Hutchison and Virgin Media respond to CMA's letter urging EU to halt Three-O2 merger

(Image Credit: iStockPhoto/simonkr)

The UK's Competition and Markets Authority (CMA) has written to EU commissioner, Margrethe Vestager, urging the European Commission not to approve the proposed merger between Three UK and O2 – despite concessions offered by the companies. 

Alex Chisholm, CMA Chief Executive, wrote in the letter: 

“While I appreciate the considerable efforts made by the Commission to explore remedies with the merging parties that seek to eliminate the adverse effects identified, it is clear that the remedies offered fall well short of what would be required to meet the relevant legal standard, as detailed in our case submissions. 

The proposed remedies are materially deficient as they will not lead to the creation of a fourth Mobile Network Operator (MNO) capable of competing effectively and in the long-term with the remaining three MNOs such that it would stem the loss of competition caused by the merger. In addition, they fail to address concerns arising from the presence of the merged entity in both the network sharing arrangements, including the greater risk of coordination that this brings. 

The only appropriate remedy that would meet the criteria that the Commission is bound to apply (ie that the remedies eliminate the competition concerns in their entirety, are comprehensive, effective and capable of ready implementation) is the divestment – to an appropriate buyer approved by the Commission – of either the Three or O2 mobile network businesses, in entirety, or possibly allowing for limited ‘carve-outs’ from the divested business. The divestment would need to include the mobile network infrastructure and sufficient spectrum to ensure a commercially viable fourth MNO in the UK. Absent such structural remedies, the only option available to the Commission is prohibition.” 

Virgin Media, a company who's agreed to buy a slice of Three's combined network, has penned a scathing response which criticised the CMA's recent approval of BT/EE and the resulting difficulty for other networks to compete due to a 45% monopoly of spectrum held by the combined entity. 

Tom Mockridge, Virgin Media CEO, said: “Less than three months ago the CMA approved the merger of BT/EE, without remedies, despite concerns that this concentrated too much valuable spectrum in the hands of one provider. BT/EE now has 45% of total UK spectrum, including 60% of the higher frequency spectrum best-suited to 4G services, particularly in urban areas. In comparison Vodafone has 28% of UK spectrum, O2 has 15%, and Three has 12%. This is the very reason it is now difficult to create a new, fourth mobile network operator. 

A combined O2/Three would provide a counter balance to the strength of BT/EE, offering an alternative source of capacity to other providers who will drive competition in their own right.” 

Three represents the smallest MNO operating in the UK, and the only major operator not to offer a fixed-line broadband solution which prevents its ability to offer multi-play service packages. The company has announced several concessions in a bid to persuade regulators to approve the proposed merger – including a five-year price freeze on customer bills, network investment, and enabling other competitors to enter the market utilising the improved network. 

Hutchison Whampoa, Three UK's owner, sent TelecomsTech a list of points in response to the CMA's letter ahead of a full statement: 

  • We are disappointed the CMA has published a letter to Commissioner Vestager this morning concerning the proposed Three UK /O2 merger. This can have no legitimate status in the merger control process.  

  • There's no surprise the CMA opposes the merger, it always has, and so has Ofcom. It's for the Commission to assess any competition concerns, on the basis of the facts and proposed remedies.  

  • It's interesting to contrast the content of the letter with the attitude of the CMA (when it was the decision maker) and Ofcom in the BT-EE CMA merger clearance, which was approved without conditions or remedies, creating a dominant fixed-mobile behemoth in the UK market. 

  • The CMA letter claims that the creation of a 4th full-fledged network operator is the only possible solution to address competition concerns. No analysis or argument is given to support this, nor why Hutchison’s proposed remedies are insufficient. It is an entirely one-sided argument designed to support a preordained outcome. 

  • Remedies proposed by Hutchison go far beyond those accepted in previous mobile merger cases by the Commission. 

  • Hutchison has commitments with Sky, Virgin, Tesco and UK Broadband to take up over 40% of combined network capacity to drive competition in the UK mobile market.  It's astonishing that CMA has failed to refer to this, and has not assessed the impact of entry of such large, committed players on the competitive landscape.  

  • The entry of so many diverse, strong and committed players will ensure that there is plenty of competition in the UK market and plenty of counter offers to any supposed price increases post-merger. 

  • The divestiture of Three or O2 to a new MNO to gain approval of the merger is a red herring. There is no taker for such a remedy, and it would undermine the whole economic rationale of the merger and reinforce the spectrum inferiority and capacity constraints of both companies.  

  • This merger is a huge opportunity to strengthen UK mobile infrastructure. Hutchison has committed to invest a further £5bn. Sky/Virgin/Tesco/UK Broadband will also invest, bringing the total of new private sector investment in the UK’s infrastructure to some £10 billion. 

  • Consumers will benefit from a broader choice of mobile providers. The improved network will allow faster speeds and better services with the existing sites and spectrum, and rural coverage will improve. There will be a new £5 All You Can Eat tariff for pensioners for voice and text. Three UK has guaranteed not to increase prices for the first 5 years.  

  • We're confident the Commission will exercise its legal obligation to review the case on its merits and take into account the impact of the plans of the remedy takers and new market entrants on competition and pricing in the UK mobile market. 

Observers predict the merger won't be prevented, but instead the commission will attach significant concessions to it that are often enough to scupper the deal. However, with Hutchison's eagerness to push forward with the merger, it could be the company accepts whatever it's offered in order for it to be cleared. 

Who do you side with on this debate? Share your thoughts in the comments. 

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