UK Telecom Merger Scene Brings Stronger Focus on EU, National Antitrust Approaches

Pending and approved U.K. telecom mergers are heightening attention on EU and national competition regulatory approaches, lawyers and consultants told us. With the approval without conditions last month by the U.K. Competition and Market Authority (CMA) of the BT/EE merger, all eyes are now on what the European Commission will do about the proposed link-up of Hutchison's Three and Telefónica's O2. These and other tie-ins continue to raise questions about how many mobile players are needed for a competitive market and whether consolidation boosts network investment. "It is very interesting times," said Hogan Lovells (London) technology and telecom attorney Don McGown.

The CMA OK'd BT's 12.5 billion pound ($18 billion) purchase of EE on the ground that the merger wouldn't "result in a substantial lessening of competition ... in any market or markets in the UK, including in relation to the supply of retail, mobile, wholesale mobile, mobile backhaul, wholesale broadband and retail broadband services," it said Jan. 15. The CMA appeared to have believed the combination made sense because neither operator was big in the other's space -- EE in mobile, BT in retail broadband, McGown said. But "obviously the combined entity has a big influence or potential influence in quad-play given BT's existing fixed line and expanding TV interests," he said.

The competitiveness of the U.K. mobile sector "is a genuine concern for our industry," said Internet Telephony Services Providers' Association Chair Eli Katz. The organization believes, despite claims by mobile operators, "there is a highly restrictive wholesale market which hampers the ability for new entrants" to play. The BT/EE merger must be viewed with the wider consolidation taking place, particularly the proposed tie-up of O2 and Three, Katz said. Substantial data already show prices rose when the number of mobile operators went from four to three in other European markets, he said.

The CMA decision is "in line with big EU member state interests," said Antonios Drossos, managing partner of Finnish telecom consultancy Rewheel. Each wants to create a national fixed-mobile telecom champion in order to control the domestic digital market, plus the markets of other EU countries through subsidiaries, he emailed. The CMA "basically turned a blind eye on the fixed-mobile anti-competitive effects," he said. Half of the EU 28 mobile markets are "tight oligopolies with non-competitive outcomes," Drossos said in a Jan. 4 Digital Fuel Monitor report. It cited a December report by the Body of European Regulators for Electronic Communications that said fixed-mobile convergence, bundling and consolidation were trends that could lead to oligopolies and possibly sub- or uncompetitive markets, high prices and consumer harm.

In contrast to BT/EE, the Three/O2 merger is being vetted by the EC because it falls under the EU merger control test, said Morgan Lewis Bockius (Brussels) EU competition law attorney Izzet Sinan. But the EU will work on it in cooperation with the CMA and the Office of Communications (Ofcom), he said. The two-part test looks at the combined worldwide revenue of all parties, the individual EU turnover of each of at least two parties, and whether each party gains two-thirds or more of its EU-wide revenue in the same member country, he said. Mergers that fall outside the test are handled by national antitrust regulators, he said. Even in those cases, however, national authorities can ask that the EC refer the cases to them.

In Three/O2, the EC refused because it sees this as a chance to pursue its own policy in the telecom arena, Sinan said. By contrast, in the similar Danish TeliaSonera/Telenor case (see 1509110010), the "parties blinked first" by withdrawing from merger talks before the EC could decide to take on the case, he said. Ofcom urged the EC Feb. 1 to block Three/O2, saying the deal could hike consumer prices and disrupt networks.

The EC likely will impose many conditions on Three/O2, said John Strand of Danish telecom consultancy Strand Consult. They will come from commitments made by the parties to satisfy EU antitrust concerns and are likely to include actions to help other players enter the market, he said in an interview. French telecom group Iliad is reportedly looking to enter the U.K. if Three/O2 goes through.

Another U.K. debate focuses on what Ofcom will do about ownership of BT Openreach, which maintains the country's copper and fiber communications cable network and is supposed to give rivals access to its telephone and broadband network on equal terms, McGown said. The regulator is expected to decide by month's end, he told us.

Also in the works is the possible merger of French telcos Orange and Bouygues, which reportedly will be handled by the French competition authority. French regulator ARCEP (Autorité de régulation des communications électroniques et des postes) is consulting until Feb. 23 on mobile network sharing. The consultation is "basically the prelude to a kiss," Drossos emailed about the Orange/Bouygues merger approval. It's hard to clear a four-operator-to-three merger where market leader Orange is involved in active network sharing with number two SFR -- and Bouygues is sharing with SFR in 35 percent of French territory -- and in a roaming agreement with number three Iliad, he said. The EC on Thursday cleared Liberty Global's buy of Belgian mobile operator Base, with conditions. The "billion dollar question" is how many independent networks are needed to make competition work in a mobile market, Drossos said.

"Consolidation of the mobile industry is a reality," Strand said in a research note. The question isn't whether the mobile market will experience consolidation but how and in which countries, he said. The Mexican government launched a "carriers' carrier" in which an operator with a mobile network serves only wholesale customers such as mobile operators, ISPs and mobile virtual network operators, he said. The carriers' carrier doesn't compete because it doesn't serve end users, he said. This isn't likely to be a good business model for Europe but could be a way to ensure rollout of services in emerging markets' rural areas, Strand said. In some countries regulators may grow to accept consolidation, while a carriers' carrier might be more effective where consolidation isn't possible, he said.

The main goal of Mexico's public-private carriers' carrier network, which is expected to roll out services beginning in March 2018, is to connect remote areas with low density and income in order to boost broadband services and promote the mobile virtual network operator market, Hogan Lovells (Mexico City) telecom lawyer Federico Hernandez told us. The winning bidder must be a new player that will have to build out infrastructure from scratch, he said. The project has been criticized for not instead allowing existing mobile operators to bid for spectrum after AT&T's acquisition of the country's third and fourth players dropped the number from four to three, he said. It's "a new experiment never seen before in Mexico," and the question is whether the private sector will show any interest in it, Hernandez said.

Another hot topic is whether consolidation is necessary to spur investment. In a Jan. 19 vote, the European Parliament approved a resolution on the digital single market that said more competition, not more consolidation, is needed to boost infrastructure investment. Network operators, however, noted a recent academic study by the Centre for Regulation in Europe (see 1509170007) that said consolidation brings higher levels of investment. More generally, "there is a clear shortfall of private investment in broadband in Europe, as recognised by the Parliament," emailed a spokesman for the European Telecommunications Network Operators' Association. "ETNO believes that building scale is crucial in the global digital value chain," he said.

EU Competition Commissioner Margrethe Vestager and the European Parliament said there's not necessarily a link between consolidation and investment, Sinan said. That's where the battle may take place, he said. If operators push hard for the EC to greenlight a merger, they may find themselves subject to a combination of structural and/or behavioral remedies and be forced to put their money where their mouth is, he said. Operators say they need to consolidate, and at some point a regulator may just say prove it, he added.