UK CMA suggests behavioural remedies may be enough for it to approve Vodafone/Three merger

The CMA started its in depth investigation of the operator mega-merger five months ago and has taken that time to conclude that its initial concerns were valid. In other words, this crack team of market dynamics specialists have exhaustively pored over the nuances and intricacies of this proposed move to eventually conclude that the merger of two rival companies may lessen competition. Brilliant.

“We’ve taken a thorough, considered approach to investigating this merger, weighing up the investment the companies say they will make in enhancing network quality and boosting 5G connectivity against the significant costs to customers and rival virtual networks,” said Stuart McIntosh, chair of the inquiry group leading the investigation, when he was finally able to catch his breath after his Herculean labour.

“We will now consider how Vodafone and Three might address our concerns about the likely impact of the merger on retail and wholesale customers while securing the potential longer-term benefits of the merger, including by guaranteeing future network investments.”

Unsurprisingly, Vodafone and Three see things a bit differently, insisting that the reduction in the number of UK mobile operators from four to three won’t in any way reduce competition. “Our merger is a catalyst for change,” said Vodafone Chief Exec Margherita Della Valle. “It’s time to take off the handbrake on the country’s connectivity and build the world-class infrastructure the country deserves. We are offering a self-funded plan to propel economic growth and address the UK’s digital divide.

“Great network connectivity is a critical enabler of so many elements of our daily life and is central to the future prospects of so many sectors. Businesses large and small are dependent on it and it enables new industries – like AI – to thrive. It facilitates a step change in productivity and care across the public sector, and it lies at the heart of every nation’s future prosperity.”

Note that she didn’t address the matter of competition at all. Now that the respective parties have got their latest round of public posturing out of their system, they can return to negotiations in which Vodafone and Three try to determine the minimum level of concessions and remedies they need to offer in order for the CMA to approve the deal.

Crucially, the CMA's provisional findings suggest that mere behavioural, rather than structural, remedies may be sufficient. In other words, if the right framework of promises and regulatory guardrails can be put in place, then the companies won’t need to do painful things like sell off parts of themselves or give up precious spectrum. The CMA has published its position on possible remedies here.

"A deal of this size and scale was always going to face intense scrutiny from the CMA, and it was fanciful that it could have been approved without any sort of remedies,” said Matthew Howett, CEO of Assembly Research. “The main impediment to it going through was the imposition of a structural remedy – anything that facilitated a new entrant and therefore re-created the problem the merger was trying to solve. With the CMA essentially having taken that off the table, for the first time we can see a pathway for the deal to complete.

"Concern over the impact of the merger on prices for consumers was predictable but is remediable. While prices in the UK are already some of the lowest among European peers (including the US and Japan), it’s possible to see a workable commitment to social tariffs, or contracts that give protection to the most sensitive to any rise in prices, even if by a small amount.

"A legally binding commitment to the £11bn of promised network investment, overseen by Ofcom, would be a win not only for consumers and network quality, but also for the new Labour government. As the EU is grappling with its own competitiveness relative to the US and Asia, regard must be given to the UK’s standing on the international stage. Draghi, in his report this week, set out the importance of infrastructure and connectivity to this story, and it’s encouraging that the CMA has essentially arrived at the same conclusion.”

"As expected, the CMA focuses primarily on pricing implications for consumers, but focusing only on price ignores the fact that the merger will bring much needed investment across the UK,” said Analyst Paolo Pescatore. “Even if the price increase is to be believed, which the companies dispute, it's pence per month and doesn’t in anyway outweigh the benefits of building the network the country deserves. To date, both parties are demonstrating that this is genuinely in the interest of UK plc, the economy, and users which paves the way for a far stronger three player market than the current imbalance."

“The ball is now firmly back in the court of Vodafone and Three,” said Kester Mann, Analyst at CCS Insight. “They need to quickly assess these proposals and make further suggestions ahead of a final deadline in early December. The next three months may prove to be the most pivotal in the history of the UK telecoms sector.

“I retain my view that approving the merger would be the best outcome for the future of the UK mobile industry. A combined Vodafone and Three can make more efficient investments and push BT and Virgin Media O2 to raise their game too, boosting the market’s long-term connectivity credentials.”

It’s telling that all three analysts seem to think the likely benefits to the country outweigh concerns about people possibly having to pay a bit more for their currently very cheap mobile contracts. We’re inclined to agree and also note how helpful Draghi’s reports is to Vodafone and Three’s cause. EE and O2, however, may see things somewhat differently.