Documentation: EU competition authorities’ email to Strand Consult reveals lack of evidence for statements used to support denied mobile industry mergers. Margrethe Vestager’s DG Comp is sabotaging future telecom industry desired by DG Connect.

Strand Consult has covered Brussels’ response to mobile industry mergers in the EU. While competition authority leaders may have good intentions, their decisions can create greater problems than the situations they try to address.

Based upon an extensive analysis of the conflicting policies for telecommunications of the two arms of the European Commission, DG Competition and DG Connect, Strand Consult calls for a regulatory time-out. DG Comp is making unsubstantiated claims about prices and innovation while DG Connect is attempting to promote a strategy to support investment in much needed next generation telecom networks. The two agencies are on a collision course as the EU continues to fall behind the United States and Asia in the mobile telecom technology sector, making the dream of regaining EU leadership through 5G all the more unlikely.

This research note details requests for documentation made by Strand Consult to Margrethe Vestager and her team at DG Comp. Strand Consult has requested backup to support sweeping statements about the future of mobile prices and “innovation in the mobile sector”, claims make to justify deterred and denied mergers of mobile operators in Denmark and United Kingdom. Correspondence with DG Comp employees Michele Piergiovanni, Head of Unit C-5 which approves mergers in the IT, telecom and media sectors; Yizhou Ren, Press Officer for Competition; and Christina Holm Eiberg, member of Vestager’s cabinent, failed to produce evidence to support the Vestager’s emphatic claims that the mobile mergers, if allowed, would increase prices and lower innovation.

Price increases – The official explanation of Margrethe Vestager and her staff
Strand Consult has studied the mobile industry for more than 20 years. All of our analyses are based on facts, and we spend a considerable amount of time making information and transparency requests from regulatory and competition authorities. As such, we are skeptical when competition authorities make loose and generalized claims to justify denying a merger after they have spent an enormous amount of taxpayers’ time and resources to study the issue at hand. Indeed one would expect bold, concrete facts and conclusions about why a merger should be denied, rather than amorphous statements that mergers are not good for consumers, competition, and innovation.

Soon after the Telenor Telia deal was scuttled in Denmark, Strand Consult predicted what would happen in the mobile market. We said that prices would increase. In less than one month after the announcement, prices rose in Denmark. Vestager when queried on the price increase, dismissed it, saying that had the merger been approved, prices would have risen “even more”, a claim repeated in Reuters among other media. The Danish Berlingske Tidende explored the comment further an in depth interview with the Commissioner. Vestager described Denmark as “a very mature and very, very competitive market” and did not seem concerned that operators raised the prices. When pressed by the journalist that avoiding higher prices was the very reason she opposed the deal in the first place, she responded, “We feel confirmed in that now when prices rise, without competition being reduced, so was the risk that they would increase with less competition had been even greater.”

Such a statement suggests that Vestager’s team may have prepared probability scenarios or similar risk analysis, but it could also be a rear-view mirror explanation, something made up in the moment to pacify the press. Strand Consult contacted Vestager’s office for further backup to the comment. Following is the explanation provided by Michele Piergiovanni on 12 May 2016.

Dear Mr. Strand

Following your exchanges with Yizhou on this matter, we would like to clarify that in merger reviews, the Commission assesses expected price developments as a result of a proposed merger and compares these with a situation absent the merger. We do so based on extensive economic analyses.

In the Danish case, the Commission had serious concerns that prices after the merger would be higher for consumers than without the merger. This does not make any predictions about how mobile prices as such would develop for reasons other than the merger. As you know, there are many factors that can affect how operators set their prices.

Recent price increases made by mobile operators in Denmark do not change the Commission’s assessment of the proposed merger’s effect on price. It is not for the Commission to comment on the reasoning behind the decisions made by the operators. But as Commissioner Vestager explained in the press room yesterday, these developments do not change the Commission’s concerns that the merger, had it gone through, would have led to higher prices than absent the merger. Thus, since some prices went up in Denmark also without the merger, there was a risk that the prices would have increased even more with the merger and its anti-competitive effects.

As you know, the parties abandoned the transaction, which meant that the Commission could not complete its investigation and take a formal decision setting out its reasoning. However, Commissioner Vestager has said that the Commission was on the path to prohibit the deal, and set out the Commission’s concerns in detail in her speech at Fordham University:
http://ec.europa.eu/commission/2014-2019/vestager/announcements/competition-telecom-markets_en http://europa.eu/rapid/press-release_STATEMENT-15-5627_en.htm

Regards,

Michele Piergiovanni

Note that Mr. Piergiovanni wrote, “In the Danish case, the Commission had serious concerns that prices after the merger would be higher.” Having “concerns” about something is different from academic or empirical evidence that a certain outcome has a probability to materialize. Telecommunications policy should not be based on “concerns” but rather, real world facts, rigorous testing, and academic discipline to perform post-mortems on past decisions and update policy accordingly. The European Commission still has a way to go on such best practices. Indeed in 2015 EU Commission President Jean-Claude Juncker’s wrote to Commissioner Carlos Moedas, Commissioner for Research, Science and Innovation, requesting him to “…to reflect and present to me options on how best we can institutionalize independent scientific advice to the Commission. We should use the opportunity of our new Commission to make best possible use of scientific advice in all policy fields…taking into account the experience made in all Member States.”

DG Comp admits to have performed only limited ex post analyses of its merger decisions. Its 2015 analysis of two mergers in the prior decade concluded that the while prices can be “idiosyncratic”, the merger of T-Mobile and Tele.ring did not increase prices in Austria. In Netherlands, price effects from the merger could not be distinguished from the competition created by MNVOs and the role of a prior merger. That the EU Commission President and DG Comp concede that the evidenced-based approach is lacking then one can only conclude that merger decisions are based primarly on “concerns”, not real world evidence. That the Danish market is mature and competitive, as Vestager describes, then it is ripe for consolidation. The industry life cycle models for consolidation have been established for more than half a century. That DG Comp denies this evolution is self-serving political preference, not proper economics.

