The past few months have seen a number of major developments in Europe regarding the possibility of "four-to-three" mergers between mobile telecoms network operators – i.e. transactions that have the effect that the number of major operators in a country is reduced from four to three.

As we reported in Competition World in January 2013, the "four-to-three" merger between Hutchison and Orange in Austria received conditional clearance from the European Commission – sending a signal that competition authorities will allow four-to-three mergers in certain circumstances, and subject to remedies designed to encourage new entry into the sector ( Competition World, January 2013, "Technology: Mobile telecoms M&A – A greenish light from Brussels"). We concluded that, following the European Commission's decision, there was a more optimistic prospect for in-market consolidation in mobile markets than seemed to be the case after the US antitrust authorities effectively scuppered the proposal for a four-to-three merger between AT&T and T-Mobile in 2011-12 – and we said that it showed that there was "real scope for M&A activity in the sector".

The major developments over the past few months have been:

  • the announcement of two new proposals for "four-to-three" mergers in European mobile markets, in line with our prediction – these were in the Republic of Ireland and in Germany
  • the publication, in August 2013, of the European Commission's detailed reasoning behind its conditional clearance of the Orange/T-Mobile merger in Austria – giving important guidance about the antitrust treatment of other four-to-three mergers, now and in the future;
  • the European Commission's antitrust clearance, in September 2013, of an acquisition by the mobile operator Vodafone of Germany's leading cable operator Kabel Deutschland
  • statements by the European Commissioner for Competition made in September 2013.

There was also, in September 2013, an announcement of significant proposals to change the EU regulatory framework for telecoms in the EU; the proposals are examined at the end of this article.

The new "four-to-three" mobile merger proposals

  • Republic of Ireland – Hutchison/O2: In June 2013, Hutchison (having acquired Orange in Austria) announced that it had reached agreement to acquire the Irish mobile operator O2 from Telefonica – effectively merging Hutchison's mobile operator 3 Ireland with O2 in the country. Like the Hutchison/Orange merger in Austria, this would reduce the number of mobile network operators from four to three, but it differs from the Australian case in that it would create a significantly higher market share for the merged entity. In Hutchison/Orange in Austria, the post-merger market share was 25 per cent; Hutchison/O2 in the Republic of Ireland, the post-merger market share would be between 35 and 40 per cent. However, as the European Commission's reasoned decision in the Hutchison/Orange Austria case makes clear (see below), "quantitative" measures such as market share are by no means the only, or even primary, consideration in the competition analysis, and various other, "qualitative", factors have significant weight.
  • Germany – Telefonica/E-Plus: Then, at the end of July 2013, it was announced that Telefonica, owner of O2 in Germany, was proposing to acquire the mobile network operator E-Plus in Germany from the Netherlands telecoms company KPN. In market share terms the merged entity's market share would be more closely comparable to that in the Republic of Ireland than to that in Austria.

The European Commission's reasoning on Hutchison / Orange Austria

Receiving less publicity than the announcement of the proposed transactions in Ireland and Germany – but hugely important for the prospects of both those transactions and future M&A in the mobile sector – was the European Commission's publication, in early August 2013, of its fully-reasoned decision granting conditional clearance to the Hutchison/Orange four-to-three merger in Austria. There had been a public announcement of the Commission's decision, by way of a two-page press release, in December 2012, but it had taken the Commission almost eight months to produce the fully-reasoned decision.

The reasoned decision runs to over 160 pages, but it is absolutely essential to understanding the current thinking of the European Commission about the antitrust aspects of four-to-three mergers in the mobile sector. The key points can be summarised as follows.

Four-to-three mergers in principle: On the analysis of the effects of this four-to-three merger on competition (and it is important to remember that, despite the clearance, the European Commission found the deal to be problematic in competition terms; hence the need for stringent conditions):

  • The European Commission considered a "four-to-three" merger inherently concerning, even where the merged entity's market share was not so high as to confer a dominant position; in fact the post-merger combined market share of all retail mobile services in Austria was just under 25 per cent.
  • The European Commission was careful, however, to deny that there was a "presumption" that four-to-three mergers are always problematic.

