The end of domestic mobile consolidation in the EU

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Rumors say that tomorrow 4 of May (or later during the month) the European Commission will render a negative  opinion (a prohibition, in other words) about the merge in UK between the mobile operators 02 (Telefonica) and Three (Hutchison Wampoa).

If confirmed, this move will not come unexpected because in many instances the Competition Directorate (DG Comp) of the European Commission has suggested that mobile consolidation in mobile domestic market is not welcomed. Instead, mobile operators should  rather look at cross-border consolidation, creating pan-european operators able to compete in a cross-borders scenario that will become more and more actual when (and if) the roaming surcharges will be phased out in June 2017. At that point, European operators may be able to provide mobile subscriptions to be used in a plurality of European countries and, as a result, consumers my theoretically choose a foreign mobile operator even for domestic needs (this situation, named permanent roaming, is however contested and sometimes considered even “abusive”. This is another story, for now).

The UK precedent will create a fundamental landmark case for the European telecom sector and, as a consequence of that, it is unlikely the similar mergers (see for instance the current one in Italy between Three and Wind) will ever be approved in the future.

Concerned mobile operators will probably complain that the “4 to 3” consolidation is necessary in UK, like in Italy or France, to boost network investments. However, it is crystal clear that the European Commission has heard and carefully considered this argument, without finding, however, concrete evidence. If the investment argument was credible, the merging entity should have accepted the Commission’s desired remedy, that is to say the creation of a new mobile operator through the transfer of spectrum, network resources and customer base by the merging entities. Such new mobile operator should not have damaged the investment plan of the merged mobile operator. By disregarding this option, Hutchison and O2 have reinforced in the Commissions the suspect that the reduction of mobile operators is merely focussed on limiting competition and increasing margins (to the detriment of consumers).

For future guidance, one would hope that the European Commission will provide a robust reasoning for its decision. Such reasoning missed in a precedent case, the aborted merger in Denmark between Telenor and TeliaSonera, because the parties abandoned the transaction before getting a formal rejection. By contrast, now it would important that the Commission clarifies that competition conditions are more important than “magic numbers”, such as 3 or 4 operators. What really matters, for competition, is a market structure encouraging the players to really compete and gain new customers. In mobile markets this surely happens when markets shares are unbalanced and there are small players, mobile operators but also MVNO, fighting to increase their position.

This is the reason why also the envisaged merger in Italy between Wind and Hutchison is close to fail (a dead walking man, to be clear. Fact is, following the potential merger the 3 Italian operators left, such as TIM, Vodafone and Three/Wind, would detain balanced markets shares – a scenario that, according to the European Commission, facilitate mutual collusion rather than competition.

Two items will probably remain opened after the (likely) rejection decision, tomorrow or in the next weeks:

1. did the European Commission sufficiently considered the MVNO remedies offered by the parties? It seems that DG COMP has never believed too much in MVNOs, disregarding the competitive pressures that such MVNOs may exercise over mobile operators. Indeed, DG COMP has the power to impose strong MVNO remedies, instead of imposing the creation of a new mobile operator, and the efficiency of such virtual operators rely on the mobile access conditions that the European Commission itself may decide.

2. In the future there will be a discrepancies between countries (Germany, Ireland and Austria) where mobile mergers have been approved thanks to the previous laissez-faire of DG COMP (when headed by Almunia) and countries where such mergers are going to be prohibited due to the stricter approach of the same DG COMP (now headed by Vestager). Should the European Commission start to think how to redress passed mistakes?

And what about #brexit? Many commentators  may argue that the Commission’s decision my be seen as an attempt to please UK. I would say that this is just a coincidence: OFCOM and DG COMP have similar view about mobile consolidation, although the reason for each may be complex: OFCOM wants to keep 4 mobile operators to protect consumers and to avoid the need to intervene with regulation into the mobile market; DG COMP wants to boost pan-european consolidation, and the best way to do it is to forbid the domestic one.

One thought on “The end of domestic mobile consolidation in the EU

    Davide Gallino said:
    3 May 2016 at 23:45

    The EC behaviour and that of local NRAs was certainly erratic in the Almunia era, but not necessarily easy going. In Ireland, H3G was not allowed to buy Eircom; in Austria tough remedies were imposed when H3g bought a stake of Orange (btw, prices went up, but the revenues of the mnos did not); in Spain Vodafone bought Ono in a couple days ( true, not mobile but cable; but “the” market is broadband I reckon), and in Germany it took a couple hours to complete the operations (perhaps Angela needed some inflation?) All this to point out that merger regulation is not an exact science.

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