In September 2023, UK mobile phone network operators Vodafone and Three (owned by CK Hutchinson) announced their intention to merge. At the time, in terms of total revenue from the supply of mobile phone services to consumers, Vodafone and Three had market shares of 23% and 12%, respectively.
In addition to Vodaphone and Three, there are two other major network operators – the BT Group (BT & EE) and Virgin-media 02, with market shares of around 31% and 23%, respectively, with other operators having a combined market share of 12%. As we shall see below, these other operators use one of the four major networks. Therefore, the merged entity of Vodafone-Three would become the market leader with a share of around 35% and there would only be three major network operators competing in the UK.
Not surprisingly, the UK competition agency, the Competition and Markets Authority (CMA), decided to conduct a detailed investigation into whether the merger would harm competition. However, in early December 2024 the CMA announced its decision to allow the merger to go ahead, subject to several important commitments by the merging parties.
CMA’s phase 1 findings
The CMAs phase 1 investigation raised several concerns with the merger (see fifth CMA link below).
First, it was worried that retail and business customers would have to pay higher prices for mobile services after the merger.
Second, in addition to the four mobile network operators, the UK market is served by a number of mobile ‘virtual’ network operators (MVNOs), for example Sky Mobile and Lyca Mobile. As we saw above, these suppliers account for around 12% of the consumer retail market. The MVNOs do not own their own networks and instead agree wholesale terms with one of the network operators to access their network and supply their own retail mobile services. The CMA was concerned that since the merger would reduce the number of networks competing to host these MVNOs from four to three, it would result in MVNOs paying higher wholesale access prices.
Vodafone and Three did not offer any remedies to the CMA to address these competition concerns. Consequently, the CMA referred the case to phase 2 for a more thorough investigation.
CMA’s phase 2 findings
The CMA’s analysis in phase 2 confirmed its earlier concerns (see linked report below). It was still worried that because the merged entity would become the largest network operator, retail customers would face higher prices or get a poorer service – for example, a reduced data allowance in their contract. In addition, the CMA remained concerned that the MVNOs would be negatively impacted and that this would lessen their ability to offer the best deals to retail customers.
However, during the phase 2 investigation, the merging parties put forward various efficiency justifications for the merger. They argued that the merger would provide them with much needed scale and investment capacity to improve their network and roll-out 5G technology. The CMA recognised these claims but questioned the merging parties’ incentives to go through with the investment once the merger was approved. Furthermore, it was concerned that if they did invest, this would be funded by raising the prices charged to consumers.
As a result, the CMA only agreed to allow the merger once Vodafone and Three accepted remedies that would address these concerns.
The remedies necessary for the merger to proceed
First, the merged entity must cap a range of tariffs and data plans it offers in the retail market for three years.
Second, again for three years, it must commit to maintain the wholesale contract terms it offers to MNVOs.
Finally, over the next eight years, the merged entity must deliver the network upgrade plans that it claimed the merger would allow. The CMA believes that in the long run this network development would significantly boost competition between the three remaining mobile network operators.
The acceptance of remedies of this nature was unusual for the CMA. Typically, like other competition agencies, the CMA has favoured divestment remedies in which the merging parties are required to sell-off some of the assets or capacity acquired. In contrast, the remedies in the Vodafone-Three deal impact on the merging parties’ behaviour.
One clear disadvantage of such remedies is that they require the merged firm’s actions to be monitored, in this case for eight years, to make sure it adheres to the agreed behaviour. One reason why the CMA may have been willing to accept this is that the communications industries regulator, OFCOM, will be able to assist with this monitoring.
It was also surprising that the CMA was willing to allow the number of network operators to decrease to three. Previously, there had been a perception that it was important to maintain four networks. This was certainly the view in 2016 when Three’s attempted merger with O2 was prohibited. This decision was made by the European Commission (EC). However, the CMA raised serious concerns to the EC and when the merging parties offered behavioural remedies argued that these were:
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.
Why has the authorities’ attitude towards the merger changed?
So why has there been a change of stance in this latest attempted merger in the mobile phone sector?
One explanation is that the market has fundamentally changed over time. The margins for network operators have declined, network usage has grown and there has been a lack of investment in expensive 5G technology. This would certainly fit with the CMA’s desire to use the remedies to facilitate network investment.
A second possible explanation is that the CMA has recently faced criticism from UK Prime Minister, Keir Starmer (see third Guardian article below). In a speech at the International Investment Summit in London in October 2024, he said that
We will rip out the bureaucracy that blocks investment and we will make sure that every regulator in this country take growth as seriously as this room does.
