With varying support for an investment commitment, there are concerns that behavioural measures might not address the competition issues identified by the CMA
Respondents are split on the proposed investment commitment, but more aligned in their criticism of retail and wholesale remedies
The Competition and Markets Authority (CMA) has published responses to the notice of possible remedies issued during its ongoing review of the proposed Three/Vodafone merger in the UK. The notice itself identifies three potential behavioural remedies:
Investment commitment requiring the parties to deliver on the network investments outlined in their joint business plan (JBP);
Time-limited retail market protections for customers during the initial years of network integration and rollout under the investment commitment; and
Wholesale market remedies such as pre-agreed terms or capacity for MVNOs that could be combined with the investment commitment.
In addition to Assembly’s own response, the CMA has published those from the parties, BT and Virgin Media O2, as well as submissions from other stakeholders, including Community Fibre, Sky and Which?. Generally speaking, Three/Vodafone and Virgin Media O2 appear on the same page regarding the proposed remedies – and in some cases on the expected impacts of the merger. While respondents’ views diverge on the investment commitment, there is broad criticism of the CMA’s retail and wholesale measures, albeit for different reasons. BT also reiterates concerns it outlined in response to the Phase 2 issues statement that the merger would: i) create an operator with a disproportionate share of total mobile capacity and spectrum; and ii) frustrate the workings of MBNL, its network sharing joint venture with Three. BT believes these concerns remain valid and urges that they are addressed through remedies (despite them not being significant competition issues in the CMA’s provisional findings).
Three/Vodafone and Virgin Media O2 largely support the investment commitment, although BT and Which? are doubtful
While Three and Vodafone argue that the investment commitment – i.e. the promise of £11bn in network capex – represents the “most appropriate, effective and proportionate” remedy. The parties state it would drive rivalry-enhancing efficiencies (REEs), deliver customer benefits and could be reflected in a change to the merged entity’s spectrum licences (for Ofcom to monitor and enforce). Therefore, with this commitment, no additional remedy would be required. BT does not believe that REEs from an investment commitment would address the competition issues brought about by the structural loss of a retail and wholesale rival. It considers that this commitment is merely a pledge to deliver the JBP, which the CMA is rightly sceptical of but is still (incorrectly) consulting on time- and scope-limited measures to resolve a continuing and wide-ranging problem. BT adds that the investment commitment suffers from an “irreconcilable tension” between the need for detailed specification to reduce the risk of circumvention and the market distortions resulting from such specification.
Consumer organisation Which? also communicates its concerns about how monitoring and enforcement would successfully incentivise compliance with the investment commitment while not leading to a loss of consumer welfare, suggesting Ofcom would need a bespoke penalty regime to deter the parties from adjusting capex plans in the future. Unite the Union is similarly dubious about this remedy, pointing to Australia (where it claims investment has declined 45% over the last five years) as a warning of what could happen in the UK. In contrast, Virgin Media O2’s tone is noticeably more upbeat on the investment commitment, downplaying circumvention and monitoring risks, and instead focusing on how it could be implemented and the KPIs that may need to be reported to the regulator to ensure effective oversight. According to Community Fibre, an investment commitment should be focused on coverage, capacity and congestion, with the requirement to achieve recognisable performance metrics, e.g. download/upload speeds and latency.
Stakeholders are unconvinced that retail customer protections will be particularly effective, while it is unclear how long they should remain in place
Three and Vodafone disagree with the need for time-limited protections at the retail level, asserting that the CMA’s merger simulation is flawed and takes no account of the deal’s projected REEs. They have, however, proposed a package of commitments covering the first two years of network integration, which includes maintaining prices for value-focused customers, preserving social tariffs and protecting vulnerable end users. In Virgin Media O2’s view, the merger together with the “Beacon 4.1 Agreements” (i.e. the extension of Vodafone and Virgin Media O2’s network sharing agreement and the transfer of spectrum from the merged entity to Virgin Media O2) will ensure that retail competition continues to be effective. It considers that the merged entity’s provision of social tariffs could help protect end users during network integration, and that this could be accompanied by an obligation to engage in promotional activities to encourage adoption among eligible consumers.
