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European Commission

MEMO

Brussels, 28 May 2014

Mergers: Commission clears proposed merger between Hutchison 3G (H3G) and Telefónica Ireland (O2 Ireland) subject to conditions - frequently asked questions

(See IP/14/607)

On which markets did the Commission have concerns?

The Commission had concerns on two markets in Ireland, namely the retail market for mobile telecommunications, and the wholesale market for network access and call origination.

On the retail market, the Commission identified two concerns:

- The Commission's main concern was that the merger would eliminate competition between the merging parties and remove Three as an important competitive force in the market. Three was the smallest player among the four Mobile Network Operators (MNOs), with clear incentives to grow its subscriber base by offering attractive prices and services. For instance, Three had very attractive data offers, including so-called "all-you-can-eat" data plans (that is, unlimited data use under certain conditions). The merger would remove this important competitive force and result in a larger merged company that would only face competition from Vodafone and Eircom as remaining mobile network operators. The Commission's investigation showed that this would reduce overall competitive pressure in the Irish retail market, resulting in higher prices for consumers.

- The Commission was also concerned about the future of the network sharing agreement that Eircom has with O2 in Ireland. This agreement is important for Eircom to achieve its network roll-out plans, including for 4G/LTE services. The Commission was concerned that after the merger, Three would have the ability and incentive to terminate or frustrate the network sharing agreement. That would severely limit Eircom's options for achieving its network roll-out plans.

In relation to the wholesale market, Three and O2 are mobile network operators which compete as network hosts for MVNOs that wish to offer their services to end consumers. The merged company would only face Vodafone as its main competitor. The Commission had concerns that without a network with national coverage, Eircom would not be a credible network host for MVNOs. The roll-out of its national network would be in jeopardy if Three were to terminate or frustrate the network sharing agreement that Eircom had with O2 in Ireland. For these reasons, the Commission's investigation revealed concerns about the reduction in the number of network hosts in Ireland. This could lead to deteriorated access conditions for MVNOs. Ultimately, this would have a negative impact for end consumers as well. However, there was no need for the Commission to reach a final conclusion in this respect, as the commitments addressing the concerns on the retail market also address any concerns on the wholesale market.

Why is the Commission still looking at mergers in the telecoms sector on a national basis?

When assessing the impact of mergers on competition, the Commission needs to consider the competitive situation in the relevant geographic markets. In mobile telecommunications, markets are still national in scope. Indeed, telecoms regulation is largely national and spectrum is still allocated at the national level. Every time users cross a border, their devices switch to a new network operator. Users need a new contract when taking up residence in another Member State to avoid roaming fees. For these reasons, mobile network operators still compete on a national basis, even if they are owned by larger, sometimes pan-European or even global operators.

If the EU had a genuine Single Market for telecommunications, telecom operators could scale up and compete on a pan-European basis. As a significant step in that direction, the Connected Continent package proposed by the Commission contains measures on roaming charges, net neutrality and the streamlining of spectrum allocations. These measures are still under discussion between the Parliament, the Council and the Commission.

In a genuine Single Market with EU-wide spectrum allocation and the removal of national regulatory barriers, the Commission would be able to assess the impact of most mergers in the telecoms sector on the whole of the EU. However, in the meantime, telecoms markets in the EU are still fragmented along national lines. As a result, the Commission and National Competition Authorities (NCAs) must protect consumers from price increases due to mergers and acquisitions in national markets.

This merger would bring the number of Mobile Network Operators (MNOs) from 4 to 3 in a small country. Why is such a merger problematic?

Three and O2 are two of the four MNOs present on the retail mobile telecommunications services market and the wholesale market for access and call origination in Ireland. These markets are highly concentrated and there are significant barriers to entry.

The proposed merger would lead to a market structure with two MNOs with a similar 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%.

While the proposed merger, in its original form, would not lead to the creation or strengthening of a (single) dominant position of the merged company, the Commission concluded that it would result in a significant impediment to effective competition. This is 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. In addition, the Commission was concerned that the merger would affect Eircom's ability to compete through the risk of termination and/or frustration of its network sharing agreement with O2.

Three was the newest entrant to the Irish market, and the smallest of the four operators. Why did the Commission consider it to be an important competitive force in this market?

