Lessons from a merger

Vodafone and Three announced their intention to merge in June 2023. The merger was assessed by the UK’s Competition and Markets Authority (CMA) and was cleared, subject to commitments, in December 2024. Whilst the CMA assessment was predominantly about the facts of the case, there was a broader context that provided an important undertone.

Firstly, in April 2023 the UK government launched its Wireless Infrastructure Strategy.¹ A key element of the UK’s investment and innovation agenda, the strategy had the deployment of 5G standalone networks at its heart. This was followed by a strategic steer to the CMA to focus on sustainable growth and productivity and enhance the UK’s position as a leading global destination for investment.²

Secondly, the UK’s communications regulator, Ofcom, had assessed the UK communications market and concluded that there were two operators (BTEE and VMO2) at scale and two operators (Vodafone and Three) that were sub-scale.³ Ofcom highlighted the potential implications of this:

‘There is also a risk that competition among MNOs (mobile network operators) weakens. This could happen if one or more of the smaller MNOs become weaker competitors, and are less able to exert a strong price constraint on other operators. A weakened MNO may also be less able, or have less incentive, to invest as fully in its network than a larger, stronger player. If so, it may opt to scale back investment to reduce its costs, which could affect its future quality of service and potentially its ability to retain or gain market share. In turn, this may weaken the incentives of rival operators to invest in improving their networks, leading to weaker competition and poorer outcomes for customers.’

Thirdly, there were concerns that the UK was performing poorly in the global rankings on mobile network performance on 5G availability and average download speed on mobile networks as shown in figure 1 below.

Figure 1: 5G availability (% of time), Q4 2023.⁴

Figure 2: Mobile average download speed (Mbps), Q3 2024.⁵

The proposed merger

The proposed merger between Vodafone and Three was announced with the promise that it would be ‘great for customers, great for the country and great for competition’.⁶

Customers would enjoy a better network experience from day one at no extra cost, with better coverage, more capacity and faster download speeds. 

The £11 billion network investment would result in a best-in-class 5G standalone network supporting job creation and the country’s digital transformation. And by creating a third operator of scale, it would intensify competition between mobile network operators and give more choice to MVNOs (mobile virtual network operators).

In essence, the merger would constitute a huge expansion in the supply and quality of mobile connectivity, lower the incremental cost of providing service, and give more value to customers. This would be achieved through the multiplicative effect of combining the networks. The new network would have more sites and more spectrum available at each site, resulting in over 60 per cent more capacity than the sum of the two networks absent the merger.

The conditions of approval

Following an extensive assessment by the CMA, the merger was approved with conditions in December 2024. Whilst the CMA was concerned that there could be some consumer harm in the form of higher prices from the merger, they concluded that the joint network plan of the parties constituted a rivalry-enhancing efficiency that would offset any harm that might materialise.

However, the CMA had two concerns that shaped the commitments offered by the parties in order for the deal to be approved:

• Did the parties have the incentive to deploy the full network plan, or would they go for a scaled-back scenario once the deal had been approved?
• Given the amount of time it would take to integrate the two networks (which was the basis for the joint network plan), would there be any short-term consumer harm?

To address these concerns, the parties offered three core commitments:

1. Investment to enable the deployment of a certain number of sites and spectrum in different geotypes (urban, suburban, rural) over an eight-year period.
2. No increase in the price of several tariffs in the retail market for an interim period of three years, or achievement of the first network commitment milestone – whichever is the longer.
3. A rollover of the terms and conditions of existing MVNO contracts as well as providing a reference MVNO wholesale offer of up to five years duration for the same length of time as the retail pricing commitment.

It is also important to note that, as part of the deal, the parties agreed to sell spectrum to VMO2 as part of an updated network sharing agreement. This eliminated any concerns about anti-competitive spectrum asymmetries.

The commitments package represents a carefully struck balance. Firstly, the need for short-term measures to protect consumers without undermining the ability of the operators to invest in the network transformation. And secondly, the need to ensure the network transformation materialises without regulating market outcomes. As described by the CMA:

‘a quasi-structural measure that works with the grain of competition. A measure that ensures market set-prices and offers rather than regulated ones.’