According to BT, the time-limited retail protections suggested by the CMA would not address the substantial lessening of competition (SLC) it has identified or be appropriate for such a fast-moving market. BT states that retail level behavioural remedies would need to be far more meaningful and complex than allowing customers to ‘roll over’ existing contracts or maintaining social tariffs; however, imposing more prescriptive price or other outcome-focused remedies for a given period of time would raise the risk of serious market distortions, including artificially high prices, which may become more distortive the longer they are in place. It is not obvious for BT what the end date for the CMA’s proposed interventions would be, with Which? considering that their duration should be commensurate with that of the relevant SLC. Which?’s response focuses on temporary retail protections, raising concerns that allowing customers to roll over contract terms would not benefit prepaid customers nor those on monthly rolling contracts, who are over-represented among the subscriber bases of the parties’ sub-brands Smarty and VOXI. The consumer group also advocates a bespoke remedy on social tariffs given that these low-cost plans are currently provided by industry rather than being regulated by Ofcom.
Community Fibre conditionally supports a capacity-based wholesale remedy, but mobile operators do not consider it would be beneficial or practicable
The parties do not consider there is a need for a specific wholesale remedy as the transaction is likely to increase upstream competition rather than decrease it. Virgin Media O2 agrees, stating that the merger and the Beacon 4.1 Agreements would deliver benefits for its wholesale customers – including Tesco Mobile and Sky Mobile – while giving it an incentive to compete aggressively to fill its expanded capacity. Professor Stephen Temple (an academic from the University of Surrey’s 5G/6G Innovation Centre) adds that the argument that successful MVNOs will be disadvantaged by the merger “looks marginal”. Should the CMA have residual concerns about this market, Three and Vodafone consider that pre-agreed access terms could form the basis of a suitable commitment. For three years following completion, the merged entity would make a Wholesale Reference Offer available to MVNOs with <2.5m customers on pre-agreed terms. However, Sky argues that such public, standardised wholesale offers would not “stand the test of time” and could significantly distort the market and undermine competitive access negotiations, which tend to rely on a dynamic, non-transparent tendering process. BT states that pre-agreed access would not address the identified SLC and suggests that it would not be sensible for the CMA to try to replace complex market-based decisions with a “one-time regulatory imposition” based on its judgement on marrying MVNO demand and supply.
On the potential reservation of capacity for MVNOs, there is general agreement among the UK’s principal mobile operators. Three and Vodafone claim that this remedy would reduce or eliminate REEs stemming from the merger, and face technical barriers, while Virgin Media O2 considers it carries the risk that scarce spectrum resources lie unused, which would be economically inefficient. BT does not believe that capacity ring-fencing would be effective or practicable, while Sky poses a number of questions about how it would be designed or operate. In contrast, Community Fibre is more positive on such a remedy so long as the capacity available is sufficient, it supports MVNO growth and is priced correctly.
A partial asset sale to facilitate a new entrant is widely unpopular, with some respondents preferring to see the merger blocked outright
Respondents also discuss the potential sale of some of the merged entity’s combined assets to create a new fourth operator. Such a structural remedy would be illogical and recreate the problem the transaction is trying to solve. Encouragingly, the CMA’s provisionally dismisses this option as ineffective. BT, Sky and Virgin Media O2 agree, with the parties adding that partial divestiture would undermine the customer benefits the merger would deliver. Community Fibre believes that the investment commitment is preferential to a partial asset sale, in which the buyer will be subscale and always at an economic disadvantage. Temple states that forcing the merged entity to divest low-band spectrum would harm consumers, while requiring the divestment of mid-band (3.6GHz) spectrum would not be especially helpful to a new entrant. However, certain stakeholders – e.g. Balanced Economy Project and Unite the Union – indicate that their preferred remedy to this deal would, in fact, be prohibition. Despite Virgin Media O2 warning that blocking the merger would be disproportionate and highly costly, Sky states that prohibition would be an effective remedy and one that’s needed if the UK wants to retain a thriving and competitive mobile market. BT does not believe that behavioural remedies (which even the CMA does not tend to favour) would address the competition issues identified, while also causing distortions affecting competition and consumers. Accordingly, it considers that prohibition is the only viable and proportionate remedy. While the parties’ package of commitments fulfils the main proposals of the notice, the CMA acknowledges that blocking the merger would represent a comprehensive solution to the SLCs it has found, indicating a final push from Three and Vodafone is needed if the review is to stay on track and ultimately get over the line come the final decision in December.
