Research Notes

4 to 3 mobile mergers can be derailed by operators telling a story too good to be true and regulators with a religious approach to consolidation

Strand Consult has analyzed consolidation in the mobile industry beginning in year 2000. Our first report appeared in 2002 describing the process in South Korea going from 5 to 3 operators. We described Brazil where many operators were consolidated into 4 today. We have also described the inconsistencies in Europe, Latin America, and USA where 4 to 3 are allowed in some cases and not others and the associated remedies.

Our research has revealed the folly of regulators to reject 4 to 3 mergers for reasons of competition and price, only to find that their logic was wrong and that prices increased. See the case of Denmark: The EU Competition Authority’s Role in the Failed Telenor Telia Merger in Denmark and the Consequences for Europe – Post Mortem Part I and The consequences of the failed Telenor Telia merger in Denmark – Post Mortem Part II in which DG Competition’s decision under the leadership of Danish Margrethe Vestager became a gift to the incumbent, TDC.

In United Kingdom, the 4 to 3 horizontal mobile mergers between O2 and 3 did not succeed, but a vertical merger between the largest fixed line (BT) and largest mobile operator (EE) was allowed. The UK, a country with 12 times the population of Denmark, could avoid the scrutiny of Brussels in the vertical merger because the merging entities were nationally owned whereas the horizontal merger was dismissed with a tweet from DG Comp noting rejection for reasons of “consumers and innovation,” nothing more. This illustrates the limited accountability of antitrust authorities and how government intervention generally works to serve incumbents against upstarts. See: Leaked documents from Hutchison / Telefonica deal in UK shows EU competition authorities don’t understand telecom markets. The decision was a gift to the incumbent BT and EE.

Strand Consult’s new research project “Why four to three mobile mergers fail” documents the mistakes made both by operators and regulators in merger review. In practice, mobile operators tend to “oversell” their transaction while regulators apply outdated or inappropriate analytical models to assess the deal. Strand Consult documents that many mobile operators’ desperate efforts to make their merger look more palatable to regulators unwittingly backfire. It also details the frequently underestimated but no less important political context in which merger decisions are made.

Our research highlights the prejudice of many antitrust authorities which have an ideological view based upon outdated economic models in which firms offer identical, homogeneous products with the same marketing strategies. Today’s mobile market is dynamic, diversified, and highly differentiated.

Strand Consult’s research details the role of compensatory remedies in consolidation. European authorities like to incorporate mobile network virtual operators (MNVOs) into the equation, but even regulators misunderstand MNVOs. In fact, an MVNO is not a mobile operator but an alternative distribution channel for mobile network operators. Germany’s 4 to 3 consolidation featured O2 bought E-Plus. As compensation, the MVNO Drillisch was awarded a golden wholesale agreement with the newly merged entity of E-Plus and O2. Read DG Comp’s decision here: The agreement increased the value of Drillisch by approx. €2 billion, and it subsequently increased Drillisch’s share of the MVNO market from 10-15% to approx. 80%. The shareholders in Drillisch received an arbitrary gift from the antitrust authorities which wanted political cover for a decision that was not justified by the facts. There was no explanation why one MVNO alone (Drillisch) should be rewarded and not the many other MVNOs in Germany.

From the very first MNVOs developed in Denmark and Germany 25 years ago, Strand Consult has a developed a center of excellence on MVNOs.  What most people think are MNVOs are, in reality, service providers. In practice, a service provider cannot change network provider without customers changing their SIM cards. A real MVNO, on the other hand, does not need to change SIM card when changing network provider. This is a key issue of competition and switching in the context of mobile network consolidation.

USA vs. EU – Two ways to look at consolidation
In general the US has had preferable view to consolidation than the EU, at least when it comes to the macroeconomic factors and dynamic competition. The US enjoys a level of investment per capita twice that of Europe, multiple national mobile operators, multiple competitive network facilities for broadband access, and 5G leadership.  The EU precautionary approach, on the other hand, has resulted in a €150 billion network investment gap, no pan European mobile operators, a predominance of DSL for fixed line broadband access, and an increasingly long roadmap to 5G. Moreover, the larger mobile application ecosystem built on private network investment and consolidation empowered a multibillion dollar economy and millions of jobs.  But American regulators have made mistakes, which the report documents.

Antitrust authorities have a tough job to weigh the evidence. Their tools are blunt; the information is not specific to their questions; and their assumptions are outdated. As such, it’s tempting to fall back on “heuristics” or rules of thumb because doing the proper analytic job doesn’t always lead to clear conclusions. Over time, however, measurement improves, and there are opportunities to review past decisions. Regulators love to celebrate decisions when they’re right (even if they can’t prove it was for the right reason), but they rarely take responsibility for when they’re wrong.

In the period most frequently studied, prices for mobile services (by any measure) are known to have generally declined in all markets, whether 4 to 3 mergers had taken place or not. Econometric models have been used to produce weak evidence that prices might have declined more in markets where there had been no mergers. This is not the proper counter-factual analysis. The proper analysis is to compare markets in which mergers have been allowed versus markets in which mergers have been denied. Using this analysis the evidence becomes even weaker for the rejection of mergers. Furthermore antitrust authorities lack a modern approach to pricing. Today’s consumers increasingly purchase bundles of voice, SMS, data and other products services. The prices of today’s bundles are difficult to compare to the pure sticker prices of 15 years ago, adding further inapplicability of the authorities’ traditional antitrust analysis. Strand Consult fills the gap by introducing the role of bundles and reviews the same evidence with comparable prices. 

Current 4 to 3 mergers T-Mobile/Sprint in USA and T-Mobile/Tele2 in Netherland should be no-brainers for approval, but both face difficulty because of the political environment, the level of expertise of antitrust authorities, and the incompetence of mobile operators themselves. T-Mobile’s John Leger is a master communicator and uses strategies Deutsche-Telekom learned from its European competitors and Masayoshi Son in Japan. However, it is a stretch to say that his merger will create more jobs when the goal of the industry for the last two decades has been to cut costs and reduce headcount.

Strand Consult’s new research project “Why four to three mobile mergers fail” offers new research and powerful facts about mobile industry consolidation in USA, EU, and around the world. Strand Consult’s goal is to lift the level of merger review in quantitative analysis, improve the credibility and transparency of antitrust decisions, and protect agencies from regulatory capture. Companies need to be smarter in their consolidation strategies; antitrust authorities need to improve their toolsets and measurement techniques; and policymakers need to modernize the standard of review.

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