Sky and Vodafone publish their objections to the Virgin/O2 UK merger

Industry News

The CMA has published issues statements from Sky and Vodafone submitted as part of its investigation into the proposed merger of O2 UK and Virgin Media.

This phase of the Competition and Markets Authority review invites interested parties to speak now or forever hold their peace. It looks like Sky and Vodafone are the only ones to have raised objections. Sky seems worried about the merged company’s incentive to keep offering a decent wholesale service to MVNOs, while Vodafone just doesn’t like the thought of there being another converged player to deal with.

Here’s the key bit of Sky’s submission:

For the following reasons, Sky considers that post-merger the Merged Entity will have both the incentive and ability to engage in input foreclosure:

Incentive – O2’s incentives to provide wholesale mobile services on favourable terms… will materially reduce as the Merged Entity pursues increased uptake of fixed/mobile bundles benefitting from its converged and vertically integrated operations. According to the Parties’ own public statements, fixed/mobile convergence is a key rationale for the Proposed Merger at a time when interest in such services in the UK is increasing…; and

Ability – the Merged Entity will have the ability to degrade Sky’s mobile service. Pre-Merger, Sky considers that O2 is a willing partner that is incentivised to secure distribution to Sky’s fixed customer base and to resolve any commercial differences. Post-Merger, the change in O2’s incentives means it is uncertain to remain a willing partner and would have less incentive to resolve any commercial differences… it is impossible to provide contractually for all commercial circumstances or market developments over a long-term deal

And here are the concluding paragraphs of Vodafone’s mammoth submission:

  1. If this transaction proceeds, as mentioned above the UK market will be dominated by two operators that serve more than double the number of fixed and mobile customers compared to their nearest competitor.
  2. Procuring wholesale network products gives operators that do not have network or only have network in one part of the market (fixed or mobile) the ability to provide converged retail services. If converged network operators are allowed to follow an input foreclosure strategy and frustrate supply of these wholesale products to other operators in an increasingly converged market, the competitiveness of the overall market will suffer.
  3. Returns in UK telecoms markets are low, debt ratios are high and mobile network costs are set to increase substantially. This is driven by the need to replace Huawei technology, additional network security requirements being imposed and the rollout of 5G technology, together with the need for additional 5G infill sites. However, the benefits for society of upgraded mobile technology are wide and meaningful. Fixed networks in the UK also require fibre investment and upgrading to ensure the ever-increasing technology needs of the UK are met.
  4. In considering [CONFIDENTIAL] the two clearly identified theories of harm, the CMA should consider this overarching longer-term potential harm for UK telecoms markets and focus on ensuring any remedies enable other competing operators in the market to credibly compete with the two very large-scale vertically-integrated operators by securing competitive wholesale access in both fixed and mobile markets. This will help ensure a more competitive enduring landscape, to the ultimate benefit of consumers.

Liberty Global and Telefónica obviously don’t agree, but their comprehensive response is so replete with legalese mumbo-jumbo that it’s hard to identify the definitive bits. So we invite you to sift through it yourself if you’re sitting comfortably.

In essence both Sky and Vodafone seem to be objecting to the very concept of a converged operator. Their objections are not entirely without merit, but for them to be taken seriously the CMA would effectively have to conclude that the approval of the BT/EE acquisition was a mistake. Since that seems to have harmed neither the wholesale market nor the consumer, we would expect the CMA to have little sympathy for these objections.

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