In early December 2024, the UK’s Competition & Markets Authority (CMA) published its Final Report granting conditional approval to the merger of Vodafone and Three in the UK. Although the final clearance process is ongoing, the CMA decision represents a watershed moment for how competition authorities assess and approve market consolidation between mobile network operators.
In May 2016, the European Commission – supported by the CMA – had blocked the attempted merger between O2 and Three in the UK. This restrictive stance was in no way unique, with many mobile mergers facing significant hurdles in Europe during the last decade. EU authorities have typically either prohibited or imposed heavy structural remedies, often seeking to create new entrants in response to any market-led attempts to consolidate the mobile industry.
It is therefore unsurprising that the CMA’s recent decision has been met with many questions, including some criticism from those that have spent many years defending the EU’s prevailing “doctrine” on mobile mergers. There have even been suggestions that the decision somehow represents a “Brexit effect” or a sacrifice of competition. Some have alluded to political interference that forced the CMA to ignore its statutory obligations.
Nothing could be further from the truth. From the date of announcement, the CMA process took no less than 18 months and involved detailed assessment of tens of thousands of documents from industry players. As a main party to the merger, Vodafone can attest that this was the most intensive and intrusive regulatory process we have ever undertaken.
Whilst we welcomed the outcome of the Final Report, we do not agree with everything the CMA did both in terms of its process and its substantive assessment. For example, in our view, the CMA still seeks a very high degree of protection against potential consumer harm, even when the evidential basis of such harm is weak, speculative or theoretical and therefore the likelihood of such harm is low. The remedies, still in the process of being translated into legally enforceable undertakings, are among the most ambitious we have ever had to commit to. They include a commitment to deploy one of Europe’s best 5G networks.
Therefore, any claims that the CMA’s conditional approval represents some form of a politically motivated U-turn is completely inconsistent with the facts of the case and the outcome of the review. More importantly, such claims cloud the bigger picture. Whilst adhering to its existing framework, the CMA did change its approach, but it did so based on a mindset of open-mindedness to the facts and an in-depth analysis of the market as it stands today (and critically, as it is likely to evolve), in line with its mandate to safeguard consumers and competition. Key to this was the fundamental recognition of the importance of long-term infrastructure investment as the bedrock for sustainable retail and wholesale competition.
Herein lies the real learning for all European competition authorities. The CMA has shown the way for a significant shift in how regulators can approach mobile mergers, without sacrificing consumer protection or competition. The CMA’s decision and its very extensive remedy package on the merging parties are aimed at maximising consumer welfare and competitive rivalry, both in the short and longer term. This is fully in line with the longstanding objectives of merger rules in the UK and elsewhere.
Yet, as the CMA’s decision shows, there are other – and better – ways to achieve those objectives by adopting new approaches to merger assessments in response to real-life changes in the competitive landscape. The CMA is not alone in embracing this genuine “flexibility to adapt.” Mario Draghi’s September 2024 report to the European Commission advocated much of the same, and Brazilian and U.S. competition authorities have in recent years adopted decisions similar to the approach now taken by the CMA.
It should also be noted that whilst both the EC and UK remedy assessment frameworks contain a proportionality requirement i.e. that remedies are proportionate to the harm that has been identified, only the CMA’s assessment framework specifies that the least intrusive remedy must be selected and that Relevant Customer Benefits (RCBs) are a key element in assessing the proportionality of remedy options.
For those seeking to put consumers and competitiveness before doctrine and dogma, we therefore set out below what we believe led to the change in approach to mobile mergers in the UK and its main lessons for the assessment of mobile mergers also in the European Union.
In June 2023, Vodafone UK and Three UK announced the intention to merge and invest £11 billion in deploying one of Europe’s best 5G networks with the promise that the deal would be Great for Customers, Great for Country and Great for Competition1.
The announcement was made at a challenging time for the UK. It was the last G7 economy to return to pre-Covid levels of Gross Domestic Product2. The war in Ukraine also fuelled an energy crisis that saw inflation hit its highest level in the 21st century, running at over 7% (annualised) for fourteen consecutive months3.
Yet there was also significant opportunity. The government had just published its Wireless Infrastructure Strategy (WIS)4 setting out the potential for £159 billion of economic benefits from the deployment of 5G. The delivery of public services could be fundamentally transformed.
The WIS recognised that for these benefits to materialise, there was a need to strengthen the investment environment. For context, the UK was seriously lagging on 5G, placing last in the G7 and ranking 24th in Europe. The UK government also confirmed their ‘openness to market consolidation among a broader set of policy reforms, noting that merger decisions are taken on their merits by the CMA’.
This was the £11 billion question. How would the CMA assess the merger?
On the one hand, the parties had clearly set out the infrastructure investment story and how the merger was one of the key means for delivering the WIS. On the other, the CMA was fully aware of the need to ensure that the merger did not come at the expense of consumers especially at a time of strained household incomes.
It was within this context that the parties and the CMA embarked on what would ultimately be an 18-month in-depth investigation into the merits of the merger.
1) The importance of scale, investment competition for wholesale and retail competition and the 5G investment challenge
The CMA, supported by UK telecom regulator Ofcom, recognised the need for a long-term perspective, particularly with regard to the proposed integration of two mobile networks. They also recognised the significant infrastructure investment required to increase capacity and quality via the deployment of 5G Stand Alone (SA) networks to deliver the next-generation services that would deliver economic growth. Beyond the improvements in mobile connectivity for retail and wholesale customers, these benefits include industrial transformation, smart cities, e-health, autonomous vehicles, and a host of other innovations.
