Vodafone/Three UK merger: telcos give ground on pricing

Simultaneously, Vodafone published two separate statements on its ongoing UK and Italian mergers, essentially pointing out that new rules mean it will not have to seek the approval of its own shareholders for either. That removes one potential small barrier in each case, but the telco still has a much greater hurdle to clear: the competition one.

The UK Competition and Markets Authority (CMA) is still looking into the Vodafone/Three merger and is due to make a decision by early December. It has expressed concerns that the tie-up could cause a substantial lessening of competition in the both the retail and wholesale markets in the UK. And while Vodafone and Three strongly disagree with that interpretation of the situation, they have made some new concessions in that area.

Their joint statement dated late last week reiterates the two big competition remedies they have already proposed: their much-mentioned £11 billion network investment programme, which would be enforceable by Ofcom; and a plan to sell spectrum to rival player Virgin Media O2. And it adds two more commitments, one on low-end pricing in the retail market, and one that covers wholesale.

"While our view is that the CMA's concerns about price increases are unfounded, we will commit to maintaining tariffs at £10 or below for two years from the completion of the merger for value-focused customers on the SMARTY brand, social tariffs on both the SMARTY and VOXI For Now brands, and continue measures to protect registered vulnerable customers," the companies said, in a statement.

On the wholesale side, they will provide a reference offer that encourages MVNOs to access their additional network capacity, they said.

The content of the proposals is arguably less important than the fact that they exist at all. As PP Foresight analyst Paolo Pescatore points out, they demonstrate a "clear willingness to work on a number of areas," including pricing in the retail market.

"[Pricing] could be a sticking point that makes or breaks it," Pescatore believes. However, "a path to approval exists which is key for all parties," he notes.

Meanwhile, with regard to that wholesale reference offer, "the devil will be in the detail," said James Gray, MD of Graystone Strategy. At this stage, Gray says he is inclined to take a positive view that it will enable more competition due to more MVNOs being encouraged to launch services.

Reference pricing removes the confidentiality element of wholesale pricing, which means service providers with wholesale deals will either be able to negotiate with their existing host or consider moving to a merged Vodafone/Three to access a better deal.

"Either way the consumer, which is the main concern for the CMA, will benefit," Gray says. "However, without the detail it's hard to say for sure if it will be an effective remedy. The ceiling needs to be set at a level that allows aggressive consumer pricing and decent margins for MVNOs. I think prudence will be applied and the ceiling will be sensible, so as not to put the JV at risk."

Overall, these new possible remedies look more likely than not to help drive the Vodafone/Three merger to completion. But nothing is certain, and the operators will not rest on their laurels any time soon.

Indeed, on Friday Vodafone published a new study that shows that a nationwide 5G SA network in the UK could unlock as much as £3 billion for the economy. It's a not-even-thinly-veiled publicity stunt to push the benefits of the merger: Vodafone couldn't possibly be expected to roll out a whole network all by itself, of course. But it's moderately interesting; there's more from the study here.

On a related note, on Monday Vodafone shared an investor update noting that new UK listing rules that came into force in late July mean that the Three deal, which is classed as a significant transaction, will not require the approval of Vodafone shareholders.

But given that shareholders were unlikely to seek to block the merger, it’s not a particularly noteworthy announcement.

The same new rules apply to its ongoing Italian deal, the sale of Vodafone Italia to Swisscom and subsequent merger with Fastweb. But again it's the competition investigation that Vodafone needs to keep an eye on in Italy, not the opinion of its shareholders.

In both markets the telcos involved need to persuade regulators that the loss of a significant player will not harm competition. That's an easier sell in Italy, where the fixed market is attracting all the scrutiny. But Vodafone and Three's latest response to the CMA does seem to be a step in the right direction in the UK too.