The potential for constituents’ bills to increase appears to be of primary interest to MPs, with concerns also about the effects on investment and employment
Merging parties outline the benefits of the deal
On 17 October 2023, the UK Parliament’s Business and Trade Committee held a hearing on the proposed Vodafone/Three merger. MPs first questioned senior representatives from the two operators on the commercial merits of the deal, to which Nicki Lyons (Corporate Affairs and Sustainability Director, Vodafone UK) restated the parties’ assertion that the merger would deliver benefits for competition, consumers and the country as a whole. Her colleague Andrea Donà (Network and Development Director, Vodafone UK) added that combining the operators’ spectrum would yield an immediate service quality improvement for around 7m customers, while the increased scale of the merged firm would enable it to better tackle mobile not-spots and roll out 5G Standalone. David Hennessy (CTO, Three) predicted considerable synergies arising from the deal, as well as a lower duplication of investment in cities that is currently happening at the expense of rural areas.
Does having fewer players mean more competition and investment?
On the consequences of the merger not going ahead, Stephen Lerner (General Counsel and Regulatory Affairs Director, Three) stated that Three was in a “vicious cycle”, with its cost of capital (8%) greater than its return on capital employed (1%). He – and other witnesses – argued that the UK is home to an emerging duopoly of BT/EE and Virgin Media O2, with two subscale players unable to keep pace. With the UK trailing many of its peers in terms of both 5G coverage and speed, Lerner and Hennessy considered that there were risks to consumers and the economy if industry cannot invest sufficiently. After one MP questioned how three mobile network operators would mean more competition than four, Lyons stated that the enlarged entity (with its £11bn capex commitment) would prompt others to invest more than would be the case absent the merger. Tommaso Valletti (Professor of Economics, Imperial College London) later disputed this, stating there is no evidence that consolidation means more investment. Karen Egan (Head of Mobile, Enders Analysis) offered a middle ground, stating that while studies indicate that overall levels of capex stay the same post-merger, operators are able to invest in a more targeted way – seemingly backing up Hennessy’s earlier point on bridging urban-rural divide. Donà also noted that a combined Vodafone/Three would be well-equipped to deliver “fibre-like speeds” via fixed wireless access (FWA), which would drive competition in the residential broadband market.
The potential impact on retail prices took centre stage
The effect of the proposed merger on prices was a major focus of the hearing and arguably the main point of contention, with several references to the impacts seen in Australia following a similar combination. Lerner stated that price rises are not planned and were not part of the Vodafone/Three transaction rationale, and that they would not be in the interest of the merged entity. Instead, the capacity uplift from the deal would provide an incentive to fill the network with traffic, which would mean pricing competitively. However, this issue clearly divided witnesses in the second half of the session. Valletti stated that his research shows that prices increase (16% on average) after a merger, calling into question the credibility of some other studies, which he labelled as “lobbying or advocacy”. George Stevenson (Bargaining and Investigative Researcher, Unite the Union) then warned that combining Vodafone and Three in the UK would raise average bills by up to £300 per year, and that the firms simply want a shortcut to increase profit margins and dividends. Egan appeared unconvinced by these figures, stating that there is no evidence that OECD markets with four players have lower prices than those that are more concentrated. Jorge Padilla (Senior Managing Director, Compass Lexecon) went a step further, citing a report from the Australian Competition & Consumer Commission (ACCC) that noted prices fell after the merger. Padilla continued to clash with Valletti on pricing, calling his work dated and stating that research on merger effects should also take account of “what you pay versus what you get” (e.g. cost per GB). Valletti conceded that prices have fallen over time, but considered it most relevant to assess how much they would have declined without market concentration.
MPs and Unite concerned about the prospect of job losses
A further line of questioning (and area of concern for some MPs) related to employment effects. Stevenson quoted a Unite estimate that the merger would lead to between 1,000-1,600 job cuts across the two firms. Lyons stated that neither Vodafone or Three are in a position to outline the employment impact at this stage, but she and Donà both foresaw job creation stemming from the process to combine the two mobile networks and from subsequent infrastructure investment. Lerner also agreed with the Vodafone representatives about the merger’s positive knock-on effects on the economy, anticipating that better and far-reaching 5G connectivity would drive productivity gains and employment opportunities.
Differing opinions on the importance of MVNOs
Throughout the hearing, some noteworthy comments were also made with respect to the competitive pressure exerted by MVNOs. Lyons and Padilla referenced the established presence of MVNOs in the UK, which now have around a 16% market share and tend to price aggressively. Donà stated that 90% of MVNOs are hosted by BT/EE and Virgin Media O2 because they have the necessary scale, while Egan felt that MVNOs had marginalised the Three network in the past. Both considered that the merger would stimulate competition and choice at the wholesale level given the additional capacity that would become available. Lerner added that it is the position of MVNOs that sets the UK apart from other countries (e.g. Australia), suggesting that it may not be appropriate to view the proposed Vodafone/Three deal as a four-to-three merger in the strictest sense. Valletti, however, disagreed, urging MPs not to over-emphasise the role of MVNOs given that their share of total revenue is much lower than their hosts. After all, the merger is an exit from the market rather than an entry, which will ultimately lead to less choice for the MVNO community.
