The EU’s dilemma on telecom consolidation

Since Commissioner Margrethe Vestager took office, she has dealt with several mergers in the telecom sector. Last April, the Commission opened an in-depth investigation into Teliasonera and Telenor’s proposed merger. The two companies ultimately decided to withdraw from the case, as they were unable to appease the EU’s competition watchdog in due time. Vestager later stated that the Commission had been “on the road to prohibit the merger”. Next came the case of Liberty Global and BASE. From this and its other cases, what can we read into the EU’s stance on competition?

Through recent cases, the European Commission has conveyed its vision of how competition should work in telecom markets. The need to have a fourth active competitor in the market appears to be one of the essential conditions for a merger to win approval. This was confirmed by Vestager following the Telenor-Teliasonera case, in which only the existence of a “fourth mobile network operator” could have alleviated the Commission’s concerns. Also, in the case of mergers that have the potential to restrict competition, and if the upfront buyer has the potential to exert enough pressure on the remaining dominant competitors, it seems that divestiture is essential. In the recent General Electric (GE)-Alstom decision, approval was conditional on GE’s obligation to sell part of its infrastructure to an assigned purchaser, Ansaldo. The decision adopted by the Commission in the Liberty Global and BASE merger case goes further. Not only has Liberty Global been required to sell BASE’s share in Mobile Viking to Medialaan, a Belgian operator, but has also had to transfer parts of BASE’s customer base and offer access to its mobile network to the same operator.

That latest decision makes it clear that the Commission no longer considers that commitments to allow network access are bringing a sufficient degree of competition to the retail mobile telephony market. This brings EU enforcers in line with the position of several national competition authorities that, especially in the case of the Telefonica Germany-E-Plus merger, considered the commitments accepted by the Commission as insufficient to address competition concerns. This Commission’s stance, though, has continued to be questioned by telecom network operators arguing that consolidation is essential for investing in new infrastructures and technology. Telecom operators are facing increasing investment pressure to keep pace with the growth in mobile data, as well as increasing competition from ‘over-the-top’ services such as Skype. The approach also fails to acknowledge that consolidation could lead to more convergence, which is beneficial to both the consumer and innovation. Arguably, more consolidation would foster the integration of national markets and the emergence of big players across the whole of the EU. But it seems that these considerations do not represent a key concern for the Commission, which insists on highlighting the potentially adverse effects.

One thing is clear for the way ahead: the Commission has to take into account the specific characteristics of the market at stake, and do so case-by-case. With the Telenor-Teliasonera merger, for example, it was the two biggest mobile operators in Denmark coming together in a highly concentrated market. The companies were also among the largest wireless operators in Sweden and Norway, involving the potential risk of cooperation and coordination in the entire Nordic market. The assessment of the upcoming Hutchinson-VimpelCom merger may considerably differ given that these mobile operators have limited coverage and are smaller than their competitors. Other independent and strong competitors are active in these member states with a corresponding subscriber base. Similarly, it is the specific characteristics of the Orange-Bouygues merger, reducing the number of telecom operators in France from four to three, that will determine the outcome of the case.

The future of consolidation in the telecoms market is difficult to predict as the Commission is placed in a difficult position. On the one hand, it needs to allow some level of consolidation for mobile operators to withstand competitive pressure from new technologies, but on the other, it needs to ensure that consolidation does not detrimentally impact consumers, innovation or the competitiveness of the telecom market. It will therefore be key in the case of future mergers to develop and implement an appropriate strategy, and to communicate the benefits and drawbacks of the specific transaction.