Submissions point to a divide among the altnet community on the transaction’s likely impact on infrastructure competition, the retail market and end users
Grain and Hyperoptic do not envisage the deal harming competition
The Competition and Markets Authority (CMA) has published responses to its areas of focus document issued at the start of its Phase 2 review into the proposed nexfibre/Netomnia transaction. They are from BT Group, Grain Connect, Hyperoptic, Sky and CityFibre, with the latter’s submission explicitly stating that the deal would give rise to a substantial lessening of competition (SLC) in one or more relevant markets. CityFibre argues that the review represents a “pivotal decision point” for the future direction of the fibre market and that allowing the transaction to proceed would reduce the number of competing fixed broadband infrastructures from three to two, leading to worse outcomes for consumers while undermining the long-held regulatory goal of effective network competition. In contrast, Grain states that the merger would have no adverse effect in the market for retail fixed broadband services and a pro-competition effect in the market for wholesale fixed broadband services (where neither of the parties currently represents a competitive constraint). Similarly, Hyperoptic states that it has not identified any competition concerns that would lead it to oppose the deal, considering that it has the potential to support a stronger and more sustainable alternative fibre platform, which may contribute positively to long-term infrastructure-based competition in the UK.
BT is visibly more measured in comparison, agreeing with the CMA’s identification of issues in the areas of focus document – e.g. the impact of the transaction on competition between the parties in the supply of wholesale and retail broadband. It urges the CMA’s investigation to take into account the framework established by Ofcom’s recently concluded Telecoms Access Review (TAR), including the significant market power (SMP) obligations imposed on Openreach, which influence competitive dynamics, as well as the incumbent’s ability to respond to them. Sky’s heavily-redacted response also welcomes the priorities outlined by the CMA, particularly consideration of whether the deal could give rise to vertical effects where the Netomnia network and its downstream YouFibre arm are both “absorbed into the Virgin Media O2/nexfibre structure”. However, Sky calls on the CMA to carefully scrutinise the parties’ claim that the rationale of the transaction is to build a national wholesale challenger to Openreach, hinting that the aim is instead to remove a direct competitor in areas of network overlap. CityFibre goes a step further, reiterating its previous claim that the deal would “support the restoration of a durable Openreach/Virgin Media O2 duopoly” while preventing the emergence of a third rival scaled network.
Retail competition is intense, with operators embattled on a variety of fronts
At the retail level, Hyperoptic sees strong competition (especially where there is overbuild), with operators under ongoing pressure to attract and retain customers. Rivaly extends beyond headline pricing and includes promotional activity, service innovation, customer experience and network quality. According to Grain, such is the intensity of retail competition that the acquisition would have no negative effects, as it results in only a small increment to the market share of an operator with an existing share of around 20%. Grain also supports Ofcom’s view (in the TAR) that the retail market is national in scope (excluding Hull) and that as such, the areas of network overlap between nexfibre and Netomnia would not have any greater effect on the conditions of competition than the aggregate effect, which is “essentially zero”. However, BT and CityFibre believe the CMA is right to consider whether the relevant retail market is national or sub-national, taking into account the geographic footprint of different providers and local competitive conditions. CityFibre states that the transaction would harm retail competition in overlap areas by removing the significant competitive constraint Virgin Media O2 and Netomnia currently exert on each other.
Stakeholders believe the CMA’s priority should be the impact of the deal on the wholesale market
With respect to the wholesale broadband market, Grain considers that the question for the CMA is how another scaled provider might emerge alongside Openreach and CityFibre. In Grain’s view, it is unlikely that more than three such competitors will come to exist due to the large capital investment and network footprint needed to operate credibly on the mass market, with “aspiring” players such as Gigaclear, Freedom Truespeed and Community Fibre lacking on both counts. Grain therefore considers that the most likely route to a third scaled wholesale fibre broadband operator is the combination of nexfibre and Netomnia, who together would have the necessary coverage, resources and management to mount an effective challenge. Sky, however, believes that fibre investment and coverage are best achieved through “three-way competition” between independent infrastructure providers, who have stronger structural incentives than vertically integrated operators (i.e. Virgin Media O2) to offer competitive wholesale access terms and in turn apply pressure to, and capture demand from, Openreach.