Underlying market shares: In any event, the European Commission considered that the "snapshot" combined market share figure of below 25 per cent understated the merging entities' actual market strength.

  • This was because the parties were winning a much higher proportion of new business – 40 to 50 per cent of "gross adds" – which meant that their future market strength was likely to be much higher.
  • The fact of a time lag – due to two-year lock-in contracts and low customer churn – obscured that future market strength.

Defining the relevant market: The number of competitors, and market shares, depend on how the relevant market is defined. In this case, the European Commission refused to depart from its traditional definition of the relevant markets:

  • For retail mobile services: there is one product market for all retail mobile services – with no subdivision according to private/business, prepaid/postpaid, 2G/3G or voice/data. In addition, for data services, mobile and fixed remain separate markets. Strikingly, the European Commission's treatment of fixed and mobile telecoms as separate markets allowed it, in late September 2013, to grant unconditional clearance at Phase 1 to the acquisition by the mobile giant Vodafone of the German cable telecoms provider Kabel Deutschland16.
  • There is a wholesale market for access and call origination on public mobile networks.
  • There is a wholesale market for international roaming.
  • There is a wholesale market for call termination.
  • The geographical market for all the above four product markets is national, i.e. Austria.

"Qualitative" competition assessment: In line with its earlier decision on the Orange/T-Mobile UK merger in 2010, the European Commission's analysis of competition effects looked not only at "quantitative" measures (number of competitors and market shares in the relevant market) but also at "qualitative" factors – including in particular:

  • Closeness of competitors: A merger is more problematic in so far as the merging entities are particularly close competitors of each other, which was the case with 3 and Orange in Austria – the degree of number portability for post-paid customers between 3 and Orange was above the market average, and the two operators had similar pricing and tariff structures, leading the Commission to conclude that there was a high degree of closeness.
  • "Maverick": The European Commission noted that 3 was "an important competitive force... driving competition" in the Austrian market, through an aggressive commercial policy evidenced in lower margin, success in attracting data-intensive users (on smartphones etc) and aggressive price competition. Although the Commission did not actually use the term maverick, the phrase "important competitive force" expresses this. The merger would eliminate this maverick force, even though 3 was the acquirer and was not being taken over, because "a reduced need for organic growth may lead to less aggressive competitive behaviour" by 3.
  • High barriers to market entry: The competition problems were exacerbated by the fact that it would not be easy for new players to enter the market – e.g. because of limited spectrum availability and the fact that the market was saturated with a high penetration rate.
  • State of the market: Whereas in Orange/T-Mobile UK a history of declining prices and profitability had been seen as suggesting that the market was already competitive, in this case the Commission considered the Austrian market to be "highly concentrated" with the parties realising "significant margins".
  • MVNOs (mobile virtual network operators – i.e. supplying retail mobile services, but not having their own network and purchasing access to the network of one of the mobile network operators): A strong MVNO sector can mitigate the anti-competitive effects of a merger between MNOs, but in Austria there were few MVNOs.
  • Countervailing buyer power: Where customers are strong relative to suppliers in a market, this can mitigate the competition concerns about a merger between suppliers. However, in this case (and in mobile mergers generally), there is no countervailing power, because individual customers, including business customers, lack the size and commercial significance to bargain prices, and resellers and distributors do not resist price increases because they can pass them on to end consumers.

Poor performance by Orange Austria: The European Commission did not accept that the fact that Orange was doing badly – e.g. deficits in quality and coverage – was a justification for allowing the merger. The Commission thought that these factors simply reflected market choice, and were compatible with Orange continuing to be a competitor long-term.

