Responding to the CMA’s critical Phase 1 assessment, the parties emphasise that the deal will be pro-competitive, enhancing network performance and benefiting consumers
The UK lags behind other European markets
On 14 June 2024, the Competition and Markets Authority (CMA) published the initial submission made by Three and Vodafone to the Phase 2 review of their proposed merger in the UK. The merging parties believe that the CMA’s Phase 1 investigation – which concluded (unsurprisingly) that the deal warrants in-depth scrutiny – does not take into account that the prevailing state of competition is not delivering good outcomes for consumers. Absent the transaction, they argue that the UK will continue to lag behind other European countries in terms of network quality and will fall short of the Government’s 5G ambitions. Three and Vodafone submit that, compared to rivals BT/EE and Virgin Media O2, they are sub-scale, unable to invest sufficiently in their networks and (citing Ofcom data) each earn below their cost of capital. This is now familiar messaging that Three and Vodafone have made publicly, particularly at financial results; however, the CMA’s Phase 1 analysis of the parties’ recent financial performance and internal documents suggests both operators are today viable and competitive businesses.
The CMA has mischaracterised competition in the retail mobile market
Responding to the CMA’s three theories of harm in turn, Three and Vodafone first contend that the Phase 1 decision does not reflect – even mischaracterises – the real conditions of competition in the retail mobile market, stating that neither operator is a significant competitive force, with Three hampered by a “long-standing reputation for poor network quality”. The parties argue that switching data undermines the CMA’s belief that Three and Vodafone are each other’s closest competitors, and disagree with the authority’s view that smaller operators have relatively stronger incentives to compete aggressively (for subscriber and revenue growth), pointing again to a lack of scale that hinders their ability to compete in a meaningful way. They also submit that the Phase 1 findings downplay the competitive constraints driven by: BT/EE and Virgin Media O2 due to their financial strengths, high market shares and converged propositions; and by fast-growing MVNOs, noting in particular Sky Mobile’s strong brand, cross-selling opportunities and expanding pay monthly customer base. Adding that the transaction would add significant capacity to the market and trigger a response from the two current market leaders, Three and Vodafone therefore state that the merger would not give rise to a substantial lessening of competition (SLC) due to horizontal unilateral effects in the retail market.
The merged entity would compete more aggressively to host MVNOs
Secondly, the parties argue that the Phase 1 decision overstates Three’s position as an “active participant in the supply of wholesale mobile services” and that they are not close competitors in this market, which is reflected in limited overlap in the tenders they have participated in and in the fact they lost out on the Sky Mobile contract for different reasons. Three and Vodafone consider that the proposed tie-up would not lead to an SLC due to horizontal unilateral effects at the wholesale level and that the CMA has not taken into account the very strong constraint BT/EE and Virgin Media O2 will have on the merged entity, nor the substantial and increasing bargaining power that MVNOs use to negotiate terms with a host network. The parties also assert that the theory presented at Phase 1 that larger mobile operators are not incentivised to bid for MVNO contracts due to the risk of retail cannibalisation is not supported by the evidence, highlighting the revenue and cashflow benefits of hosting MVNOs, and the importance of wholesale business to BT/EE. Three and Vodafone state that together they would have an enhanced ability (via greater network capacity and quality) and incentive to compete for wholesale traffic.
The merging parties would have neither the ability nor the incentive to disrupt either of the two network sharing agreements
Thirdly, the parties state that the deal will not result in an SLC due to the merged firm’s presence in the UK’s two network sharing agreements, Beacon and MBNL, describing the concerns raised by the CMA in its Phase 1 decision as “unfounded”. They argue that a combined entity would not be able to disrupt BT/EE through MBNL – something BT submitted to the CMA that it very much sees as likely – given the non-exclusive nature of the agreement, which BT/EE and Three intend to reform and scale back until it is terminated in 2031. Three/Vodafone would also not have an incentive to frustrate BT/EE through MBNL, the costs and consequences of which would outweigh any alleged benefits. Similarly, the operators together would not have the ability to disrupt Virgin Media O2’s rollout plans through Beacon (e.g. via increased network access charges), and would actually be incentivised post-merger to work together with their network sharing partner, engaging in a “strategy of mutual cooperation”. The parties also reject the “unrealistic” expectation that their presence in both Beacon and MBNL would lead to increased sharing of commercially sensitive information, for which strict contractual safeguards are in place, and to a reduction in industry investment, maintaining it would increase in future by upsetting the current “low-investment equilibrium”.
A step change in network capacity and quality
Three and Vodafone ultimately – and quite naturally – conclude that the transaction would provide them with the necessary scale to deploy a “best-in-class network to compete with rivals and win customers”. They claim they would also have the incentive to do so in order to drive operational efficiencies, cost savings and commercial benefits, while BT/EE and Virgin Media O2 would also face pressure to invest more in their own networks. With the CMA’s Phase 1 decision clearly demonstrating scepticism about the potential benefits of the tie-up, the parties underline that the step change in network capacity and quality resulting from the merger is verifiable and supported by detailed economic modelling. They detail how the deal would deliver positive outcomes for consumers, including tackling the urban-rural divide in mobile connectivity and achieving the ambition for nationwide standalone 5G outlined in the UK’s Wireless Infrastructure Strategy. While this will be music to the Government’s ears, it is up to the CMA to determine whether it is “more likely than not” that a SLC will result from the merger. Three and Vodafone’s initial submission – coupled with stakeholder responses to the issues statement – provides the CMA with plenty of material to chew over ahead of the upcoming oral hearings in July.