In response to this, the CMA has indicated that in 2025 it will review its approach to mergers, ensuring that only truly problematic mergers don’t proceed, and reconsider when behavioural remedies may be appropriate (see final CMA link below).
The CMA’s decision in the Vodafone-Three case certainly demonstrates that it is now willing to accept behavioural remedies when there is a regulator in place to support the subsequent monitoring.
It will be interesting to see how this merger affects competition in the mobile phone market and, more generally, whether the CMA starts to implement behavioural remedies more widely, especially in markets where it would have to do all the subsequent monitoring.
Articles
CMA reports, etc
Questions
- Why is it beneficial to have MVNOs in the market for mobile phone services?
- Why is it important that MVNOs have a choice of mobile networks to supply their retail mobile services?
- How do you think the other mobile network operators will react to the Vodafone-Three merger?
- Compare the relative benefits of blocking a merger with requiring merging companies to adopt certain remedies.
There have been a number of recent developments in communications markets that may significantly alter the competitive landscape. First, the UK Competition and Markets Authority (CMA) has provisionally cleared BT to takeover the EE mobile phone network. The deal will allow BT to re-establish itself as a mobile network provider, having previously owned O2 until it was sold in 2005. The CMA said that:
They operate largely in separate areas with BT strong in supplying fixed communications services (voice, broadband and pay TV), EE strong in supplying mobile communications services, and limited overlap between them in both categories of service.
BT will therefore be in a better position to compete with rivals such as Virgin Media who were early movers in offering. 
Second, O2 itself (currently owned by Telefónica) is the subject of a takeover bid from Hutchinson Whampoa who already owns the mobile network Three. Because the companies meet their turnover criteria, this deal is being investigated by the European Commission (EC) and the signs don’t look good. If it goes ahead, it would create the largest mobile operator in the UK and leave just three main players in the market. The EC is concerned that the merger would lead to higher prices, reduced innovation and lower investment in networks. Previously, considerable consolidation in telecommunications markets across Europe has been allowed. However, recent evidence, including the prevention of a similar deal in Denmark, suggests the EC is starting to take a tougher stance.
If we compare the two proposed takeovers, it is clear that the O2–Three merger raises more concerns for the mobile communications market because they are both already established network providers. 
However, it is increasingly questionable whether looking at this market in isolation is appropriate. As communication services become increasingly intertwined and quad-play competition becomes more prevalent, a wider perspective becomes more appropriate. Once this is taken, the BT–EE deal may raise different, but still important, concerns.
Finally, the UK’s communications regulator, OFCOM, is currently undertaking a review of the whole telecommunications market. It is evident that their review will recognise the increased connections between communications markets as they have made clear that they will:
examine converging media services – offered over different platforms, or as a ‘bundle’ by the same operator. For example, telecoms services are increasingly sold to consumers in the form of bundles, sometimes with broadcasting content; this can offer consumer benefits, but may also present risks to competition.
One particular concern appears to be BT’s internet broadband network, Openreach. This follows complaints from competitors such as BSkyB who pay to use BT’s network. Their concerns include long installation times for their customers and BT’s lack of investment in the network. One possibility being considered is breaking up BT with the forced sale of its broadband network.
It will be fascinating to see how these communications markets develop over time.
BT takeover of EE given provisional clearance by competition watchdog The Guardian, Jasper Jackson (28/10/15)
Ofcom casts doubt on O2/Three merger BBC News, Chris Johnston (08/10/15)
BT and Openreach broadband service could be split in Ofcom review The Guardian, John Plunkett (16/07/15)
Questions
- What are the key features of communications markets? Explain how these markets have developed over the last few decades.
- What are the pros and cons for consumers of being able to buy a quad-play bundle of services?
- How do you think firms that are currently focused on providing mobile phone services will need to change their strategies in the future?
- Why is BT in a powerful position as one of the only owners of a broadband network?
- Instead of forcing BT to sell its broadband network, what other solutions might there be?
Market trading has existed for centuries and in many respects it hasn’t changed very much. One thing that has developed is the means of exchange. Goods used to be traded for other goods – for example 1 pig for 4 chickens! But then money was developed as a means of exchange and then came cheques and plastic.
However, for many market traders, accepting credit and debit cards is relatively costly. It involves paying a monthly contract, which for many traders is simply not worthwhile, based on the quantity and value of the transactions. But, for many customers using debit or credit cards is the preferred method of payment and the fact that some traders only accept cash can be a deterrent to them making purchases and this therefore reduces the sales of the market traders.
