The proposed merger between Three UK and Vodafone UK: the consequences for the spectrum landscape in the UK

Almost seven years after Hutchison’s Three UK and Telefonica UK merger was blocked, Three and Vodafone have announced their intention to combine Vodafone UK and Three UK into a joint venture.

This deal is now subject to the UK Competition and Markets Authority’s (CMA) approval. The UK telecoms regulator, Ofcom, changed its long-held stance, saying it was now more open to consolidation in the sector. It had previously argued that dropping to only three networks in a country could harm consumers. In the past, the UK market assessment by Ofcom concluded that a three-operator market (from four operators) could harm consumers in the UK. In 2016 the CMA and the European Commission blocked Three’s attempted takeover of O2, arguing that it would have risked higher prices.  In April 2023, Ofcom estimated that around three in ten (29%) households had difficulty affording a communication service [1]. So how would the market consolidation help consumers? The CMA looks on a case-by-case basis on these consolidation decisions. The government’s current view is that “there is no ‘magic number’ of mobile operators. So what would the CMA be testing? 

Spectrum Distribution considerations 

One of the assessments is the competition and efficiency impacts of the spectrum distribution.  Will the merged entity have an unmatchable advantage over others?  

There is the potential that the merger could in the view of the regulator imbalance spectrum holdings, resulting in noticeable differences in the services they are capable of delivering compared to the competition. This risks the competitive intensity in the UK market and is potentially detrimental to UK consumers.  

One way to assess this is to investigate the types of services anticipated to be supported by the UK MNOs using their spectrum in the next 5-10 years. Predicting the future is not easy. Usually, a larger spectrum holding can support higher data rates at the cell edge to an average user. The operators with smaller spectrum holdings may not be able to match the minimum cell edge throughput. If that’s the case, the key question is whether, absent regulatory intervention, the market would be likely to redistribute the spectrum. Hence the merged entity has no competitive advantage over its competitors.  

Forced Spectrum divestment 

If the CMA or Ofcom think that the merged entity has a potential competitive advantage due to the combined spectrum holding, one remedy used in the past was spectrum divestment. When T-Mobile and Orange were merged, EE, the merged entity, was required to divest 2×15 MHz in 2012. Similarly, if spectrum divestment is required, the CMA may ask Ofcom to decide the quantity of spectrum to be divested from Voda-Three.  In this case, the impact of releasing various different quantities of spectrum will be assessed to determine the most appropriate quantity.  

Spectrum distribution is not equal among operators for many reasons. They can enter the market at different times, and their market shares are different so the need for spectrum is also different. The ability to acquire spectrum at auction also varied depending on their capacity for raising funds from investors. Traditionally therefore spectrum distribution has never been perfectly uniform.  

 Without divestment, the spectrum distribution among the three remaining major national MNOs in in the UK would be as follows. 

The spectrum mix 

Telefonica has done well to remain competitive in the market despite always have a slight disadvantage of the competition in its total holdings. In this new landscape the disadvantage in spectrum holding is quite noticeable.  

In sub-1 GHz spectrum, the difference between the merged entity and BT/EE is insignificant. The biggest differences come from 1.4-2.6 GHz and C-band spectrum . So far competition has worked with the current distribution of 1.4-2.6GHz bands despite the differences between the largest spectrum holder BTEE (240 MHz , 21%) and VMO2 (101.6MHz and 21%).  

 Perhaps some scrutiny is needed around the distribution in the C-band. Before the potential merger, Three UK is the largest spectrum holder in this range. i.e. 140 MHz (12%) compared to 80 and 90 MHz (7% and 8%) for the other operators.  But after the merger, the merged entity could hold 20% of the C band spectrum, which is 80 MHz each by VMO2 and BT/EE compared to 230 MHz by Voda-3.  

Could historic Ofcom spectrum caps shape possible spectrum divestments? 

Past auctions have been designed by Ofcom with various spectrum caps and floors to ensure bidders have sufficient amounts of spectrum to be credible in the market. The spectrum caps were set as safeguards allowing substantial asymmetry by international standards.  

The table below shows the spectrum caps on pre-existing holdings plus auction acquisitions placed by Ofcom during the last three IMT spectrum auctions: 

Historically Ofcom has enforced a cap of 37% to 42% for the total spectrum holdings. With the proposed merger, Vodafone-3UK could hold 46% of the total spectrum holdings. If we assume the precedent of the caps used in the past auctions; and thus 42% of total spectrum holdings is the upper limit, Vodafone-3UK may need to divest 42 MHz of spectrum. Perhaps, considering the LTE and 5G technologies bandwidth multiples of 5MHz, it is reasonable for Voda-Three to divest 50MHz, making their holdings 41%. This releases spectrum to market for existing players or perhaps less likely gives enough of an opportunity for a new entrant.  

A possible future spectrum distribution 

Assuming, no new entrants, a hypothetical scenario of O2 acquiring all of that spectrum leaves the distribution as 32%, 41% and 27% among the BT/EE, 3-Voda and VMO2 respectively. Still, the difference between the lowest and highest spectrum holder is 14%. But we need to look at it more closely as the different bands play a significant role in mobile networks. 

 With a 50 MHz divestment of C band spectrum by the merged entity and perhaps VMO2 and BTEE acquire 25 MHz each, the final distribution would be as below: 

Three UK might argue that current holdings are due to their strategic decision to acquire UKBB, which has been focused on FWA and some special service networks in ports; therefore, just considering mobile broadband use case-driven competition and economics is not sufficient.  

The Real Wireless Capability 

What-if analysis on spectrum holdings is exactly what Real Wireless carried out during the 2.3GHz and 3.4 GHz auction periods. Our Policy and Regulation and techno-economics capabilities can be combined to consider the capability of MNOs to provide the services demanded by public and enterprise users in future years with the existing spectrum holdings and then, different MNO capabilities to offer these same services with additional spectrum holdings in merger scenarios.  

During the 3.4 GHz and 2.3 GHz spectrum auction time; Three UK asked Real Wireless to investigate their position and a report was published by Ofcom [2]. This is just a glimpse of the analysis required to assess if competition concerns and regulatory intervention are necessary.

Real Wireless has carried out independent assessments for spectrum regulators and market authorities, helping them to come to an informed decision.  If you’re interested to find out more please get in touch.