For this level of investment, scale is more important than ever. But in Europe, including in the UK, insufficient local scale in terms of customers and assets has left smaller operators with low returns on capital employed (‘ROCE’) and thereby an inability to invest in local infrastructure at an appropriate level.
2) As a result, larger operators are left facing limited infrastructure investment competition.
Vodafone UK and Three UK were both struggling to keep pace with their larger scaled peers. The inability of both companies to generate sustainable returns led to a gap between the UK mobile experience and that of other comparable countries. The CMA accepted that the mobile market does not necessarily need four Mobile Network Operators to maximise retail or wholesale competition, provided that the intensity of retail and wholesale competition from rival MNOs can be maintained
3) The importance of understanding the changing competitive landscape
Together with the current level of retail competition from MVNOs, technology advancements mean that there are hardly any entry barriers to MVNOs but also that MVNOs can more easily switch from one network to another, further enhancing their bargaining position. Moreover, there is also the prospect of entry by big tech companies into communication services as already set out in the WIS.
4) The benefits of the merger
By allowing the two operators to merge, the CMA has recognised that spectrum, network infrastructure, and overall resources can be combined in a scalable and efficient manner to deliver greater capacity and quality with a lower unit cost of production. The merger is a unique opportunity to generate the necessary returns to invest in delivering a market-leading 5G network, with much greater coverage and capacity than either operator can achieve alone.
This dramatic increase in additional capacity, generated by the pooling of resources and a step change to the pace of 5G deployment, will flow through to both the wholesale and retail markets. In turn, this will allow consumers continued access – either through MergeCo’s retail offerings or via its MVNOs – to attractive data bundles and unlock quality improvements, such as reduced congestion and increased download and upload speeds.
In addition, the sale of spectrum to VMO2 – as part of a renewal of the existing network sharing agreement – further strengthens its and its MVNOs’ ability to compete.
This combination of factors enabled the CMA to conclude that if the merging parties deliver their joint business plan / joint network plan it will boost competition across the market. The merged operator will become a stronger player and drive other operators to invest more in their own infrastructure to remain competitive. This more dynamic competition will raise network quality across the entire UK mobile market.
The CMA approved the merger of Vodafone UK and Three UK to create a competitive third scaled operator in the market. The approval was largely predicated on the acceptance of efficiencies that are then guaranteed by far-reaching network investment commitments to ensure delivery of the joint network plan, rather than traditional structural remedies. The deployment of the extensive, high quality 5G network across the UK will be enshrined in the merged company’s licence, and subject to oversight from Ofcom and the CMA.
But because it takes time for this new network to be deployed and its pro-competitive impacts to flow through in wholesale and retail markets, the CMA insisted that the long-term network commitment would be complemented with shorter-term pricing commitments to protect retail and wholesale customers.
Herein lies the significant shift in how regulators can approach mobile mergers. Historically, European regulators have largely focused on shorter-term price competition when reviewing market consolidation opportunities. This has meant either blocking deals outright or imposing traditional structural remedies in the form of major asset divestitures and/or [bringing?] new entrants into the market.
By contrast, the CMA recognised that to support much-needed investment in UK digital infrastructure to the benefit of UK citizens and their consumer welfare, greater scale was needed. Its decision prioritises the longer-term benefits of investment and innovation for consumers.
The decision showcases how regulators can achieve an effective balance that safeguards consumer interests in the short term and unlocks major infrastructure investment for the same consumers’ longer-term benefit. With the remedies, the CMA was confident that the merger would deliver for Customers, for Country and for Competition.
In doing so, the CMA found a way to support the growth agenda of the Government, of which deployment of 5G is a significant element. And it did so using its existing legal framework and without comprising on its remit to safeguard competition and to act in the interest of consumers, many of whom are still facing a cost-of-living crisis.
In the EU, a review of the merger guidelines and remedies notice is the most important action. This review must ensure that mergers in the telecoms sector take into account:
One of the most significant learnings from the CMA decision is that the CMA demonstrated the flexibility that exists within its competition law framework to approve the merger with remedies that differ significantly from those required in previous EU cases.
This flexibility offers a blueprint for other competition authorities, including the European Commission (EC), when assessing mergers in the mobile sector. It also recognises that each case will be somewhat unique, and therefore an assessment on the merits will always be necessary.
However, a greater degree of regulatory predictability would be highly beneficial and make the European mobile sector more attractive to investors, many of whom have reduced their sector exposure in recent years.
In the EU, this means acting on the proposals from Mario Draghi in his report “The Future of European Competitiveness”5 as reflected in the mission letter to Executive Vice President Teresa Ribera.
The recently published Competitiveness Compass6 for the EU reflects this by arguing that competition policy must keep pace with evolving markets and tech innovation. ‘This should be reflected in revised guidelines for assessing mergers so that innovation, resilience and the investment intensity of competition in certain strategic sectors are adequate weight in light of the European economy’s acute needs’.
Using the lessons from the CMA provisional approval, this would in practice mean that the EU should:
As the EU looks to revamp its competition rules, it can draw on these lessons from the Vodafone / Three merger in the UK. Globally competitive digital infrastructure is possible in Europe, but only if there are appropriate incentives to invest through enhanced scale.
More details on the merger approval can be found here.
3 https://www.ons.gov.uk/economy/inflationandpriceindices
5 EU competitiveness: Looking ahead - European Commission
6 https://commission.europa.eu/document/download/10017eb1-4722-4333-add2-e0ed18105a34_en