Efficiencies: Although the European Commission may in principle have regard to efficiencies as mitigating the anti-competitive effects of a merger, this is subject to the provisos that the merger must be necessary to achieving those efficiencies and that the benefit of the efficiencies will be passed on to consumers. In this case, the European Commission did not accept that the alleged efficiencies offset the anti-competitive effects:

  • On cost savings through the merger, the European Commission considered that the merger was not essential to achieving them, and they could be achieved through less-anti-competitive means such as domestic roaming or network sharing.
  • On faster roll-out (e.g. of fourth-generation, or 4G, mobile networks), the European Commission was not convinced that customers would get the benefits, since the merger would allow the party (who would face fewer competitive pressures) to claw back from customers the benefit through increased prices.

Remedies (conditional clearance): The package of remedies – divestment of spectrum to a new entrant, and granting 30 per cent of the merged entity's network capacity by way of wholesale access for up to 16 MVNOs (including at least one upfront contract) – was designed to give the opportunity for a new mobile network operator to emerge. Essentially the message here is that the European Commission will allow mergers between mobile network operators in "four-to-three" markets, but only if there are remedies to facilitate a "new fourth operator" emerging.

What the Commissioner said

A pithier indication of European Commission and competition policy on mobile telecoms and mergers came in an interview given by the European Commissioner for Competition, Joaquin Almunia to the German business newspaper Handelsblatt in September 2013. The German business community is of course particularly interested in the policy, given the proposed Telefonica/E-Plus merger in Germany.)

Commissioner Almunia said that there was no objection in principle to a four-to-three merger:

"We have no dogmatic position on the number of providers... There are countries with three, four or even five operators".

He did, however, draw the line at reducing the number below three. He said that duopolies and monopolies of European mobile telecoms companies would be "unacceptable"17.

Meanwhile, important EU regulatory proposals

On September 11, 2013, Neelie Kroes, the European Commissioner for the Digital Agenda (responsible for the EU's telecoms regulatory framework) announced detailed proposals for new EU legislation on telecoms regulation. The key elements are:

  • Abolition of higher charges for international calls within the EU: From July 1, 2014, it will no longer be lawful for fixed or mobile operators to charge more for a cross-border call within the EU than for domestic calls.
  • Abolition of international roaming premiums: Where a subscriber of a mobile service in one EU country uses a mobile phone in another EU country, the price of calls made on that phone are usually inflated by high international roaming charges. For such calls within the EU, mobile providers will now need either to offer their customers tariffs that apply everywhere across the EU ("roam like at home"), or allow their customers to opt for a separate roaming provider who offers cheaper rates without having to buy a new SIM card.
  • Stronger powers for the European Commission to veto regulatory remedies imposed by national telecoms regulators on telecoms providers.
  • Pan-EU harmonisation of rules:
    • A single authorisation, rather than separate national authorisations, will apply for telecoms operators across all 28 Member States of the EU.
    • The rules on wholesale access to networks will be harmonised.
    • Consumer rights (e.g. for plain-language contracts, amount of information provided, rights to switch provider or contract, right to a maximum 12-month contract) to be harmonised.
  • Coordination of spectrum auctions and assignments: There will be greater coordination of the timing, duration and conditions of assignment by Member State governments of spectrum.
  • Net neutrality: It will be prohibited to limit the availability of internet content to users, regardless of the cost or speed of the users' internet subscription.
  • Next generation broadband networks: There will be a Recommendation harmonising the costs that incumbent network operators may charge for giving others access to their existing broadband networks, and requiring that all applicants (including the incumbent's retail arm) have genuinely "equivalent" access to the networks.

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16Case COMP/M.6990 Vodafone/Kabel Deutschland, European Commission press release IP/13/853, "Mergers: Commission approves acquisition of German cable operator Kabel Deutschland by Vodafone", September 20, 2013.
17Reuters, Frankfurt, "EU's Almunia says 3-4 mobile operators may be enough", September 4, 2013.

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