Research Notes

Margrete Vestager and DG Competition have lost an important lawsuit – What can the telecommunications industry learn from the Hutchison/O2 case

Strand Consult has analyzed 4-3 mergers for many years. We have described the cases that the EU’s DG Competition has rejected and the cases that have been approved outside the EU. Strand Consult has observed that competition authorities have limited understanding of the impact of technological development on competition in the telecommunications world.  See Strand Consult’s research note EU Competition Commissioner Margrethe Vestager is a gifted woman who should spend some time to get acquainted with how the telecommunications market works.

The European General Court annulled DG Comp’s 2016 decision and blocked the Hutchison Three/O2 merger in the United Kingdom. The court ruling comes after Hutchison sued the European Commission. We’re talking about a merger in which  Hutchison/O2 expected to reap  significant  return from a £9.25bn deal. In the meanwhile, O2 have moved on to a merger with Virgin Media, a deal now awaiting regulatory approval.

Strand Consult described the case back in 2016 in  two research  notes:  BREAKING NEWS: Margrethe Vestager blocks 3UK / O2 deal – Bad news for Europe and consumers. Good news for British Telecom’s shareholders  and Leaked documents from Hutchison/Telefonica deal in UK shows EU competition authorities don’t understand telecom markets. DG’s Comp’s inability to update analytical framework dooms mobile mergers. The courts recent decision provides similar analysis to Strand Consult, saying that DG  Comp’s justification to block the Hutchison/O2 merger was unfounded.

The court document reviewed DG Comp’s assessment: That acquisition would have removed an important competitor on the United Kingdom mobile telephony market and the merged entity would have faced competition only from two mobile network operators, Everything Everywhere (EE), belonging to British Telecom, and Vodafone. The Commission considered that the reduction from four to three competitors would probably have led to an increase in prices for mobile telephony services in the UK and a restriction of choice for consumers. The acquisition would also have been likely to have a negative influence on the quality of services for consumers, hindering the development of mobile network infrastructure in the UK. Lastly, it would have reduced the number of mobile network operators wishing to host other mobile operators on their networks.

This argument is very similar to the DG’s Comp’s view toward the Telia and Telenor merger in Denmark, a deal that the parties themselves withdrew because of EC pushback. Strand Consult also described this  merger in detail: 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 and what it means for mergers in the UK, Italy and the global telecom market – Post Mortem Part II.

In any event, the decision is too late to save the Hutchison/O2 deal, but it is interesting to review the clarity of the judicial opinion.  The judges conclude that DG Comp hasn’t done its job well enough. The press release for the judgment states,

1. The effects of the operation on prices and on the quality of services for consumers have not been proved to the requisite legal standard

– The General Court finds that the Commission’s application of the assessment criteria of the so-called ‘unilateral’ (or ‘non coordinated’) effects – namely, the concept of ‘important competitive force’, the closeness of competition between Three and O2 and the quantitative analysis of the effects of the concentration on prices – is vitiated by several errors of law and of assessment.

– The Court finds that, although the Commission established that Three and O2 are relatively close competitors in some of the segments of a market, that factor alone is not sufficient to prove the elimination of the important competitive constraints which the parties to the concentration exerted upon each other and therefore to establish a significant impediment to effective competition.  

– The Court also finds that the Commission’s quantitative analysis of the effects of the concentration on prices does not establish, with a sufficiently high degree of probability, that prices would increase significantly.

2. The Commission failed to show that the effects of the concentration on the network-sharing agreements and on the mobile network infrastructure in the UK would constitute a significant impediment to effective competition

– The Court finds that a possible misalignment of the interests of the partners in a network-sharing agreement, a disruption of the pre-existing network-sharing agreements, or even the termination of those agreements do not constitute, as such, a significant impediment to effective competition in the context of a theory of harm based on non-coordinated effects.

– In that regard, the Court notes, first, that the effects of the concentration in relation to a possible exercise of market power, in the form of a degradation of the services offered by the merged entity or of the quality of its own network, were not analysed in the contested decision, even though the assessment of a possible elimination of important competitive constraints between the parties to the concentration and a possible reduction of competitive pressure on the remaining competitors should lie at the heart of the assessment of the non-coordinated effects arising from a concentration.

3. The effects of the concentration on the wholesale market were not found to be sufficient to establish the existence of a significant impediment to effective competition

– According to the Commission, the loss of Three as an ‘important competitive force’ and the ensuing reduction in the number of host mobile networks would have placed the virtual operators in a weaker negotiating position to obtain favourable wholesale access conditions.  

– The Court finds that neither Three’s wholesale market shares nor their recent increase justify its classification as an ‘important competitive force’. The mere fact that Three had more of an influence on competition than its market share would suggest is not sufficient to establish the existence of a significant impediment to effective competition, particularly as it was not disputed that Three’s market share was small.  

Given the sharply worded decision, DG Comp will likely review it a few times before deciding to appeal to the higher court.  At a minimum, DG Comp should review how it looks at 4-3 mergers.

Other mergers have been blocked and deterred for the same arguments the court now claims that DG Comp did not justify adequately. It is probable that DG Comp has made similar assumptions and mistakes in other cases. Additionally, DG Comp may have applied unnecessary and even harmful remedies as a condition of merger approval. This decision and the knowledge that DG Comp has erred could wake up dormant dreams of long overdue consolidation.

What the decision could mean for the telecommunications industry in Europe
The recent judgment could help restart failed attempts for consolidating the European mobile industry. DG Comp is likely to accept the clearly worded decision and recognize that they need to lift the level of their merger analysis.

Strand Consult has pointed out the mistakes made by DG Comp in the research note 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 the future telecom industry desired by DG Connect.  The research note includes text from Strand Consult’s dialogue with authorities to prove where mistakes were made in DG Comp’s merger analysis. Strand Consult’s argument is similar to that used by the European General Court in the recent judgment.

Once the world leader, the European Union trails the US and China in telecommunications infrastructure investment according to ITU statistics.  Investment will not be attractive in the EU without consolidation. However without consolidation, the EU telecom sector could miss out on much to the technology shift which is driving operators to upgrade their equipment. Technological change and improved efficiency are two of many good reasons for consolidating the industry.

However, one favorable court decision is not enough to make a 4-3 merger happen. Operators have derailed their own merger ambitions by telling a story that’s too good to be true.

The European General Court is an important decision and has implications for the European mobile industry. It should be read carefully by DG Comp and mobile operators. It remains to be seen whether DG Comp will appeal, but the fact remains that at least the European General Court believes that 4-3 mergers can happen.

Strand Consult’s 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.

To learn more about Strand Consult’s research project “Why four to three mobile mergers fail”, contact Strand Consult.

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