The European Commission has cleared the proposed merger between Hutchison 3G (H3G) and Telefónica Ireland (O2 Ireland), subject to conditions.

Introduction

Three and O2 are two of the four MNOs (Mobile Network Operator) present in the retail mobile telecommunications services market and the wholesale market for access and call origination in Ireland. These markets are highly concentrated and the Commission recognised that there are significant barriers to entry.

The proposed merger would lead to a market structure with two MNOs with a similarly strong position, Vodafone and the merged entity, both with a market share of roughly 40%, followed by a third more distant player, Eircom, with a market share close to 20%.

The Commission found that the proposed merger, in its original form, would result in a significant impediment to effective competition because, in addition to the loss of competition between the merging parties, the merger would remove Three (H3G) as an important competitive force from the market, change its incentives to compete aggressively on price and service innovation and remove pressure on the remaining competitors' prices.

This article examines one aspect of the remedies package that the Commission secured from the parties before clearing the transaction, and highlights some of the major difficulties which may arise in its implementation.

Commitments

H3G commits to sell up to 30% of the merged company's network capacity to two Mobile Virtual Network Operators (MVNOs) in Ireland at fixed payments. The capacity is measured in terms of bandwidth and the MVNO entrants will obtain a dedicated "pipe" from the merged entity's network for voice and data traffic.

With a pre-fixed capacity at their disposal, the new MVNOs will have increased incentives to fill that capacity by offering attractive prices and innovative services. Their incentives will be very similar to those of Three (H3G) before the merger. The Commission describes this as sufficient to resolve its concerns in relation to the retail market.

The Commission was of the view that the two MVNOs that will enter the Irish market in Ireland in the short term will be able to replace the competitive force that Three previously exercised.

The Commission’s decision leaves open the possibility for an MVNO to become a full mobile network operator at a later stage. To facilitate this, H3G committed to divest five blocks of spectrum in the 900 MHz, 1800 MHz and 2100 MHz bands. The spectrum will be available for ten years, starting from 1 January 2016.

MVNOs

MVNOs offer mobile telecoms services to consumers through access to the network of mobile network operators (MNOs).

There are significant technical requirements for becoming an MVNO, such as providing customers with the ability to port numbers and developing software to interface with the central database, but the Commission's investigation in this case showed that the model is viable for the Irish telecoms market. An alternative possibility would be for the entrant to come in the form of a ‘light MVNO’, effectively a reseller, in which case the entrant would use numbers provided by the MNO and not develop software.

Perhaps importantly, the Commission has required H3G to commit to provide the MVNOs with all technical assistance they may require for the duration of the agreement, as well as the ancillary services they may reasonably require. This is designed to help the MVNOs launch their commercial operations as quickly as possible.

MNO

H3G’s package included an option for one of the MVNOs to become a full mobile network operator by acquiring spectrum at a later stage.

To facilitate this, H3G committed to divest five blocks of spectrum in the 900 MHz, 1800 MHz and 2100 MHz bands. The spectrum will be available for ten years, starting from 1 January 2016. As regards this transfer of part of an existing MNO’s spectrum, there may some problems which could arise.

This is interesting because, previously, an MNO licence could only be granted to a firm which had won a spectrum auction. The Commission seems to have been in favour of accommodating a new MNO as new entrants are the single best way to add real competition to the market.  This is in recognition of the important competitive force played by H3G on the Irish market since its entry in 2005. New entrants on to markets tend to compete aggressively to build market share by offering attractive offers to consumers.

Conclusion

The Commission has pronounced that the transaction, as modified by the commitments, does not raise competition concerns. However, its decision to clear the merger is conditional upon the full implementation of the commitments. Throughout the duration of the proposed arrangements, ComReg has stated that it will use its statutory powers to monitor the competitive dynamic of the mobile markets affected while proceeding with its radio spectrum in order to promote competition and further promote innovation and network investment.

Thus, while this deal will bring the number of mobile network operators from four to three in a small country, the complex arrangements provided for in the remedies package and the overall dynamic nature of the market mean that competition in the sector should remain healthy.