On 11 May 2016 the Commission blocked an acquisition of Teléfonica UK’s O2 by Hutchison 3G UK’s Three, casting doubt on the acceptability of ‘four to three’ mergers in the mobile sector.

The Commission expressed concerns that the proposed merger would result in less choice, higher prices and lower quality services for UK mobile customers, and that it would have harmed innovation in the important mobile sector. The Commission also noted Three’s disruptive role in the market since its entry in 2000, considering it to be a driver of competition as the most aggressive and innovative player.

As with previous transactions in this sector, the parties offered substantial remedies in an attempt to meet the Commission’s concerns but in this case the Commission rejected the proposed remedies as inadequate to replace the loss of competition resulting from the merger. The Commission’s three main concerns were as follows:

1. ‘Four to three’

The proposed takeover would have reduced the number of network providers from four to three. Although the Commission has noted there is no “magic number” for the number of mobile network operators required to ensure a competitive mobile market and each case will be decided on its facts. What seems clear from this decision is that the Commission does not believe that three is always the magic number. The Commission considered that the reduction in the number of mobile network operators would lead to higher prices and reduced choice and quality for customers. The combined entity would have been the market leader with a 40% share of the market, which would have lessened Three’s incentive to compete aggressively and act as a disruptive force in the market.

In response to this concern, Hutchison offered to give access to a share of the merged entity’s network capacity to one or two mobile virtual network operators (i.e. operators that do not own the networks they use to provide mobile services but instead enter agreements with a mobile network operators to access their network at wholesale rates) (“MVNOs”). Hutchison also proposed 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 and Virgin Media. However, the Commission pointed out that, even if those offers were taken up, the MVNOs would have been commercially and technically dependent on the merged entity and have little ability or incentive to differentiate their offerings.

2. Impact on infrastructure

The Commission’s second reason for blocking the takeover was that it would frustrate future development in the UK mobile network infrastructure. There are currently two network companies between four mobile operators. Three and EE have a network sharing arrangement on MBNL, while O2 and Vodafone have a network sharing arrangement on Beacon. If the merger were to go ahead, the combined entity would have straddled both network sharing arrangements, giving it a full overview of the network plans of both remaining competitors. The Commission stated that this would have weakened EE and Vodafone and hampered future development of mobile infrastructure. The potential impact on the entire UK mobile infrastructure was, the Commission noted, a key difference between the UK transaction and previous transactions in other Member States (Austria, Denmark, Ireland and Germany).

Hutchison’s response was to offer certain complex behavioural remedies, including promises to both EE and Vodafone confirming their various arrangements to ensure one network partnership would not be favoured over another. However, the Commission, which generally prefers structural remedies (e.g. a divestment) over behavioural remedies, which can be difficult to implement and monitor effectively, rejected Hutchison’s proposals on the basis that Three and O2 would still have their respective stakes in the two network sharing arrangements.

3. Reduction in choice for MVNOs

The Commission’s third competition concern was that the takeover would reduce the number of mobile network operators willing to host MVNOs. As MVNOs rely on access to the infrastructure to provide their service to customers, the reduced number of host mobile networks would have left prospective and existing MVNOs in a weaker negotiating position to obtain favourable wholesale access.

Hutchison offered a set of behavioural measures aimed at granting mobile MVNOs access to 4G and future technologies but the Commission did not see the measures as sufficient to allay concerns. It noted that its investigation“showed that UK mobile virtual operators – including the well-known ones, such as Virgin Media – have difficulty competing on data (large data packages in particular) and on innovation (e.g. 4G services and newest technologies) because of dependence on the wholesale access conditions offered by their host mobile network operator.”

Comment

The decision comes in the wake of criticism of a number of telecom clearances by the Commission. In January 2014 the Commission approved Hutchison’s takeover of Orange Austria. The Austrian merger was followed swiftly by the approval of Hutchison’s takeover of O2 in Ireland (May 2014) and Telefónica’s takeover of E-Plus in Germany (October 2014)

The Commission’s general approach to remedies has been to create a ‘fourth entrant’ in the market by constructing a package of assets designed to entice a new entrant or increase the position of an existing MVNO. Questions were raised as to the efficacy of the remedy in Austria, where no upfront candidate was required. In the wake of the merger, no new rival emerged and Hutchison retained its assets. Further, after complaints of price rises following the Austrian merger, the telecom regulator launched an investigation which found that there had been a 40% price increase since the transaction. In 2015 two new MVNOs entered the Austrian market and in March 2016 two of Austria’s regulators released reports detailing how wireless prices in the country have fallen to pre-merger levels. However, the report also highlighted some uncomfortable facts: it said that some retail prices were still above the level they were before the merger; the regulators questioned how “sustainable” the MVNO competition is; and the regulator pointed out that one of the new MVNOs was not using Hutchison’s network, but piggybacking on T-Mobile Austria’s.

The Commission required an upfront MVNO package as part of the Irish transaction, however the Irish regulator, the Commission for Communications Regulation (“ComReg”) was clear that it did not believe that the substance and form of the agreed remedies were sufficient to address the Commission’s competition concerns, and that significant negative consequences of Irish consumer welfare may result.

In January this year, the British telecom regulator publically spoke out against Three’s acquisition of O2. Sharon White, Ofcom Chief Executive, published an article in the Financial Times on 31 January 2016 urging the Commission to block the proposed merger. Ofcom’s main concerns were echoed in the Commission’s final decision; that the merger would result in higher prices and that the combined entity would straddle both network sharing arrangements. Ofcom’s intervention was followed shortly thereafter by an unprecedented move by the Competition and Markets Authority, in writing to the Commission to emphasise its concerns.

Given the prevailing negative attitudes of the national competition authorities and the mixed success of remedies in previous telecom mergers, it is perhaps not surprising that the Commission blocked the UK merger. The UK decision is not the first time in recent years that the Commission has blocked a telecom acquisition. In September 2015 the Commission prevented Telenor and TeliaSonera from merging their Danish telecommunication businesses. This apparent change of direction may suggest a tougher stance from Margrethe Vestager who became Competition Commissioner in October 2014, as compared to her predecessor Joaquín Almunia.

Attention will now turn to yet another proposed merger in the mobile sector: Hutchison’s plans to merge its Italian unit with rival operator, Wind Telecomunicazioni.