With the security clearance out the way, is there now an open door for the Three / Vodafone merger?

When I shared my initial reaction to the CMA’s judgement on the Three / Vodafone merger, I knew that the security implications could be a stumbling block. The headlines said it all.

Now I’ve had time to pick over the judgement, alongside the news that the government has said the proposed merger passes the National Security and Investment Act (2021) tests, it’s time to consider what else could stand in the way.

My analysis leads me to think that there are some interesting observations for MVNOs to note, as they might be the next set of hurdles to derail the proposal.

Before I launch into them, it’s worth summarising the areas of concern for the CMA:

General reduction of competition and thus likelihood of increased pricing. This is particularly acute in terms of pricing. The regulator sees Three as the ‘price challenger’ so removing it from the market will drive up costs. In turn, the remaining operators will be incentivised to be less aggressive.

Wholesale competition. If MVNOs are the answer to the above scenarios, then this is negated by the fact that, in theory, wholesale competition is reduced. With fewer operators providing wholesale terms, and, knowing not all operators will bid for every MVNO out there, there’s less opportunity for MVNOs to provide the ‘competitive tension’ needed to drive down prices.

Access to commercial information. This one didn’t get much coverage in the press, but it’s not something to gloss over. The judgement infers that with a foot in both camps of Cornerstone and MBNL, the merged party will be able to see competitor network rollout plans.

At a high level, my expectation is that this will kill off network sharing as we know it today. One way or another, if the merger goes through, (or even to allow the merger to go through), BT and VMO2 will need to reconsider their options with regards to Network sharing.

There are a lot of options. One could be a new sharing agreement between BT and VMO2, with the merged entity managing on its own sites across its current footprint from previous agreements. It’s quite a complex challenge and potentially a big barrier that MNOs opposed to the merger might highlight as a significant risk to competition.

So, with all this in mind, will the merger bring imbalance to the MVNO market?

Let’s start with some facts. MVNOs are normally a driver of market competition. The UK has a very mature MVNO market, with roughly 15-20% of all subs (depending on how you do the segmentation). The UK launched the very first ever MVNO way back in the last century, so the wealth of heritage is strong.

Although MVNOs are still offering great value, the concern is that with just three host operators in the market, MVNO competition will diminish in the longer term. I think the crux of the regulator’s argument is that MVNOs may not benefit from the same levels of aggressive wholesale pricing as they do today.

What’s more, existing MVNOs may not have the competitive tension to drive either a move to another host or re-negotiate better deal terms when it’s time to re-sign wholesale contracts.

I think it is a legitimate concern. Although Vodafone has been a bit less consistent than Three in its execution of a wholesale strategy, both are active.

But there’s a flip side to the challenge.

The new entity will have a lot of network capacity to monetise. Certainly, they will want to compete hard, both at wholesale and retail, against BT/EE and VMO2. But the ultimate question is whether the three MNOs can continue to compete to grow share, or will they try to drive extra value by competing less and forcing the market up?

If they did decide on the latter strategy, then it could take some time to execute. Wholesale contracts (or at least those I have written or advised upon), tend to have clauses that reward growth with discounts and have specific protections against price rises. It’s going to be difficult to walk these back any time soon.

So, it’s not a case of whether this will happen or not, it’s more about what the CMA can do to legislate against that risk.

Around the world, MVNOs have been used to drive competition with varying degrees of success. In some markets, regulators have mandated that MNOs must offer wholesale deals. They have even defined the methodology, which is typically benchmarked against retail pricing using retail minus methodologies.

This ensures MVNOs can be competitive and make reasonable margins. However, consumer competition isn’t always commonplace simply because of the regulated approach to wholesale.

If we look at Georgia, a market which is only just starting its MVNO journey, the networks are mandated to put out reference offers, and, in some cases, there are regulatory requirements to do so linked to 5G spectrum.

But, in my opinion, it feels like the market operators are only really paying lip service to this. They have no real intention or motivation to bring in more competitors, and frankly mobile telecoms competition is the least of Georgia’s problems! So, unless the CMA and OFCOM ensure any legislation has real “teeth” the approach may not be effective here.

In other European markets like Austria and Ireland where there was a similar scenario of operators merging, the regulator mandated more MVNOs to create balance. They also mandated the technical set up (to give maximum growth potential) and stipulated capacity-based wholesale deals. Having launched MVNOs in Ireland that were born from this legislation, I can see the value of this.

Further afield in Mexico, a far more radical solution transpired – a network ONLY for MVNOs.

Where does this leave the UK? What are the CMA’s choices?

It could set wholesale pricing caps across the market to keep MVNO costs lower and to ensure MVNOs can compete on price. Or it could insist upon the JV launching extra MVNOs and the wholesale pricing methodology it uses.

But we shouldn’t forget the UK market isn’t full of MVNOs that are exclusively driven by providing the lowest price. There are others that differentiate on offering other forms of value to consumers e.g. calls abroad and family bundling, better service, different member benefits and so on.

And, even with fewer MNOs, consumers will still get a good deal. Our MVNO market is vibrant and diverse enough to ensure it.

For what it’s worth, based on my 30+years’ experience in telecoms, the overwhelming trend has always been that pricing and ARPUs have reduced in real terms and the value included (whether that’s minutes, texts or more recently data) has grown, not to mention your download speeds.

The recent inflation-linked price grab by the major operators has slowed this, but you still get far more minutes, texts, and data for your pound now than you did a few years back.

Let’s not forget that we have already seen several mergers in our history – BT/EE, Virgin Media and O2, Vodafone and Cable and Wireless, and, for the real veterans, Orange and T Mobile – and MVNOs continued to spring up.

You can see why it’s a difficult conundrum for the CMA, and why it’s prudent that it seeks evidence from all parties to reassure it that competition will be maintained both in wholesale and retail.

The next few months will ensure this analysis is done in detail. Every rock will be up turned. Though, I still hold my view, MVNOs can steady the market and, if we look at this factor alone, the merger has merit.

The trick will be to have a strategy regardless of which way it falls. There will be change. MVNOs need to be thinking about what they would want from an opportunity to renegotiate terms, what proposition development they’d want to do, and how they could turn the saga into an opportunity for growth.

If you’re running an MVNO and reading this thinking ‘we need to do this’, then drop me a line and we can set up a consultation and game-plan the options.

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James Gray

Managing Director at Graystone Strategy

James has over 20 years of experience working in the telecoms and retail industries. He is an expert in subscription-based business models, CRM, direct and indirect channel management and major proposition development and launches. He has held a number of Marketing Director and Consumer Director roles.