Implications for EU merger policy

The clearance of the UK merger, and the investment that it will unlock, shines a light on critical aspects of merger policy. Below are four key implications that are relevant in all geographies but particularly in the EU as it is currently consulting on how to revise its merger guidelines.⁷

Efficiencies and other benefits: Merger guidelines should provide clearer approaches on how to address efficiencies in investment intensive and highly dynamic sectors. The time horizon to deliver on efficiencies linked to network investments should be longer. This may require guidance on how to consider efficiencies so that these are consistent with the usual investment cycles in each sector or industry.

Remove the preference for structural remedies: The strong preference for structural/divestment remedies as set out in the EU’s merger remedies notice should be removed. This would ensure that market structures that cannot deliver the investment needed for the timely transition to next generation mobile connectivity do not become entrenched.

Role of NRAs: Guidance should be provided on how the experience of sector-specific regulators can be leveraged in the implementation and enforcement of remedies requiring monitoring. The telecoms sector, with the enhanced competencies of the sector-specific regulators, is well placed to serve as a benchmark.

Broader benefits/least intrusive remedy: In the EU, the current proportionality test is focussed on measuring the proportionality of a remedy simply by reference to whether it addresses the identified competition harms. It should be extended to include consideration of the impact of remedies on relevant customer benefits and other transaction efficiencies. There should be a related rule that the least intrusive/costly remedy should be accepted, so long as it fully addresses the relevant competition concerns.

The joint network plan of the parties constituted a rivalry-enhancing efficiency that would offset any harm that might materialise.

Implication for telecoms policy more broadly – the need to ensure generational shifts

The lessons from the UK merger are not limited to merger policy. The process has also highlighted the benefits that customers get from higher capacity and higher quality networks. It has also shown how market conditions and policy decisions that hold back investment in next generation mobile connectivity are the real source of consumer harm. In this regard, there are three policy areas that need to be carefully appraised:

Spectrum: Spectrum policies should be supportive of investment. In particular:

• There should be no unnecessary spectrum fragmentation, either to support inefficient market entry or to support marginal use cases (e.g. private networks)
• Spectrum fees should represent the opportunity cost of using the spectrum for an alternative use rather than a tool to extract the maximum value (including the value of sunk assets) of its use in mobile networks
• Obligations akin to ex ante regulation should only be imposed through established market analysis procedures.  To the extent spectrum licences have obligations associated with them, they should be to ensure investment that optimises the utilisation of the allocated spectrum.

Open internet regulations: Open internet regulations were typically implemented at a time when voice was the predominant use of mobile networks, with data an important and growing add-on.  But the use of networks has fundamentally changed, with customers gaining access to online content in a variety of ways and network operators seeking to sell customised connectivity solutions to businesses and customers.

Open internet regulations are highly prescriptive and applied only to network operators and not the platforms which also control consumers’ internet experience. This creates a lack of regulatory certainty in relation to the permissibility of customisable solutions that are a significant feature of 5G standalone networks. 

As such, a new principles-based approach that applies across the internet value chain is necessary. This would allow network operators to develop the new services that can unlock and accelerate the investment in next generations of mobile technology.

Unfunded obligations: In most regions in the world, telecoms operators have been subject to far-reaching telecoms law and regulatory (economic) frameworks that impose costs and obligations on the sector as a licence to operate. In recent years we have seen the emergence of additional adjacent frameworks, for example in relation to security and sustainability, with their own costs and obligations. These obligations have typically been left for the industry to fund. 

As a result, operators have made decisions in the context of the economic framework, including how much to bid for spectrum or the terms and conditions of wholesale access, which can be ‘superseded’ by subsequent policy decisions. This uncertainty can have a chilling effect on investment in next generation connectivity. 

To remedy this, regulators should ensure that all obligations, whether economic or adjacent, are only imposed within a single coherent framework, thereby removing the possibility for unfunded obligations that hold back investment.

Conclusion

In the last twenty years, consumers and businesses have benefited enormously from the new generations of mobile technology. Greater capacity, better quality and the rollout of new services have transformed our economies and societies. 

However, the process of transformation is ongoing and policymakers and regulators have a critical role to play in setting the pace of transformation. Policies must enable and encourage investment in next generation technologies – at scale and at pace.  This is what will unlock the most value for consumers and businesses.