Proposed Vodafone-Three merger will happen but likely in 2025

• Merger could make it harder for MVNOs to secure competitive deals which may reduce their ability to offer competitive rates to customers.
• CMA will explore potential solutions to its concerns before final decision by December 7.
• CMA is soliciting input on potential remedies to address its significant competition concerns.

The prospective £16.5 billion telecom merger between Vodafone UK and CK Hutchison’s Three UK represents a watershed moment in the UK telecommunications landscape, a sector already characterised by rapid evolution and intense competition.

The merger, anticipated to create a dominant mobile network operator with a combined customer base of 27 million, is now facing delays pushing into 2025, Dario Betti, CEO of the Mobile Ecosystem Forum, said.

“Vodafone and Three UK argue that the merger would actually strengthen competition by creating a stronger third player, capable of challenging market leaders like BT’s EE and Virgin Media O2.”

However, the primary concern identified by the Competition and Markets Authority (CMA) is that the merger could adversely affect both pricing structures and service quality for consumers, posing significant questions about the future of competition within the market.

Intricate balancing act

“The CMA’s cautious stance reflects an intricate balancing act between the need for competitive pricing and the pressing demand for investment in infrastructure—particularly in advancing 5G networks,” Betti said.

The regulator’s provisional findings from a comprehensive investigation suggest that the merger could lead to increased costs for mobile customers or a downgrade in service provisions, particularly detrimental to the most vulnerable demographics.

The reduction in the number of mobile network operators from four to three raises substantial concerns regarding increased market consolidation and its impact on retail and wholesale markets, particularly for Mobile Virtual Network Operators (MVNOs).

Stuart McIntosh, chair of the inquiry group, said that the CMA has meticulously weighed the potential benefits of enhanced network quality against the risks of diminished competition.

This prudence is commendable; however, it raises fundamental questions regarding the regulatory framework guiding telecommunications in the UK.

As Betti aptly noted, this situation invokes a broader discourse: Should telecom services be regulated similarly to utility services, focusing on price control, or should they embrace a more liberalised market where innovation thrives unchecked?

Rising communication costs

A critical aspect of this debate is the emergence of Big Tech companies, which are increasingly integral to the telecommunications ecosystem, overshadowing traditional mobile service providers.

Additionally, Betti highlights the inevitability of rising communication costs, driven by the growing demand for advanced technologies within Europe.

“The pressing inquiry is not merely whether consumer bills will escalate but rather who will be the beneficiaries of these payments—traditional mobile operators or internet-based companies. This distinction underscores a significant shift in how telecommunication services might be conceptualised and delivered moving forward.”

Comparative analysis with other European telecom markets, such as Vodafone Italia’s prospective sale to Fastweb, he said reinforces the notion that the shifting dynamics of telecom mergers are not confined to the UK.

The ongoing deliberations in various jurisdictions presage a tide of transformative changes across the industry. The anticipated Vodafone-Three merger, along with similar proposed consolidations, signals a reorientation within the communications sector that warrants close examination.

Potential remedies

In light of its preliminary findings, the CMA is soliciting input on potential remedies to address its significant competition concerns. These concerns revolve around the potential impact of the merger on both retail and wholesale customers, as well as the overarching competitive landscape in the telecommunications sector.

One of the principal remedies under consideration includes legally binding investment commitments, which would be monitored by the sector regulator. Such measures are crucial to ensuring that the merger not only complies with regulatory standards but also fosters a competitive environment that benefits consumers.

The CMA emphasises the importance of protecting retail customers—who directly experience the effects of market consolidation—as well as wholesale customers, who play a vital role in the supply chain.

The CMA has made it clear that it retains the authority to prohibit the merger should it determine that no suitable remedy can sufficiently alleviate its competition concerns.

This underscores the gravity of the situation and the imperative of securing competitive market conditions. As expressed by McIntosh, the CMA will rigorously evaluate how Vodafone and Three can mitigate its concerns while simultaneously working towards the potential long-term benefits of the merger, including the assurance of future network investments.

To facilitate a thorough review, the CMA has set deadlines for collaborative inputs, inviting responses to its provisional findings by October 4, 2024, and feedback on possible remedies by September 27, 2024. These contributions will play an essential role in shaping the final report, which is slated for release by December 7, 2024.