Operators in Europe have renewed calls for consolidation in mobile. Whilst some regulators and competition authorities might be more receptive than in the past, operators will need to convince them that consolidation really is key to unlocking investment
After previously unsuccessful attempts, mobile operators are once again actively pursuing in-market consolidation. In Italy, Portugal, Spain, and the UK, there are advanced discussions of mergers that would result in four-player markets becoming three-player ones. In all cases, Vodafone is involved in discussions and is currently Europe’s most active operator in pursuing consolidation.
Now could be a good time for operators to revive their push for consolidation, with some authorities seemingly more receptive and sympathetic than before. The European Commission wants to spur investment in digital infrastructure and is open to a more flexible approach to competition, and in the UK, Ofcom recognises operators’ need to invest to achieve wider social benefits of 5G that may be difficult to monetise.
Elsewhere the challenge may be harder, with national competition authorities appearing to be unconvinced of the positive impact of mergers. Fears of price rises and anticompetitive conduct are the most common, but regulators also see little evidence that any improvements in quality and customer service are attributable to mergers.
Operators looking to obtain merger approval will have to provide compelling or new evidence that consolidation is conducive to more investment. MNOs may have to show regulators the benefit of a more-for-more approach, where prices may increase but consumers benefit from convenient bundles and faster, more reliable networks. Establishing a link between consolidation and a more rapid deployment of 5G could give operators a stronger argument.
Operators are actively pursuing consolidation in several key European markets
After previously unsuccessful attempts, mobile operators are once again actively pursuing in-market consolidation across Europe. There has been speculation of acquisitions in Italy, Portugal, Spain, and the UK, all of which involve Vodafone. In Italy, the operator is reportedly interested in acquiring Iliad (although recently it was Iliad who made a €11bn offer to acquire Vodafone’s Italian subsidiary). In Spain, Vodafone has been reportedly interested in acquiring the Masmovil group for more than a year now. This would also result in the acquisition of Masmovil’s Portuguese subsidiary, which recently took over the MVNO Nowo. Orange has also been linked to the takeover of Masmovil in Spain. In the UK, Vodafone has shown interest in merging with Three. Rather than an outright acquisition, this tie up could be in the form of a joint-venture.
In all these markets consolidation would result in a reduction in the number of players from four to three. Only in the UK have attempts to consolidate been tried and blocked in recent years. In 2016, the European Commission blocked O2’s attempted acquisition of Three, in agreement with the UK’s Competition and Markets Authority and Ofcom (a decision that was later annulled by the European Court of Justice). In Italy there was consolidation in 2018 following the Wind/Tre merger, but Iliad entered the market soon after as a result of the remedies agreed as part of the deal. Portugal was a three-player market until recently. That changed when Masmovil acquired Nowo, and then obtained spectrum following a 5G auction in October 2021. Spain has been a four-player market for more than a decade. Vodafone was reportedly interested in acquiring Yoigo (which later became Masmovil) in 2014, saying this would depend on the EC’s stance on consolidation, but never took formal steps to make it happen. MNOs in all these markets have been pursuing consolidation for some time, but haven’t been able to overcome regulators’ concerns – particularly over what would happen to prices and quality for consumers.
A more favourable sentiment for consolidation could be emerging
This time around, things feel different and the tide may be turning. Both in the UK and at an EU-level, there are signs that regulators could be more open to the prospect of three-player markets. In the past, Ofcom seemed determined to maintain a four-player market in the UK. In its recent discussion paper on the future approach to mobile markets, there was some clarification of position. It restated that while it has seen no evidence of increase in service quality and investment in more concentrated markets, it would keep the door open and assess any merger on a case-by-case basis, depending on the specific circumstances of that merger and on how markets evolve. It’s difficult to predict whether the CMA would be now more favourable to consolidation. The current investigation into the proposed sale of Three’s towers to Cellnex relates to an upstream market and the concerns raised by the CMA in that inquiry cannot easily be translated into the retail mobile market. However, the CMA’s provisional decision to block the sale or subject it to structural remedies shows the authority is mindful of a risk of higher mobile prices and reduced quality for consumers.
Most of the mobile mergers approved in recent years were subject to remedies to facilitate the entry of a new operator in the market (e.g. Orange/Hutchison in Austria, Hutchison/Telefonica in Ireland, Telefonica/E-Plus in Germany, Wind/Tre in Italy). By paving the way for new entrants, those remedies often ended up recreating the problems the merger was trying to solve. It’s perhaps unsurprising those that were rejected (O2/Three in the UK), or abandoned (Telia Sonera/Telenor in Denmark), were so because the merging parties couldn’t reach an agreement on remedies with the EC.
