As the telecoms sector evolves, so cable assets become increasingly valuable. But consolidation, however necessary, raises difficult competition questions – and proposed EU regulatory reforms further cloud the deal landscape
Cable networks are highly attractive targets in the telecoms sector, as shown by recent deals such as Liberty Global’s acquisition of Dutch cable provider Ziggo, Vodafone’s acquisition of Ono (Spain) and Kabel Deutschland (Germany); the takeover by Orange of Spanish broadband provider Jazztel;; and the Comcast/Time Warner deal in the United States.
Their popularity stems in part from broadband demand, as more sophisticated internet services such as high definition (HD) video streaming require ever-faster data speeds. Only fibre networks are able to match the broadband speeds possible via coaxial cables, which themselves enable faster data transfer than traditional copper telephone lines. But the roll-out of a wide-ranging fibre network would require huge investment and considerable time, meaning existing cable networks enjoy an appreciable competitive advantage.
A cheaper route to 4G
It is cheaper for mobile operators to carry traffic over fixed-line and cable networks, so investing in cable assets reduces the cost of providing data-hungry 4G/LTE services. Cable networks also allow operators to offer so-called ‘quad-’ and ‘triple-play’ products which combine mobile, broadband, fixed-line and TV services. These improve customer retention, while users benefit from a single provider and competitive pricing.
The telecoms industry needs to consolidate for a number of reasons. The European market comprises more than 100 fixed-line and mobile providers, which makes large-scale network infrastructure investment difficult. Proposed regulatory reforms that would phase out roaming charges increase this pressure still further. If passed, mobile network operators will need to derive more revenue from their retail businesses, while the reforms would also create new business models by allowing pan-European telecoms operators to enter into agreements with local mobile virtual network operators (MVNOs) to expand their reach.
The US market illustrates another dimension to cable consolidation. Cable networks regularly pay TV broadcasters to distribute their content. As ad revenues decrease, so broadcasters compensate by increasing their fees. Consolidation may help to increase the geographic reach and therefore the number of potential viewers, giving cable networks a more balanced position in these negotiations.
Competition law and consolidation
The acquisition of cable networks can trigger a broad range of competition law questions during merger control proceedings. This is particularly true in horizontal acquisitions among cable network providers in the same country. However, due to the ongoing convergence of industries, a number of new, often vertical, issues arise which are being scrutinised by the EU Commission and national competition authorities.
In any event, as the recent cases of the last years demonstrated, merging parties need to be well prepared for case-by-case analyses and individual assessments by competition law experts.
The regulatory landscape
Telecoms regulation also plays a role in cable network deals. In Europe there has been much talk about the need to create a European Single Digital Market, but it remains to be seen how quickly the new Commission, led by Jean-Claude Juncker, will be able to make further progress towards the aim of a ‘connected continent’. Besides the challenges associated with co-ordinating spectrum use in mobile markets, conflicting interests around issues such as roaming charges and net neutrality will need to be dealt with. The recent debate around net neutrality in the US is likely to spark similar discussions in Europe. The way in which regulatory authorities answer these and other questions will affect future cross-border consolidation in all telecommunications markets.