Consolidation in the telco market – where now?

It is now well known that TeliaSonera and Telenor abandoned their proposed joint venture in the face of opposition from the European Commission, read more. Interestingly for us commentators, by stepping away from the EC process, TeliaSonera and Telenor denied Margrethe Vestager, the EU Competition Commissioner, the opportunity to rule on the application of merger control to telecoms markets in Europe – markets which have followed a trend towards consolidation in recent years. Although this has not stopped Ms Vestager from expressing her views. In a speech at the Fordham University annual conference on Friday 2 October, Ms Vestager provided her thoughts on some of the key themes in telco mergers, giving clues as to how the Commission might assess these transactions under her governance.

Justifying telco mergers on the basis of investments

A common argument for clearance put forward by merging parties is that the transaction will facilitate investment, R&D and innovation and will therefore result in a better quality or price offering for consumers.

Whilst Ms Vestager accepted that telco consolidation could lead to these efficiencies, she doubted whether these benefits would be passed on to consumers, rather than retained by the shareholders. What incentive is there to improve price or quality offering where competition in the market has been weakened by the transaction? “So far, I have not seen compelling evidence that would support the existence of a trade-off between competition and investment”.

This presents a key challenge to merging telcos – particularly in the face of increasing competition from OTT players who do not have to invest in infrastructure – and suggests that, in concentrated markets where specific competition concerns have been identified, merging parties will face an uphill battle to secure merger control clearance on the basis of increased investment alone.

Acceptable remedies?

Pre-Vestager, a theme appeared to be emerging in the context of 4-to-3 telco mergers in Europe. In the Austrian H3G/Orange merger in 2012 and Irish H3G/Telefonica merger in 2014 (both involving mobile operator Three – part of the Hutchison group of companies), whilst the competition authorities identified competition issues, the parties secured clearance by offering to facilitate entry of new Mobile Virtual Network Operators (MVNOs) to provide retail competition for the merged entity:

• In both cases, upfront MVNO agreements had to be signed as a condition to clearance and, in the Irish case, UPC – as the relevant upfront MVNO – was given the option to acquire the “48 brand” and/or “48” customer base (previously owned by O2 Ireland). 
• In the Austrian case, in addition to the requirement to sign an upfront MVNO agreement, the merged entity was also required to put in place a Reference Offer, setting the terms on which additional entities wishing to become MVNOs could gain wholesale access to the merged entity’s network. Certain commitments were also given in relation to spectrum divestment. 
• In the Irish case, the spectrum commitment took the form of an option for either of the two MVNOs concerned to acquire an identified package of spectrum within the first 10 years of commercial launch. A commitment was also given regarding continuation of an existing network sharing arrangement with Meteor (the smallest mobile network operator in the Irish market post-merger, and part of Eircom).

In similar vein, the German merger between Telefonica Deutschland and E-Plus, which was cleared by the Commission after an in-depth Phase II inquiry in July 2014, also contained MVNO commitments along with spectrum divestment and commitments regarding 4G network sharing agreements.

The Telenor / TeliaSonera case analysis seems to mark a departure from previous approaches. While not rejecting the developing track-record of the “MVNO solution”, Ms Vestager did warn that it was “probably too early to conclude on the effectiveness of the remedies in those cases”. Ms Vestager was careful to emphasise that each transaction will be assessed in light of the market context. “There is no one-size-fits-all approach”, she says.

The creation of a new mobile network operator (MNO), with its own mobile network infrastructure, is perhaps Ms Vestager’s preferred option. Providing a robust view on the adequacy of remedies, Ms Vestager stated: “what I can say is this: The more structural the remedy the better… an effective remedy in the Danish [Telenor / TeliaSonera] case would have been the creation of a fourth MNO. This would have replaced the competitive pressure eliminated by the merger”. 

Further guidance?

Two further transactions, again following the 4-to-3 market concentration theme, may present an opportunity for the Commission to provide further guidance on the application of merger control to the telecoms markets:

– The Hutchison / Telefonica UK merger marks a further step in the consolidation of the UK telco market. However, Ms Vestager may again be denied the opportunity to make a definitive ruling, if the UK’s competition authority, the Competition and Markets Authority (CMA), manages successfully to obtain a referral back to it under the procedure in Article 9 of the EU Merger Regulation. The Commission has until 30 October 2015 to decide whether to allow the CMA to investigate.

Interestingly, in a speech reported today, Sharon White, Chief of regulator Ofcom, suggests that Ofcom may still think that four operators might be the appropriate number in the UK: “Consolidation can in theory have benefits – improving economies of scale and making it easier to finance investment. However, Ofcom’s experience is that competition, not consolidation, drives investment and delivers low prices… Having four UK networks had delivered good results for consumers and sustainable returns for companies“.

– Hutchison has also announced a proposed joint venture with Italian rival VimpelCom, which could lead to further examination of consolidation in telco markets in the EU.

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