Recognition of the full concept of Consumer Welfare
Telefónica welcomes that the core element of its proposal, which is the full recognition of the parameters of consumer welfare in the merger assessment (i.e. quality, innovation and consumer choice, beyond short-term price effects), is now reflected in the new Draft Guidelines. Telefónica has advocated for a technical approach grounded in the well-established competition law parameters for assessing consumer welfare.
The Commission now recognizes that the assessment of mergers should give adequate weight to price and non-price parameters, taking into account appropriate timeframes according to the characteristics of the markets and the sector. Non-price competition can encompass a variety of parameters to the extent they are relevant for the competitive process in the markets at hand, including output and quality, also covering consumer choice, capacity, output, product features, investment, innovation, privacy, sustainability, resilience (including security of supply).
A Shift Toward Dynamic Analysis is welcome, but the recognition of Scale’s Full Benefits Requires a Supply-Side Lens
In line with Telefónica’s proposal, the Draft Guidelines places a strong emphasis on competitiveness objectives, acknowledging that due weight should be given to scale, innovation, investment and resilience as pro-competitive factors. However, the current framing appears to associate a pro-competitive scale primarily with the ability to compete in global markets. This approach risks overlooking the competitiveness of many European industries whose relevant markets—defined on a case-by-case basis—may be local, regional, national or cross border rather than global. Therefore, in its response, Telefónica has advocated for the recognition of scale in the relevant markets.
Similarly, Telefónica welcomes the clear shift towards a more dynamic analysis based on the incentives and ability of firms to innovate and invest as a result of the transaction. However, the Draft Guidelines leave scope for the Commission to further strengthen its analysis by fully leveraging the dynamic efficiency, which would allow for a more comprehensive assessment of how firms operate, invest and innovate under real market conditions, and therefore better identify the circumstances in which scale is necessary to drive competitiveness. Telefónica recommends that the Commission:
– Takes a proper assessment of the supply side of markets, which involves a clear analysis and understanding of the function of production of each market and firms’ capabilities.
– Considers performance improvement as a driver of competitiveness: Take into account productivity increases and not just how to share the current productivity. This approach encourages thinking in terms of market growth or ‘growing the pie’, instead of just redistributing what already exists among established players.
– Considers profits and profitability driven by innovation and risk-taking as a desirable market outcome: in contrast to those stemming from monopoly power or reflecting inefficient market structure and extraction of consumer welfare.
“Theories of Harm” vs “Theories of Benefits”
Under the current proposal, the Commission would focus primarily on the identification of anticompetitive effects and potential “Theories of Harm”, while leaving it to the merging parties to demonstrate any positive effects through efficiencies now framed under the new concept “Theories of Benefits”. Then, the Commission would make a balancing exercise between benefits and harm within the SIEC (“Significant Impediment of Effective Competition”) assessment.
To conduct a real overall analysis, Telefónica encourages the Commission to endorse the methodology proposed by BRG’s Report:
– Step 1: Identify the relevant dimensions of competition and the market characteristics around them.
– Step 2: Assess the so-called “direct strategic effects”, stemming from the change of ownership. This step should be analysed by the Commission to help it form a view on the “Theory of Harm”, conceptualized as the consequence of getting a net effect of the loss or gain of competition in all the dimensions affected by the deal and identified in Step 1.
– Step 3: Consider the efficiencies, the so-called “indirect strategic effects”, such as investment and production costs, access to technologies, financing conditions or organizational capabilities. This step is compatible with the “Theory of Benefit” scenario proposed by the Commission as the parties are the best placed to show the benefits brought to consumers by the synergies of the deal.
In any event, the Commission should clarify how the SIEC would work under the new Theory of Harm Vs. Theory of Benefit analysis. When will the parties be able to bring forward the efficiency defence? What happens if the Commission dismisses the arguments? Do the parties have several chances to bring forward efficiencies?
Need for a symmetric treatment in the assessment of efficiencies vs harm, applying equivalent evidentiary requirements and taking the “most plausible” counterfactual
Telefónica welcomes the recognition of dynamic efficiencies based on investment and innovation, as well as the consideration of appropriate timeframes and out-of-market efficiencies. In addition, the Commission makes a revolutionary shift in the standard of proof for assessing harm and benefits, now intended to be symmetrical under “the more likely than not” test. Nevertheless, the efficiencies section can be significantly improved by taking into account the following recommendations:
– Ensure that the evidentiary standard for harm and efficiencies is genuinely symmetrical, so that efficiencies are neither subject to a higher burden of proof (as the traditional three criteria of verifiability, merger-specificity and pass-on to consumers) nor treated as exceptional (consistent with the stated objective of the Commission to apply equivalent evidentiary requirements based on a robust and cogent body of evidence).
– Equal treatment of long-term and short-term efficiencies, regardless of whether they are dynamic or direct, through evidential, procedural, and analytical tools that do not depend excessively on quantification. For this, it is key that the time horizon reflects economic reality by properly analyzing the supply side and characteristics of the market.
– Merger specificity should be assessed against the most likely counterfactual or subsidiarily a counterfactual with a certain degree of likelihood and explicitly encompassing the possibility that the counterfactual is a no-alternative scenario, which remains a common benchmark in M&A practice.
– Out-of-market efficiencies should be duly recognised as relevant economic benefits contributing to the Union’s competitiveness objectives.
Moving forward
Telefónica welcomes the Commission’s efforts to drive a meaningful evolution of EU merger control policy through the Draft Merger Guidelines, as well as its willingness to engage with stakeholders and take their views into account. This provides an important opportunity to develop a more dynamic, future-oriented and economically grounded framework that preserves effective competition in all its parameters while better reflecting today’s investment, innovation and competitiveness challenges.
But progress isn’t the same as completion. For these Guidelines to deliver on their promise, the Commission needs to close the gap between principle and practice. That means treating the benefits of a merger with the same analytical seriousness as its potential harms. It means recognising that scale and efficiency are features of the system with potential benefits to consumers, and it means building a framework where European companies can consolidate, invest, and compete.
Finally, looking at future developments, Telefónica considers that, after having tackled such relevant evolution of the Merger Control Guidelines, the Commission should open the review of the Remedies Notice accordingly.
