80% of the UK's C-band spectrum. Even if a divestment left each player with an equal 40% share, the company with the most extensively deployed 5G network would obviously be much worse off.

"While BT's current 32% of spectrum won't change and is reasonable in a three-player market, they might argue that they are short of lower-band spectrum (important for coverage) and 5G spectrum (important for capacity)," said Karen Egan, the head of telecoms for Enders Analysis, in a LinkedIn post today.

Besides issuing this promise, Vodafone has also extended its CTIL agreement with VMO2 for "more than a decade." Under the new arrangement, the "enlarged network" will be a participant in CTIL. There has not, however, been an equivalent update regarding MBNL. The agreement there between BT and Three does not expire until 2031. But a similar renewal or extension would prolong Vodafone-Three's involvement in both JVs – the competitive problem BT refers to as "the frustration concern."

To an outsider, the easiest fix would seem to be Three's withdrawal from MBNL, and Vodafone's commitment to CTIL implies this is now a consideration. Yet BT attaches significant value to the agreement with Three that expires in 2031. Unwinding MBNL, it seems, would also be trickier than abandoning CTIL. The latter effectively splits the UK in two and gives each telco lead responsibility for one half. MBNL appears to involve more sharing in the strict sense of the word.

The £11B pledge

Vodafone and Three insist their merger is needed if the UK is to have a 5G network that matches the best in the world. In a four-player market, the return on capital employed for smaller telcos with fewer customers falls below the weighted average cost of capital, they have argued.

The consequence is that operators do not invest, and recent data from Ericsson shows midband 5G population coverage across the mainly four-player European region is just 30%, compared with more than 90% in China and the US. Post-merger, Vodafone and Three have promised to spend £11 billion (US$14 billion) on blanketing the UK with a 5G standalone network.

Senior technology executives this week argued that today's networks won't be good enough to support artificial intelligence applications on devices or at the edge. "Capacity is probably not going to be an issue," said Scott Petty, Vodafone's chief technology officer, during a press briefing at Vodafone's London offices. "Latency is much, much more important."

"The time it takes for that data to get up and back will dictate whether you're happy as a consumer to use that interface as your primary interface and the investment in latency is going to be critically important," he said. "We're fortunate that 5G standalone drives low latency capability, but it's not deployed at scale. We don't have ubiquitous coverage. We need to make sure that those things are available to enable those applications."

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About the Author(s)

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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