In July, we launched the EU Merger Control series, outlining Telefónica’s position on the review of the EU Merger Guidelines, and welcomed this as an opportunity to strengthen Europe’s competitiveness and build a framework that supports innovation, resilience and strategic autonomy.
The first post examined why the Commission’s economic assessment approach must evolve ahead of any reform of EU merger control rules. The second post provided an overview of Telefónica’s response to the consultation. The third post set out the sector’s call for an in-depth review of the merger guidelines to ensure they are fit for today’s EU challenges. The fourth post related to the analysis of market power based on structural features and other market indicators. In the fifth post, we shared our Policy Brief, which provides a clear and concise overview of these issues and a summary of Telefónica’s technical contribution to the ongoing revision of the Merger Guidelines, focusing especially on the role of investment, innovation and scale. The sixth post explained Telefónica’s position on the role of sustainability in merger control analysis.
This seventh and last post of the year assess the need to rethink the current approach in the assessment of efficiencies towards a more holistic, dynamic and balanced perspective. Furthermore, it should establish a standard that makes the efficiencies defence workable, considering sensible timeframes for their achievement according to sector specificities and with a broader recognition of effects beyond the given market.
Need to rebalance the current standard of proof for efficiencies
The Commission’s current approach in the assessment of efficiencies in mergers is generally too static and focused mainly on short-term price effects. This approach often overlooks qualitative benefits and the ability of companies to invest and innovate, which overly has impacted negatively in EU mergers, especially for the incapability of merging parties to demonstrate that the effects exerted by the transaction were merger specific.
As a result, the Commission needs to set a standard of proof that is sensible and workable, that considers the uncertainty that companies face in the setting of efficiencies, irrespective of whether the efficiencies to consider are in-market or out-market. Most importantly, the Commission should set a balanced standard of proof in the assessment of efficiencies and the theories of harm.
Need to set the right counterfactual – no less alternative means are always possible nor less “risky” from competition perspective
When assessing whether the same synergies could have been achieved absent the merger by less anticompetitive agreements (like cooperation agreements, licensing, joint venture, organic growth), the Commission should take right counterfactual, considering those alternatives only when they are feasible and the most likely scenario.
The Commission should not base its analysis in theoretical considerations especially when some alternatives are not realistic and attainable, and the parties have demonstrated that they had already exhausted all available forms of “less anticompetitive alternatives”. Conversely, the Commission should rely on the analysis done by the merging parties, with special emphasis on the internal documents
For instance, in the case of telecoms, cooperation agreements are based on commercial negotiations that need to last long-term. The cooperating parties do not always hold the same commercial incentives or sufficient assets symmetry.
Lastly, it is important to note that non-concentrative alternatives are always inherently less anticompetitive compared to mergers. There could be constellations in which cooperation between competitors can be complex and complicated to monitor from a compliance perspective – especially in the information sharing.
Consumer Welfare: A broader view under the dynamic efficiency approach
It is important to note that merger efficiencies should be assessed on a case-by-case basis under the dynamic efficiency approach, looking at the supply side of the market and its characteristics. This would allow a better understanding of consumer welfare benefits generated by the transaction.
Under the dynamic approach, the Commission would be able to recognize efficiencies that contribute to broader objectives of the EU identified in the Mission Letter – framed into the full concept of consumer welfare. This involves a holistic assessment of competition in terms of at least, the four parameters of competition: price, quality, choice and innovation, so that the potential benefits to be passed on to consumer are assessed and quantified with reference to all of these parameters – and not just prices.
Therefore, the notion of consumer welfare should be taken fully into consideration to enable a broader assessment of efficiencies, so that the Commission considers not only the direct efficiencies exerted to end-consumers in the relevant markets where the merging parties are active, but also the effects on SMEs, medium companies and public administrations. Moreover, the Commission should recognise out-of-market efficiencies, i.e., those that exert effects not only to direct consumers in the relevant market, but also other customers in the same market, as well as same consumers in different markets, especially those that can support wider EU objectives.
Long-term perspective in the consideration of dynamic efficiencies
The Commission should take the appropriate timeframe for the assessment of efficiencies on a case-by-case basis, based on the characteristics of the sector and investment cycles.
Moreover, the Commission should put the focus on dynamic efficiencies versus static efficiencies that materialize in the short-term (2-3 years) as the current standard of the Commission to accept efficiencies. Unlike static ones, dynamic efficiencies arise in the longer-term from increased investment and innovation.
For example, in the case of telecoms, capacity expansion and technology upgrade decisions are made with a long-term planning horizon (i.e., 8- 12 years) that reflects both the economic life of the assets and the time for returns on investment. This means that efficiencies arising from a merger, such as the ability to deploy more advanced network equipment earlier or at larger scale, must be assessed over that longer timeframe to fully capture their positive effects.
Explicit recognition rivalry-enhancing efficiencies
The Commission should broadly consider rivalry-enhancing efficiencies: as recognised by the CMA, efficiencies are not limited to merging parties but can enable more intensive competition across the market in the longer term. In telco, for instance, the investments in quality can elicit a competitive response from the rest of the market to not lose customers. Over time, mergers can result in a market structure that unlocks a new wave of competition on parameters such as quality.
Telefónica has advocated for these changes and is happy to see that they are shared by the general opinion of the industry as well as in the messages conveyed in the workshop celebrated by the Commission a couple of weeks ago. All in all, we are convinced that the proposed changes would allow a broader recognition of efficiencies in EU mergers that will enhance investment intensity and competitiveness in the EU.
