The increasing uncertainty about mobile consolidation in Europe

 

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Mobile consolidation within domestic markets has always been in the European telcos’ wish list. However, in the last 5 years this ambition hardly clashed with the European Commission’s approach, in the persons of Margareth Vestager, heading the Competition directorate (“DG COMP”) of the Commission, who treated the subject with severity during her mandate. Vestager opened the doors to panEuropean mobile mergers, but showed to be very strict towards domestic mergers (unlike her predecessors Almunia, who cleared 3 domestic mergers, such as in Germany, Austria and Ireland). To achieve this scope, Vestager made national mobile mergers (unlike transnational) subject to a remedy of divestment of spectrum and other mobile resources, in favor of a new entrant mobile operator, so as to maintain at least 4 network operators in the national market and avoid the reduction to only 3. This “rule” was consistently applied in important merger operations in Denmark, the United Kingdom and Italy, despite mobile operators claiming (in vain) that consolidation was necessary to support investments, especially for 5G.  DG COMP offices never bought this argument, and they may have some reason, considering the high sums paid by mobile operators in 5G auctions, irrespective of consolidation.  However, this approach of the Commission may also be criticized because it supports competition merely on pricing arguments, while the market needs to move towards more innovation and diversification.

But a few weeks ago, on 27 November 2018, the European Commission authorized, with some surprise, a domestic mobile merger happening in the Netherlands: it was about the purchase of the small Tele2 (5% of market share) by the third Dutch operator  T-Online (20% of market share), resulting in the reduction of mobile network operators in the Netherlands from 4 to 3. One wonders if this decision constitutes a precedent for starting a new approach in the merger policy of the European Commission, or whether it is an accident. At the moment this is not known, because European Commission’s officials are reported to exclude a revirement from the merger practice developed so far, while the Dutch case should be regarded as the result of exceptional circumstances. This approach, however, is misleading because the Commission did not provide any convincing arguments that the Dutch market conditions were so different from other cases dealt by the Vestager’s offices with much more severity. Therefore, this new case, rather than providing new guidelines for the future, only provokes uncertainties.

The merger between Tele2 and T-Online in the Netherlands led to the creation of a JV owning a consolidated market share of 25%, with the loss of the smallest and most competitive operator in the market (Tele2). One could believe that this scenario would strengthen competition, as the incumbents KPN and Vodafone / Ziggo would have now to face a stronger, consolidated third competitor (and no one else). However, the Commission’s competition practice developed so far (at least before this case) sounds different: the presence of a small group of operators (only 3) with similar market shares (between 25 and 35%) does not clearly help competition, while it may provoke the opposite effect, in particular the alignment of commercial practices – a normal behavior in small oligopolies. The traditional mantra of the Commission has normally been that competition is surely created by a Maverick operator, that is to say a small, hungry challenger who needs to be aggressive (with low prices but not only) to attract new customers and use efficiently its network (which otherwise would be empty). In the Dutch case the classic Maverick operator was Tele2, which with only 5% of the market had no chance but being very aggressive. However, thanks to the authorization of the Commission, Tele2 will now disappear, while it is not clear which incentive should bring the new JV to continue to be so aggressive, since with a consolidated market share of 25% it could find more convenient to align its pricing policy with the rest of the Dutch market. In previous cases, such as Italy and the UK, the Commission’s strict approach had led to the imposition of the entry of a Maverick operator, in these cases the French Iliad, which then actually entered Italy (but not in the UK). The entry of Iliad in Italy has caused a dramatic fall of domestic prices. One would correctly question why the entry of Iliad (or whatever low-cost operator) was imposed for Italy, and not for the Netherlands. 

The reason why the Maverick operator’s rule was disregarded by DG COMP in the Netherlands is unknown. The Dutch Tele2 was financially weak and poorly developed, it only had the 4G network and for the rest depended on national roaming agreements. It was a kind a super-MVNO, like Iliad in Italy. However, being small and week has never been an argument to decrease competition. By contrast, as previously said, Tele2 was the only operator in the Netherlands in real need to be aggressive to acquire new customers and market shares. Fact is, it was the only one to have offered an unlimited data plan. This type of competition will now disappear, although the new JV has offered to continue to maintain this aggressive offer: but it is unilateral commitment, not a remedy, which could be withdrawn any time.

No surprise that, at the news of the T-Online/Tele2 merger’s authorization, KPN’s shares jumped upwards, demonstrating that the disappearance of the Maverick operator in the Dutch market will weak competition and allow prices to rise.

If the European Commission had argued and explained that the time had come for a change of direction, that’s is to say: “welcome domestic mobile mergers”, then everyone would have understood. There are many reasons to support the idea that domestic mobile mergers make more sense than cross-borders ones. Fact is, the latest European regulatory developments suggest that the mobile market is and will remain marked by national borders: spectrum policy remains firmly in the hands of national authorities; the new European code strengthens the powers of national authorities to decide national cases on the basis of local specifications; wholesale caps roaming are well above retail domestic prices, thus preventing permanent roaming. In other words, European regulation has done very little to support a business case for pan-europeans mobile mergers, unlike domestic ones, therefore one should wonder why this scope should be boosted by a single leg of the European Commission (DG COMP), while the other legs are rowing against.

On the contrary, the DG COMP has made a striking exception to the merger practice implemented so far, but at the same time denying that something may have changed. In this way, the doubt remains that the Dutch case is a more political* rather than a market decision, and that there are no clear rules for the future. Belgian authorities are planning to open the market to a 4th mobile operators, while in other countries (France, Spain) there are reflections about consolidating down to 3. What lesson to be learned from this Dutch case? Boh.

*I would not be surprised to learn, one day, that this decision may have been taken at pure political level, with some senior officials dissenting or even opposing it. A similar situation likely happened during the Almunia’s term (2009-2014) when other 4 to 3 mobile mergers were authorized, despite the likely contrary opinion of the offices. However, there are no official evidence for that, since the eventual dissenting opinion of the offices cannot be reported in official minutes or drafts. We have to stay with doubts and suspects, made more inconvenient by the fact that the beneficiary of this strange decision is the German incumbent Deutsche Telekom.

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