As Three (H3G) was the latest entrant to the Irish market, it had the highest incentives to grow its subscriber base by offering attractive prices and innovative services. Three made considerable investments in its Irish operations and whilst it has understandably taken time for Three to recoup those investments fully, there were signs that its financial position was improving. Three was therefore also likely to have continued to exert an important competitive constraint in Ireland in the future.

After the merger, Three would remain as a larger company only facing competition from Vodafone and Eircom as remaining mobile network operators. Absent the commitments, this would have changed the competitive dynamics considerably and have lessened the overall competitive pressure on the market. This pressure is important for consumers to benefit from attractive prices and services. For these reasons, the Commission was concerned about the loss of competition between the merging parties and the removal of Three as an important competitive force on the Irish market.

Did the Commission include the need for network investment in its analysis? Will competition enforcement not diminish the incentives for mobile network operators to invest?

The Commission takes account of the impact of a merger on network quality for consumers. It can do so in the analysis of efficiencies that a merger may bring about.

The Commission carefully investigates the efficiencies that merging parties claim. In this case, it looked at whether the merger would bring material additional benefits in terms of network coverage, speed and quality compared to the situation absent the merger, including taking into account the pre-merger network sharing arrangements between Irish mobile network operators. The evidence confirmed that in terms of coverage, O2 was likely to achieve the same coverage as the merged entity. Three was likely to offer the same speeds and quality that the merged entity would offer. On this basis, the merger in itself did not bring significant additional network quality benefits. The Commission found that the merger would have brought limited efficiencies in relation to broadband access in isolated rural areas of Ireland where Three - currently the beneficiary of the National Broadband Scheme - may have decommissioned some loss-making sites upon expiry of the scheme. However, it is clear that such limited efficiencies could not counter the harm that consumers would suffer from the elimination of the retail competition between Three and O2 and the reduction in overall competitive pressure on the Irish mobile telecoms market.

Competition is not detrimental to investment. Mobile telecoms companies across Europe are already investing in 4G/LTE networks (see Digital Agenda Scoreboard), without merging their operations. Network investment and competition can go hand in hand. The commitments in this Decision ensure that after the merger, Irish consumers can continue to benefit from the attractive prices and services that healthy competition brings about.

How do the commitments solve the Commission's concerns on the retail and wholesale markets?

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. This model is more effective than the typical pay-as-you-go model that MVNOs currently use in Europe and under which they pay for network access according to the actual usage of their subscribers. The Commission's investigation in this case also showed that the model is viable for the Irish telecoms market. 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. This is sufficient to resolve the Commission's concerns on the retail market.

With these commitments, the two MVNOs that enter in Ireland in the short term will be able to replace the competitive force that Three has previously exercised. Today's decision leaves open the possibility for them 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.

The commitment in relation to the network sharing agreement with Eircom will allow that operator to become a credible network host for MVNOs in Ireland. With this commitment, MVNOs retain the possibility to negotiate network access with three network hosts, namely Vodafone, Three and Eircom. Two MVNOs will already benefit from the capacity that Three will sell to them on attractive terms. This is sufficient to resolve the Commission's concerns on the wholesale market.

Is it possible that two MVNOs will exercise the same competitive constraint as Three did before the merger? Why would a fixed-capacity model for MVNOs be more effective than the traditional business models of MVNOs?

The term MVNOs encompasses a great number of different operators with varying business models. Some MVNOs are "light" MVNOs and are effectively pure resellers. Other MVNOs are full MVNOs, with their own core network. Similarly, some MVNOs target the general population of a Member State whereas others are only focused on a niche customer group.

It is therefore very important to look at the specific MVNO model. The commitments offered by H3G introduce a new model which is based on the purchase of a fixed capacity of Three's network. By acquiring fixed capacity, the two MVNOs will have incentives to grow and utilise their capacity. These are similar incentives to those of an MNO.

Today MVNOs in European markets typically operate under a pay-as-you-go-model. This means that they pay for network access depending on the actual usage of their subscribers. Under such a model, each usage by a subscriber constitutes a variable cost for the MVNO that it pays to its host MNO. This differs greatly from the model of Three as MNO, which owns network capacity and, as the smallest operator in Ireland, has the incentive to fill that capacity by acquiring new customers. This is reflected in the attractive data offers that Three has offered in Ireland.

