Vodafone and Three may have to agree to be supervised on price and investment promises before they are allowed to merge.
The proposed merger between Vodafone and Three, two of the UK’s four mobile network operators, drags on like the 2010 Wimbledon tennis match between John Isner and Nicolas Mahut. That finished with a final-set score of 70-68 on day three and left John Isner, the eventual winner, so exhausted that he could barely stand in round two. Each telco already insists it is too weak to survive on its own. As they continue to return the stinging shots of regulatory opposition, they are unlikely to grow any stronger.
The operators, which announced their deal in June last year, are battling competition authorities unconvinced a merger will be good for the country. It would not be the first tie-up of so-called Tier 1 telcos. In 2016, UK fixed-line incumbent BT bought mobile operator EE in a £12.5 billion (US$16.5 billion, at today’s exchange rate) deal. Five years later, cable operator Virgin Media came together with O2, another mobile operator. The difference this time round is that both Vodafone and Three are in the mobile networks game. A merger would reduce the supply of mobile networks to UK businesses and consumers, turning the market into an oligopoly, say critics.
The Competition and Markets Authority (CMA) published its latest edict this month on Friday the thirteenth, and executives at Vodafone and Three may have read it in horror. While the CMA has not served up an ace that kills the deal, it has raised serious objections after its more detailed review and is demanding remedies that sound onerous.
Its overarching concerns are twofold. The first is that a merger would drive up prices for UK consumers, partly by limiting the options available to mobile virtual network operators, which rent network capacity. The finding is hardly a surprise. Regardless of the sector, higher prices are a natural economic consequence of a reduction in the supply of something when demand for it is unchanged. The CMA’s other concern, in its own words, is that “the merged firm would not necessarily have the incentive to follow through on its proposed investment” after the merger. In simple terms, it might not do what it promised.
The risk of broken promises
The pricing concerns are short of merit. Besides promising higher investment, Vodafone and Three have insisted there will be “no annual price increases” if they are allowed to combine. This does not mean they can be trusted. Analysis carried out by the CMA shows average prices would rise by 7% for Three and 3.8% for Vodafone after a merger. It measures the “harm” to consumers of this and higher prices charged by rivals at between £328 million ($433 million) and £1.1 billion ($1.5 billion). But the regulatory obsession with price looks misguided when UK tariffs are already among the lowest in the developed world.
Today, a consumer can sign up for a SIM-only deal that provides unlimited calls, minutes and a generous allocation of monthly gigabytes for less than £15 a month. This is well below the cost of other essentials such as energy and water, the prices of which have risen steeply in recent years. Average monthly revenue per user for a Vodafone postpaid customer is now less than £18. In the US, a postpaid phone customer of T-Mobile, widely seen as the value leader, generates almost $49. Even adjusting for higher income levels and other factors in the US, this is considerably more expensive. UK phone users, from a telco perspective, have long enjoyed a bargain.
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