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In-country mobile mergers, lessons to be learnt?

 

On the 1st of September, the Commission announced its decision to authorize the joint venture between Hutchison and VimpelCom in Italy. This clearance is subject to strict conditions, mainly the divestment of sufficient assets to allow a new entrant to enter the Italian market as a fourth mobile network operator (MNO). Iliad, the fourth entrant in the French mobile market, is the buyer of the assets to be disposed of by Hutchison and VimpelCom (as it has also approved in today’s decision as a so-called "fix-it-first" remedy).

Almost four months earlier, by decision of 11 May 2016, the Commission decided to block the O2UK acquisition by Hutchison in the UK. In that case, CK Hutchison offered unprecedented concessions –including an immediate 5% market share divestment through the divestment of shareholding in Tesco Mobile, capacity deals leaving 40% of the combined network capacity in new entrants’ hands, the open option to become MNO (including a spectrum offer) to one of those entrants, 4G and 5G access to all MVNOs and the solution to network sharing related concerns- to try and secure approval for this transaction, far beyond what would be necessary on an objective reading of the Commission’s own evidence in this case (much lower price increases than previous transactions, not close competitors, not elimination of wholesale network, etc.).

Meanwhile, we have heard many times the reiterative mantra that the Commission does not support a “magic number” of MNOs per country. Then, if this is not the case, which is the big difference between an MNO and a capacity MVNO which could justify such a different outcome in these two cases?

In both case, as in other similar recent cases, the concerns of the Commission are mainly based on the fear that the merger could eliminate competition between two strong players and that the elimination of an important competitive force could “result in less choice and a decrease in quality of services for consumers, as well as higher retail mobile prices charged by all operators than in the absence of the deal” (as stated in the last Italian case). In order to avoid those effects, the Commission expects the parties to facilitate the entry of a new competitive constrain strong enough to restore pre-merger market conditions.

At this point, it is important to ask ourselves what kind of operator could become such strong enough competitive constraint. Must it be an MNO? Could it be a capacity MVNO? Which is really the difference between them? The Commission itself recently described a capacity MVNO remedy as quasi-structural in nature and allowing for the emergence of a market player that will be conceptually closer to an MNO but does not need to develop its own infrastructure before competing.

In fact, we are not aware of the timing of the Italian remedies but it is easy to predict that it will take a time for Iliad to develop a consistent and national-wide network. Meanwhile, it will have to rely on a transitional wholesale agreement with the merged entity. On the contrary, a capacity model would allow Iliad to start competing with the three Italian MNOs from day one and with a cost structure based on variable costs which would permit Iliad to focus more resources on retail prices instead of developing infrastructure. Would not this scenario entail a much strong, intense and immediate competitive constrain?

The Commission refers to Iliad as the “fourth successful entrant in the French mobile market”. If it has investigating into the secret of such success in France, it would had maybe realized that Iliad enter into that market based on a capacity model. Maybe, this was part of its success. Do not forget that in the UK case, the capacity model could have been taken by convergent players with a much better position in the market…

What is the added-value of an MNO from a competition law perspective (as we are not talking here about sectorial regulatory objectives)? Maybe, the problem is the wholesale market, where, by the way, Hutchison had a negligible position in the UK. But…what if the capacity MVNO could provide wholesale services over the contracted capacity becoming then as well a new wholesaler? Which would be the difference in that case?

The efforts from DGCOMP to support a specific market structure, favouring a particular type of operators with a concrete cost structure make us think more in a sectorial regulator than in a competition authority. Why? Why this kind of analysis by the Commission?

A change of Commissioner? If the same competitive concerns could be solved by some kind of remedies (entry of a capacity MVNO) meanwhile a particular Commissioner is onboard, but this is not enough when another Commissioner is appointed, then the legal certainty principle is at stake.

Pressure from the British authorities in the run up to the Brexit referendum? In fact, the role played by Ofcom and the CMA was particularly concerning.  On the one hand they appear happy to create just one asset owning fully converged player in the UK, but on the other, they do not see shared ownership of mobile assets by key converged competitors to BT (as Virgin or Sky) as good for competition with the new “national champion”. While Ofcom appears desperate to stick with its policy of securing four national networks, its previous decision to auction spectrum without competition safeguards could  allow all of that spectrum to flow to BT and not secure viable long run capacity positions for O2 or Three.

The answer is not clear but it is in any case worrying for mobile operators notifying mobile mergers. For these future projects – very relevant: to be notified during this Commission’s mandate- the lesson is learnt: there is a magic number of MNOs, four, which DGCOMP will not allow to be changed through in-country mergers. For the sake of the legal certainty, the Commission should be clear about it and not allow experiments like the UK one to proceed at the cost of well-intentioned companies.

 

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Enrique Medina
Chief Policy Officer