The European Commission could also now be more amenable. Despite Commissioner Vestager’s previous reluctance to see the number of players in mobile markets reduce to three, she recently showed signs of changing her stance, referring to the need for “in-built flexibility” in applying competition rules (although she made no explicit reference to telecommunications). The EC’s long-term objectives of digital sovereignty and the renewed importance placed on industrial strategy could also mean more openness to consolidation, given the role of telcos in building European cloud infrastructure that competes with the US-based hyperscalers, and the need to rapidly scale-up the availability of 5G and of gigabit-capable connectivity.
Europe’s largest operators have beaten this drum for a number of years, and recently reiterated their message as they are mindful of a stronger political will to change course. The ruling of the ECJ in 2020, which annulled the blocking of the O2/Three merger, is also likely to provide ammunition to MNOs seeking consolidation. The decision is a legal precedent that will hold the EC to a higher standard in demonstrating harms to competition in horizontal mergers, and will likely influence the CMA’s future approach in the UK since the authority was heavily involved in the decision at the time. The ECJ found that the EC had failed to prove the effect of the merger on retail prices and quality of service, and also failed to demonstrate the negative effects on the wholesale market.
Not all national regulators seem unconvinced
Despite the EC’s openness to a more flexible approach, several national competition authorities still appear to be concerned that a three-player market may not serve the best interests of consumers, giving rise to a potential conflict. Whilst the main concern relates to prices, national authorities are also unconvinced about improvements in quality. This has been particularly evident in Portugal, where in April 2020 the AdC noted that the telecoms sector is characterised by high prices and low consumer switching. Concerns around market power were further exacerbated when MEO was found to be operating an illegal cartel with Nowo which resulted in price fixing and reduced quality of service. In light of such current market conditions, the AdC will likely wait to see the effects of Masmovil’s recent entry into the market before allowing a reduction in the number of players.
There have been similar concerns about market concentration in Italy. Before the arrival of Iliad, the AGCM considered the mobile market to be an oligopoly whose power increased after the Wind/Tre merger. It argued that the increased concentration favoured anticompetitive agreements like the one it sanctioned in 2020 when it fined Fastweb, TIM, Wind Tre and Vodafone a total €228m. The operators allegedly agreed to raise prices by introducing a 28-day billing period instead of the typical monthly one (although the fine was annulled by a court in 2021). In Spain, the main obstacle to consolidation could come as a result of the market being characterised by a recent wave of fixed/mobile convergence. The CNMC and the EC approved several fixed/mobile mergers (Vodafone/Ono, Orange/Jazztel, Masmovil/Euskaltel), and so any further changes to the market structure would then need to be assessed against the impact on both the fixed and mobile segments of the market.
In other markets where 4-to-3 mergers have already happened, regulators appear unconvinced they’ve always had a beneficial effect. In Austria, the RTR’s assessment of the H3G/Orange merger highlighted significant price increases in the short run, which were only partially offset by decreases in the longer term as a result of entry of MVNOs into the market. The Austrian competition authority is now concerned about the possible impact on competition once H3G’s commitments expire at the end of 2022. It has already received several complaints from MVNOs that benefited from the access remedy, and could now struggle to be hosted under viable conditions. In Ireland, BEREC noted that the Hutchison/Telefonica merger in 2014 led to statistically significant price increases in the short-to-medium term, and ComReg agreed with BEREC’s findings. Regulators have a more mixed view of the impact of these mergers on quality. They recognise that consolidation can generate efficiencies that facilitate investment, but in none of these mergers did they reach a conclusive view of whether that has been achieved. The former head of RTR defended the Austrian merger in 2016 and noted it had an extremely positive effect on network performance, but BEREC and the RTR are less sure about reaching that same conclusion.
What will MNOs need to prove in order to obtain merger approval?
The main task facing operators hoping to merge is to provide competition authorities with strong evidence that the merger will have a positive effect on quality and/or investment. It could be a case of outlining the benefits of a ‘more-for-more’ approach, where prices may increase but customers get more convenience in the form of bundles, faster and more reliable connectivity, and improved customer service. So far, regulators have generally seen these benefits in fixed/mobile mergers (as we have seen for Spain), but the more-for-more argument in mobile-only mergers has not been forthcoming.
The need for a rapid and extensive rollout of 5G could provide a case for consolidation if it helps operators monetise the wider social benefits of 5G. Ofcom recently made a similar point in its discussion paper on the future approach to mobile markets, leaving the door open for operators to show that consolidation is necessary for that to happen. So far, with the exception of Denmark, which is a four-player market, countries with three MNOs are generally going at a faster pace in deploying 5G at scale (Germany and Netherlands achieved 90% coverage, Ireland is at 70%, and Greece at 60%). If operators can demonstrate the link between consolidation and rapid 5G coverage, they are likely to have a stronger argument to get the deal done.