Given the highly competitive retail market, Grain considers that it would be more realistic for the CMA to assess the conditions of competition on the basis of wholesale services provided to third parties. Submissions from BT, CityFibre and Sky appear to agree on this point, advocating that the CMA should identify a single product market covering all fixed broadband services, including Virgin Media O2’s cable network. With respect to geographic market definition, BT considers that the CMA needs to take into account the differing levels of (actual and potential) competitive intensity in different areas. Though it disagrees with how Ofcom accounted – or did not account – for the presence of “rival network development” in its wholesale market analysis in the TAR, BT argues that Ofcom’s findings are not binding on the CMA, whose forthcoming analysis differs in that:
The assessment of the relevant market is an analytical tool rather than a prior step to the imposition of ex-ante regulation;
Its principal focus will be on areas of overlap between the parties;
It will analyse the impact of the transaction on the competitive landscape over the long-term (and not the five-year horizon of a market review); and
It represents a “one-shot opportunity” to assess the impact of structural market change.
CityFibre considers the most appropriate counterfactual to be one where it acquires Netomnia
Hyperoptic states that the development of competition over the coming years will depend not only on the prevailing market structure, but also on the commercial and financing environments in which operators make strategic decisions regarding network expansion and investment. The CMA’s assessment of competition in fibre should therefore take into account both the presence of altnets and their practical ability to build sustainable customer bases over time. Grain considers that such factors are relevant for the CMA’s choice of counterfactual, which may be characterised as a move from a single regulated supplier (Openreach) to an increasingly competitive market with multiple wholesale operators. It adds that in making this choice, it is also worth bearing in mind the “plethora” of altnets that will consolidate – although not all combinations will increase the number of lines available in the wholesale market. CityFibre is also mindful of the scope for consolidation, considering that an acquisition of Netomnia by itself would be the most appropriate counterfactual, ahead of the status quo, with both options “materially more competitive” than the conditions resulting from the merger. In light of network upgrade and/or deployment plans previously announced by the parties, CityFibre dismisses their suggestion that the counterfactual should reflect worse conditions than those currently at play as “unconvincing”. BT emphasises that regulation over the TAR period (2026-2031) is relevant to the CMA’s determination of the counterfactual, assuming that Ofcom’s decisions will continue to constrain Openreach’s commercial behaviour irrespective of the transaction.
Grain considers that the parties’ argument that there would be higher investment as a result of the combination is credible. Whether the aggregate network investment by the parties would be slower or not, the combination would bring the largest alternative fibre network to bear more quickly than if nexfibre and Netomnia continued to operate as standalone firms. Grain therefore broadly agrees with the parties’ that the deal would enhance wholesale competition (so long as the merged entity ensures high standards of non-discrimination); however, it does not believe that it would lead to a reduction in retail prices. BT is less convinced, stating that the claimed pro-competitive effects of the merger can only be realised in a situation where Openreach can respond in a dynamic and timely way. Again suggesting that regulation impedes it from doing so, BT argues that this reduces the extent to which the merged business would be incentivised to compete and in turn the potential benefits that could flow through to end users. Sky, meanwhile, is more sceptical, stating that to the extent that there are incremental benefits to the deal, it considers that they are already available in the counterfactual where ISP customers can buy fibre services from Netomnia. Sky adds that the upgrade of Virgin Media O2’s existing network would represent a lower-cost route to expanding fibre coverage and take-up than the transaction without removing an independent rival from the market. CityFibre echoes this point, arguing that the deal offers no merger-specific efficiencies and that combining two overlapping fixed broadband networks would, in fact, be fundamentally inefficient.
