The European Commission has blocked the purchase of Telefonica UK by Hutchison (or the purchase of O2 by 3, in network terms). The decision, taken on competition grounds, won’t be a surprise to many as the mood music has been negative on the merger for several months now.
All the same, the decision will get a low hiss from the mobile industry and nearly all who sail in her since mobile operator consolidation has, for several years, been seen by mobile carrier advocates - and of course the financial markets - as a necessary precondition for European mobile ‘market repair’ (i.e. price rises) and further network investment.
In fact it always seemed pretty clear that the proposed merger would run into trouble, especially since a similar 4 to 3 merger was blocked in Denmark last year. According to the Commission it has blocked the UK merger since it “had strong concerns that UK mobile customers would have had less choice and paid higher prices as a result of the takeover, and that the deal would have harmed innovation in the mobile sector.
“The takeover would have removed an important competitor, leaving only two mobile network operators, Vodafone and BT’s Everything Everywhere (EE), to challenge the merged entity. The significantly reduced competition in the market would likely have resulted in higher prices for mobile services in the UK and less choice for consumers than without the deal. The takeover would also likely have had a negative impact on quality of service for UK consumers by hampering the development of mobile network infrastructure in the UK. Finally, the takeover would have reduced the number of mobile network operators willing to host other mobile operators on their networks.”
Here are the Commission’s competition concerns laid out in full
Less competition leads to higher prices and reduced choice and quality for consumers: The takeover would have eliminated competition between two strong players in the UK mobile market. Three is the latest market entrant and has been an important driver of competition in the UK mobile market. O2 has a strong position with high brand value and reputation. It is the second largest mobile operator by revenues and the largest in terms of subscribers (if its share in the Tesco Mobile joint venture is included). Combined, Three and O2 would have been the market leader with a share of more than 40%.
They would have had much less incentive to compete with Vodafone and EE. This would have reduced choice and quality of service for UK consumers. The Commission's analysis also showed that with the takeover retail mobile prices would have been higher for all UK operators than without.
Future development of entire UK mobile network infrastructure hampered: The merged entity would have been part of both network sharing arrangements, MBNL and Beacon. It would have had a full overview of the network plans of both remaining competitors, Vodafone and EE. Its role in both networks would have weakened EE and Vodafone and hampered the future development of mobile infrastructure in the UK, for example with respect to the roll-out of next generation technology (5G), to the detriment of UK consumers and businesses.
Reduced number of mobile network operators effectively willing to host virtual operators: The transaction would have reduced the number of mobile network operators willing to host other mobile operators on their networks. Mobile virtual operators rely on access to the infrastructure to provide mobile services to consumers. The reduced number of host mobile networks would have left prospective and existing mobile virtual operators in aweaker negotiating position to obtain favourable wholesale access terms.
In response Hutchison proposed remedies, but these were judged to inadequately address the problems.
..to give access to a share of the merged entity's network capacity to one or two mobile virtual operators.
.. to divest O2’s stake in the Tesco Mobile joint venture, and to offer a wholesale agreement for a share of its network capacity to Tesco Mobile.
.. to offer a wholesale agreement for a share of its network capacity to Virgin Media.
The Commission says that even if these offers were taken up, the mobile virtual operators would have been commercially and technically dependent on the merged entity, with limited ability or incentive to differentiate their offerings, including in terms of network quality.
Regarding network sharing agreements, Hutchison offered certain behavioural remedies, which would have been difficult to implement and monitor effectively. Three and O2 would have kept their respective stakes in the two network sharing agreements, MBNL and Beacon.
As regards the Commission's third concern (regarding the takeover's effect on mobile virtual operators), Hutchison offered a set of behavioural measures aimed at granting mobile virtual operators access to 4G and future technologies. These were commercially unattractive for the mobile virtual operators and raised significant uncertainty as regards effective implementation.
The Commission therefore concluded that the proposed remedies would not have been able to prevent the likely negative impact on prices, quality of service and network innovation in the UK mobile sector as a result of the takeover, which is why it decided to block the proposed transaction to protect UK customers and businesses.
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