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European Commission - Fact Sheet

Mergers: Commission prohibits Hutchison's proposed acquisition of Telefonica UK – Factsheet

Brussels, 11 May 2016

The Commission has blocked the proposed acquisition of O2 by Hutchison under the EU Merger Regulation. It had strong concerns that UK mobile customers would have had less choice and paid higher prices as a result of the takeover that would also have harmed innovation in the important mobile sector.

This Factsheet sets out relevant background on the UK mobile market and the Commission's approach to assessing mergers. For a summary of the Commission's competition concerns, the remedies proposed by Hutchison and the Commission's assessment of the remedies proposed, please see the press release.

 

UK mobile telecoms market

The UK mobile market is currently competitive – retail mobile prices are among the lowest in the entire EU. The UK is also one of the most advanced countries in the EU in terms of roll-out of 4G technology and take-up of 4G services.

There are currently four mobile network operators in the UK – BT's mobile business EE, Telefónica's O2, Vodafone and Hutchison’s Three. Based on its investigation the Commission had strong concerns that the combination of Three and O2 would have led to a reduction in terms of choice and to higher prices and lower quality services for UK consumers than without the deal.  

The role of Three

Three is the latest mobile network operator to have entered the market and since its entry has been the driver of competition as the most aggressive and innovative player. For example, it is generally considered to offer the most competitive prices and was the first mobile network operator to offer 4G at no extra cost. It has also launched popular deals such as free international roaming and was the first UK network to launch a service using the new technology of "voice over LTE".

Despite being a late entrant to the UK mobile market, Three has managed to offer a good network service, in particular in terms of network reliability and mobile internet performance, as confirmed by independent reviews. Three's market share in terms of subscribers has been constantly increasing – besides for Three, this is only true for O2.

The role of O2

O2 has a strong position with high brand value and good reputation. It is the second largest mobile operator by revenues and the largest in terms of subscribers (if its share in the Tesco Mobile joint venture is included). O2's market share in terms of subscribers has been constantly increasing.

The role of mobile virtual network operators

Mobile "virtual" operators do not own the networks they use to provide mobile services to UK consumers. Instead, they enter agreements with one of the mobile network operators to access their network at wholesale rates.

The Commission found that the ability of mobile virtual operators to compete in the UK retail mobile market is already limited today. The Commission's 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 their dependence on the wholesale access conditions offered by their host mobile network operator.

 

The Commission's approach to merger reviews in mobile telecoms markets

The objective of EU merger control is to make sure that mergers in the European Union do not weaken competition. In mobile telecoms markets, effective competition ensures fair prices, quality networks and spurs innovation.

Mobile telecoms operators in the EU still operate within national markets because, for example, telecoms regulations and spectrum allocation remain very much national affairs. Therefore, the Commission's case-by-case assessment of transactions under EU merger rules in this sector is still linked to national markets. Working towards completing a truly integrated Digital Single Market is a top priority for the Commission.

The Commission always assesses each case by itself and on its own merits. There is no "magic number" for the number of mobile network operators required to ensure a competitive mobile telecoms market. It depends on the specific characteristics of the national market in question.

If competition concerns are identified, the parties can propose remedies, which must address the Commission's concerns in full. In general, structural remedies definitively solve competition concerns once and for all. There are therefore good reasons to prefer structural remedies in cases involving companies operating in the same market, as their implementation can be measured easily and, unlike behavioural remedies, does not require future monitoring, which can be a complex and lengthy process.

Differences with previous mobile mergers assessed by the Commission

The proposed takeover of O2 by Hutchison has a number of specific characteristics, which clearly distinguishes it from previous transactions in other Member States (Austria, Denmark, Ireland and Germany) that involved a reduction in the number of mobile network operators from four to three. In particular, the merged entity would have had network sharing agreements with both remaining network operators, EE and Vodafone. Thus, the proposed takeover would have impacted on the entire UK mobile infrastructure. The disruption of the current network sharing arrangements in the UK would have hampered the future development of mobile infrastructure, for example with respect to the roll-out of next generation technology such as 5G, to the detriment of consumers and businesses.

Consolidation and investment

In the Commission's experience, it is effective competition in telecoms markets that drives investment, as each telecom operator would want to attract more customers than its rivals through better quality services and lower prices. Research seems to suggest that a reduction of the number of mobile network operators from four to three in a national mobile market in the EU can lead to higher prices for consumers - but not that it leads to more investment per subscriber. In other words, it does not seem to lead to significantly higher overall investment in the market. The Commission's assessment in the case of Hutchison's proposed takeover of O2 supports this position.

Furthermore, the Commission notes that mobile network operators can share mobile networks and thus share the costs of network roll-out and benefit from large efficient networks without the need for consolidation, which is the case in the UK.

Efficiencies

In its merger assessment the Commission also takes account of the benefits a merger may bring about, such as its impact on network quality for consumers. In particular, it can do so by analysing, in line with specified criteria under the EU Merger Regulation, whether the efficiencies of a merger would outweigh its harm to consumers. Such efficiencies must also result directly from the merger and the Commission has to be sufficiently certain that they would materialise and to what extent.

In the case of Hutchison's proposed takeover of O2, the Commission assessed the efficiency claims by Hutchison, and concluded that they do not meet the criteria. Hutchison's efficiency claims were mainly based on the integration of the networks of Three and O2. These claimed efficiencies were uncertain to materialise. Even if they did, they would only have started to materialise a few years after the merger and taken even longer to be realised in full. Therefore, the Commission could not conclude that the claimed efficiencies would be able to outweigh the harm to consumers, which would have materialised immediately after the merger as a result of the loss in competition in the market.

MEMO/16/1705

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