There is no doubt that Danish mobile prices being some of the lowest in the developed world have nowhere to go but up, so Vestager could hedge her bets and spin the outcome as if she has a crystal ball and knew it all along, a trick she learned from years working as politician in front of the Danish media. That DG Comp doesn’t get around to assessing its merger decisions until 9 years after they happen gives Vestager plenty of wiggle room. Unfortunately the politicians who make the decisions are long gone by the time the impacts are reported. This demonstrates a stunning lack of accountability by competition authorities.

Vestager displayed the same brazen confidence in the press conference announcing the blocking of the Hutchinson 3 and Telefonica O2 deal in UK, this time taking it a step further, predicting the future of prices as well as innovation.

Innovation – What Margrethe Vestager said and how the world looks
Margrethe Vestager said that blocking the 3/O2 merger was good for consumers and for innovation in the UK. She declares,

The Commission has blocked the proposed acquisition of O2 by Hutchison under the EU Merger Regulation. 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.

It is difficulty to see how a merger between 3 UK and O2 would negatively affect the innovation in the mobile sector, and indeed, such an analysis would be unlikely to prove. The mobile sector is large and diverse. It includes mobile operators, device and component manufacturers (Apple, Samsung, Qualcomm), network equipment providers (Ericsson, Nokia, Huawei, Cisco), and third party service providers (Whatsapp, Skype, Spotify) among others actors. Innovation occurs within network standards and product development (evolution from 2G to 5G), the design and value proposition of mobile services (operator SMS vs. peer2peer SMS), and in the marketing and distribution of mobile services (MVNOs).

While it is not clear whether Vestager meant innovation among mobile operators alone or among the larger mobile ecosystem, the claim that the merger would have harmed innovation is hard to justify in either case. There is a tremendous amount of evidence that industry consolidation promotes innovation, particularly disruptive innovation. It is precisely telecom operators’ profits in SMS and long distance that spurred entrepreneurs to create Skype and WhatsApp. These disruptive technologies are the key source of price competition in the mobile industry today, not merger policy. That disruptive players emerge in the face of consolidated enterprises is very thesis of Schumpeterian competition and Clay Christiansen’s Innovator’s Dilemma. Moreover the innovation analysis has evolved to incorporate the notion of Big Bang Disruption in which author Larry Downes, coiner of the term “killer app”, describes how disruptive innovation happens “overnight.”

Academics have the benefit of data—as well as the check of the peer-review process. The top papers in innovation have hundreds of thousands of citations each; they are tested continually. They offer a far more rigorous analysis and the test of time than DG Comp. Academics who publish in the innovation field face one of the most competitive of any academic field. Asu such, they choose their words about innovation carefully. Appointed officials, on the other hand, because they have little accountability, can say anything and everything will either create or deter innovation. Strand Consult has observed politicians brandishing the term “innovation” to whatever suits their policy preference, be it subsidies for municipal braodband, open internet rules, etc.

A thoughtful approach would describe innovation differently. A 2014 EU Commission report on innovation notes that th UK owes its innovation ecosystem to human resources, venture capital, business angels, entrepreneurship, and international academic publications. Not surprisingly, mobile mergers are not cited as a factor that impedes innovation. However European Commission policies are noted as creating “bottlenecks” as well as failing to stimulate the conditions for research, development, and innovation.

Strand Consult has tried repeatedly to get an answer about the innovation claim from Vestager’s staff Michele Piergiovanni, Yizhou Ren and Christina Holm Eiberg, but they have not provided any information.

What should the EU do – Consistent evidenced-based policy is needed, lest the EU fall further behind in telecom
The European Commission is on a collision course when it comes to telecom policy. DG Connect supports one direction based upon a series of reports and investigations from the EU Commission’s extensive research department, while DG Comp makes another based on gut. The FT- ETNO’s event in Brussels in October 2015 demonstrated that Commissioners Ansip and Oettinger have a vision for the future. It can be likened to a magnificent and beautiful glass house. Vestager’s view, on the other hand, is that of a wrecking ball. There is no policy thread for her leadership other than to say that she is tough on business. Whenever operators try to realize the view that Ansip and Oettinger define, the DG Comp bull charges the china shop.

The lack of leadership in the European Commission and inconsistent approach has been the status quo for far too long. The EU has moved far in the wrong direction and lags behind when it comes to investment, a staggering €100 billion.Each time a merger process is initiated, many market activities, especially investment, are put on hold.

DG Comp doesn’t help matters as its review of telecom mergers take one-third longer than other industries. Companies apply for merger approval with rational expectations; they would not undertake the time and effort if they did not believe the merger would be approved.

What appeared to be a forthright process for merger review in the past is no longer the case under Margrethe Vestager. DG Comp today is a Black Box. How its decisions are made is not known, and the justifications for its decisions, as Strand Consult has shown, are not revealed.

Strand Consult describes that the EU has a serious problem when its two agencies for telecom, DG Comp and DG Connect, are going in opposite directions. That’s why it’s time for a time-out. Juncker needs to get his commissioners on the same page. If he can’t do that, then it would be better for Brussels to let enough alone. The competent national regulatory and competition authorities are up to task, especially with what are “national affairs”, as Vestager described Telecommunications.

Read the report The Wireless Ecosystem, US vs. EU in which Strand Consult details how the EU is falling further behind the US in the connected mobile telecom sector.