Under the model accepted by the Commission in the commitments, MVNOs would also have a pre-fixed amount of capacity at their disposal. The minimum capacity that the MVNOs have to commit to is significant. This gives them incentives to fill that capacity by offering attractive prices and services to their subscribers. Although they remain hosted by Three, these MVNOs can use their significant capacity to offer a wide range of prices and innovative services. The Commission concluded that thanks to this new model, their incentives will come very close to those of Three as it has operated as a MNO in Ireland.

How will the MVNO agreement work in practice?

The two MVNOs will commit to purchase the capacity for a minimum of five years, with the possibility to extend the agreement up to ten years. They will commit to a significant minimum amount of capacity. Three (H3G) needs to conclude such an agreement with one MVNO before it can complete its own acquisition of Telefonica Ireland. For the duration of the agreement, Three will provide the MVNOs with all technical assistance they may require as well as the ancillary services they may reasonably require. This should help the MVNOs launch their commercial operations as quickly as possible.

The market test of the commitments revealed interest from operators to enter the Irish market on the basis of this model. Parties with a continued interest may include telecommunications companies or retailers with an established presence in Ireland. A number of other companies have indicated that they would be interested in obtaining capacity on Three's network on the capacity arrangement foreseen in the commitments. Once formally proposed by Three, the Commission will assess whether the candidate MVNO would fulfil the relevant requirements set out in the commitments.

Does more network investment in Europe require relaxing EU competition rules?

The European mobile telecoms industry is facing important challenges. Consumers increasingly use their mobile telecoms networks to access Internet services, to communicate via video links or even to watch TV content. The resulting increase in data consumption requires updated mobile networks. 4G Long-Term Evolution (LTE) technologies allow for the consumption of more data at higher speeds and with a better network experience. The availability of high-speed communications networks is a key part of the European Union's Digital Agenda targets.

The roll-out of 4G and LTE networks in Europe occurred slightly later than in other regions in the world, due to the later date at which Member States auctioned the spectrum that is needed for the roll-out. However, European mobile operators are catching up quickly, and the roll-out of 4G and LTE in Europe is accelerating.

Telecoms companies claim that they need to merge to gain the required scale to make those investments. This can include mergers between mobile network operators in different countries, or mergers between mobile network operators and telecoms companies in neighbouring markets such as fixed telecoms (including cable). The Commission has recently approved a number of these mergers, such as Telenor/Globul in Bulgaria (MEX/13/0704) and Vodafone/KabelDeutschland in Germany (IP/13/853).

The mergers that are now before the Commission concern mobile network operators in the same Member State. These mergers can increase market power in national mobile markets which are characterised by relatively few competitors and high barriers to entry. They require closer scrutiny to ensure that they raise no competition concern and do not harm consumers. The Commission has approved several mergers between mobile operators in the past: T-Mobile/tele.ring in Austria in 2006 (IP/06/535), T-Mobile/Orange in the Netherlands in 2007 (IP/07/1238), T-Mobile/Orange in the UK in 2010 (IP/10/208), Huchison 3G/Orange in Austria in 2012 (IP/12/1361). The Commission is currently assessing the proposed acquisition of E-Plus by Telefónica Deutschland in Germany (see IP/13/1304).

The key obstacle that European telecoms companies face in gaining scale is the fact that telecoms markets in Europe remain fragmented. The Commission has consistently underlined the need to eliminate the remaining barriers to a genuine single telecommunications market, which for instance relate to the national procedures for the allocation of spectrum and the lack of a truly European regulatory framework. These barriers are also what sets Europe apart from countries such as the US and China. Without them, EU telecom operators would be able to tap fully into a half a billion customer base.

Thanks to the liberalisation of the European telecoms markets, consumers enjoy quality services at relatively low prices, especially compared to the US. Both competition and investment are needed to ensure that consumers maintain these benefits. Evidence shows that competition and customer demand are key drivers of investment in new technologies. Relaxing competition rules would not guarantee that investment take place, but would shift the cost of making the required network investments on consumers who would be faced with less competition and higher prices.


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