Is consolidation in the telecoms industry in the interests of consumers?
Snapshot
- 2023 will be an important year for telecoms mergers, as the regulatory appetite for national mergers between competing operators will be tested
- While regulators have historically been sceptical about deals that remove a competitor from national markets, the telecoms sector is making the case that consolidation is key to achieving synergies and unlocking innovation for the benefit of consumers
There can be little doubt that the next 18 months will bring a period of consolidation in the telecoms market in both the UK and Europe. In the UK alone there are over 100 altnet suppliers all vying for a slice of the fibre broadband market. This is unsustainable and we will see mergers as each of these companies chase the elusive subscribers. But will this benefit consumers or not?
The push for consolidation
In July 2021, Orange and MasMovil announced their intention to merge their businesses in Spain. In the UK, Vodafone and Three have confirmed talks regarding a potential merger. If both deals progress, they will act as a key test of the current regulatory appetite for major in-market mergers when they come before the European Commission and the UK's competition regulator, the Competition and Markets Authority.
Proponents of further consolidation argue that these national markets are highly competitive and that the resulting synergies will then enable combined entities to pass on benefits to consumers, as well as to provide the necessary scale to drive infrastructure improvements, such as the roll out of 5G. Similarly, it is argued that consolidation is necessary to compete effectively on the international stage in markets with fewer players, such as the US and China.
Historic regulatory scepticism of in-market mergers
Traditionally, regulators have been reluctant to approve mergers that reduce the number of mobile network operators (MNOs) below four players in-market, wary of the potential adverse effects arising from any decrease in competition at the infrastructure level.
Since Margrethe Vestagers' tenure as Commissioner for Competition in 2014, the Commission has taken a more permissive approach to national concentrations. In 2015, TeliaSonera and Telenor withdrew from a proposed merger following a failure to agree acceptable conditions with the Commission for approval. In 2016, the Commission blocked the planned merger between O2 and Three that would have left three MNOs in the UK. While the Commission cleared an Italian MNO merger between 3 Italia and Wind that same year, this was conditional on the merging parties facilitating the entrance of a new MNO, preserving four MNOs in the Italian market.
Although the Commission has maintained that there is no "magic number" of operators in any market, the prevailing view has been that telecoms mergers reducing the number of operators below four were unlikely to receive clearance, unless accompanied by commitments ensuring effective ongoing rivalry at both the infrastructure and downstream retail level.
Scope for greater network consolidation?
Recently, there have been encouraging signs for supporters of consolidation.
In 2018, the Commission approved the T-Mobile and Tele2 deal in the Netherlands, permitting a merger between the two smallest network operators in the Dutch market, reducing the number of competitors to three. The Commission concluded that the merger would ensure they could compete more effectively against the biggest players on the market, KPN and VodafoneZiggo. While the case was highly fact specific, it marked a divergence in approach and showed the Commission was willing to consider unconditional clearance for such deals.
In a major development for UK operators, in 2022, Ofcom, the UK's regulator for the telecoms sector, softened its previous stance that there should be four MNOs in the UK, instead confirming that its stance would depend on the specific circumstances of the case.
O2 and Three
A major boost to those arguing for a more lenient approach came in 2020, when the EU General Court overruled the Commission's veto of the proposed merger between O2 and Three. The court considered that the Commission had failed to prove expected negative effects on price and quality to the requisite legal standard and failed to show that these had a "strong probability" of materialising. This is a significant ruling for those considering telecoms consolidation – the case had the potential to profoundly affect clearance prospects and commentators were suggesting it may even overhaul the Commission's traditional approach to assessment.
However, 2022 muted the optimism. Following the Commission's appeal to the Court of Justice of the EU (CJEU), Advocate General Juliane Kokott's opinion was that the General Court's ruling should be set aside on the basis that the Commission should be given a wide margin of appreciation when scrutinising mergers. While the CJEU, which is set to hear the case in 2023, is not required to follow the AG's opinion, in most instances it does.
Time for regulatory change?
While there may be reason for cautious optimism that regulators across Europe and the UK could be softening their stance against telecoms consolidation, the likelihood of clearance for deals the Commission has been historically sceptical of remains unclear.
Given this uncertainty, all eyes will therefore be on the progression of the potential mergers between Orange and MasMovil, as well as between Vodafone and Three, if and when they come before the regulators.
Authors
Simon Neill, Lead author Partner, UK simon.neill@osborneclarke.com +44 20 7105 7028
Joachim Piotorowski Associate, UK joachim.piotrowski@osborneclarke.com +44 207 105 7899
Lucy Paull Senior Associate, UK lucy.paull@osborneclarke.com