Together with a balancing of spectrum across industry, the announcement boosts the chances of a Three/Vodafone merger
The new agreement will extend Cornerstone for more than 10 years
On 3 July 2024, Vodafone and Virgin Media O2 announced that they had agreed to extend and enhance their existing mobile network sharing agreement – Cornerstone – for more than a decade, with the aim of improving coverage and services across the UK. The agreement is expected to not only benefit consumers and businesses, but also MVNOs, which will have access to a higher capacity network across a wider grid of sites. Cornerstone was set up in 2012, pooling O2 and Vodafone’s masts in order to support their provision of 2G and 3G services, with infrastructure replaced over time as technologies evolved. Vodafone has transferred its part of the venture to Vantage Towers, while Virgin Media O2 sold a minority stake to investment fund GLIL Infrastructure.
Virgin Media O2 would acquire spectrum from a merged Three/Vodafone
While many elements of the agreement are independent of the outcome of the proposed Three/Vodafone merger (which the Competition and Markets Authority (CMA) is currently reviewing) the agreement could provide a “stable basis” for the merged firm’s combined network to participate in Cornerstone, while Virgin Media O2 will acquire spectrum at “market value” from the newly created company. As things stand, the merged entity would own 46% of total spectrum below 6GHz, BT/EE would hold 32% and Virgin Media O2 would hold 22%. The biggest asymmetry would be in C-band spectrum (i.e. 3.4-3.8GHz), where Three/Vodafone would have 59% – see Figure 1.
The CMA’s Phase 1 decision did not explicitly highlight this imbalance as a major competition concern; however, it recognised the scope for different spectrum holdings to influence an operator’s reliance on, or incentives to cooperate in, a network sharing agreement and even the potential for them to frustrate their network sharing partner as a result. A transfer of frequencies from the merged entity would help rebalance the UK’s mobile market by establishing three scaled network operators, each with a more closely aligned spectrum holding, which can compete at the retail level while supporting the MVNO segment. Although it is unclear what kind of realignment the CMA might want to see, it has stated that mobile operators require a balance of spectrum to provide both coverage and capacity, with the latter a key determinant of network quality. The C-band is particularly valuable, and even considered optimal for delivering 5G services.
The CMA likely to seek additional commitments to mitigate the impacts on competition – particularly if BT’s concerns are to be appeased
While details on the spectrum band(s) or amount that would change hands post-merger remain unknown, Lutz Schüler (CEO, Virgin Media O2) has expressed confidence that the announcement addresses the issues Virgin Media O2 has voiced in relation to the transaction, as well as those set out by the CMA following its Phase 1 review. This initial investigation identified theories of harm stemming from competition concerns in the retail market, in the wholesale market and due to the merged entity’s involvement in both network sharing agreements (Cornerstone and MBNL). The agreement and spectrum sale should boost Three and Vodafone’s case for the tie-up, but it is unlikely to be sufficient on its own to fully appease the CMA. The future of MBNL will need to be determined, particularly in light of BT’s expectations that it would be harmed by the merger, while the CMA will probably seek further commitments (e.g. guaranteed wholesale capacity for MVNOs and/or a commitment not to raise prices) to help offset the potential impacts on competition and consumers.