But, with advances in technology a new way of paying has emerged. Small card readers can now be plugged into iphones, ipads, other tablets and smartphones. By putting a customer’s card into this device customers can then pay by card and either sign for their purchase or use the phone to enter their security details. There are plan for these companies to offer chip and pin technology to further ease payment by card on market stalls. The traders pay a small commission per transaction, but aside from that, the initial start-up cost is minimal and it is likely to encourage more customers to use markets. Jim Stewart, the Director of a firm that has begun using this technology said:
I think it’s definitely going to take off, the world is going that way … The money has always appeared in my bank account, no transactions have been declined, my accountant is happy, it’s all been good.
Some customers have raised concerns about the security of these transactions, as they have to put their cards into someone else’s ipad. However, traders have said that there are no risks and that customers can be sent a receipt for their purchase. The following few articles look at this latest (and other) technological developments.
Smartphone card payment system seeks small firms BBC News, Rob Howard (19/1/13)
POS Trends: What’s new for 2013 Resource News (17/1/13)
Payments by text message service to launch in UK in Spring 2014 BBC News (15/1/13)
Questions
- What are fixed cost and why does having a traditional card payment machine represent a fixed cost for a firm?
- How might this new technology affect a firm’s sales and profits?
- Will there be an increase in the firm’s variable costs from adopting this technology?
- Using a cost and revenue diagram, put your answers to questions 1 – 3 into practice and show how it will shift them and thus how the equilibrium may change for a market trader.
- What are the properties of money that allow it to be a good medium of exchange?
- How will this increased use of debit and credit cards affect the demand for money? Use a diagram to illustrate your answer.
Will we soon live in a world without cash? More and more payments are being made electronically: whether by credit card or debit card, or by direct debit or bank transfer, or by cash loaded cards. For many people cash is now largely used only for small transactions.
But even here, things are changing. Direct transfers via mobile phone apps are increasingly being used for small transactions. Mobile phone companies, banks and others are busy developing such apps and more and more are being released onto the market.
And it’s not just in developed countries. Many developing countries are finding that mobile phones are an ideal way of transferring money for a whole range of transactions. For example, in Kenya, under 20% have a formal bank account, only 1% have a landline and yet more than 70% have a mobile phone, and this percentage is still rising. In 2007, a system known as M-Pesa (see also) was launched:
The user can create a free account and deposit money into it for free with registered agents at retail outlets. They may be gas stations, supermarkets, banks or micro-finance providers or small and medium-sized businesses. No minimum account balance is required.
The user can then transfer up to $440 from the account to someone else — including someone who doesn’t have a cellphone. The recipient provides identification and picks up the cash from another registered agent.
Users can deposit and withdraw cash, pay water and electricity bills, pay their children’s school fees, get paid by their employers or buy extra airtime for their phone.
Other developing countries are introducing similar systems. The second webcast link below gives an example from South Africa.
So how long will it be before cash disappears as a medium of exchange? Or will people continue to prefer to carry cash around with them – especially given the convenience of having cash machines readily available which do not charge for use.
Webcasts
Life in a cashless society BBC News Magazine, David Wolman (14/6/12)
FNB Introduces Cashless Payment App ABNDigital on YouTube (14/5/12) (see also FNB launches new geo-payment system IT News, Africa
PayPal leads mobile payments push Reuters (4/6/12)
Are We Moving Towards a Cashless Society? TheAlyonaShow on YouTube (14/3/12)
Articles
More than 70 per cent of Canadians ready to go “cashless” CNW (13/6/12)
Is a cashless society on the way? Westfair Online, Janice Kirkel (18/5/12)
Mobile money misery BBC News, Rory Cellan-Jones (16/5/12)
Cellphones transform Kenyan commerce CBC News (27/10/10)
Chart
For a PowerPoint of the above chart, click here.
Questions
- What are the advantages and disadvantages of using cash?
- To what extent can mobile phone technology replace cash? What are the advantages and disadvantages of such technology?
- To what extent can mobile phone technology fulfil the various functions of money?
- Private-sector holdings of cash have been rising as a proportion of (nominal) GDP – see above chart. Is this consistent with a decreased use of cash? Explain.
- Why may mobile phone transactions be particularly useful in developing countries?
- What proportion of your own expenditure is conducted by cash? Has this changed over the past couple of years? If so, explain why.
