The European Commission has approved under the EU merger regulation the acquisition of Jazztel plc by its rival Orange SA, subject to conditions. Jazztel is mainly active in Spain.
There are currently four nationwide fixed network telecommunications players active on the Spanish market:Telefónica, Orange, Jazztel and Vodafone/ONO.
Both Orange and Jazztel provide fixed internet access services in Spain. Both companies mainly rely on regulated direct access to the unbundled local loops of the copper network of the incumbent telecom operator Telefónica. In addition, they are deploying their own FTTH networks in parts of Spain.
Fixed internet access services are offered separately to customers but also in so-called "dual-play", "triple-play" or "quadruple-play" bundles. These offers combine the fixed internet access services with other telecommunication services such as fixed telephony, television and mobile telephony.
The Commission had concerns that the takeover as initially notified would have led to higher prices for customers on the retail market for the provision of fixed internet access services in Spain, as well as on the possible markets for dual-, triple- and combined triple-/quadruple-play services including fixed internet access services.
These concerns were based on the following findings:
- Orange and Jazztel have been very dynamic fixed internet access providers in Spain in recent years and have increased their market shares, in terms of numbers of subscribers, by around 50% since 2010. In contrast, Telefónica (operating under the brand Movistar) has experienced a decline of its subscriber share, while the market shares of the other main national operators, Vodafone and ONO (which merged in 2014) are stable.
- Jazztel has pursued an aggressive commercial strategy in particular in the low-cost segment for triple-play products, thereby exercising price pressure on the offers of all other major operators.
- Orange has also been launching innovative and aggressive tariffs in the past three years.
- The takeover would eliminate the strong competition between Orange and Jazztel and reduce the number of major nationwide players from four to three. Based on 2014 data, the revenue market shares in the Spanish fixed internet access market would be as follows: Telefónica had around 43%, the merged entity would have around 30% and Vodafone/ONO around 18%.
The takeover, as notified, would remove these important competitive pressures. Orange's internal documents, public statements of competitors and the Commission's economic analysis all suggest that after the takeover, the merged entity and their main remaining competitors would compete less aggressively, which would lead to higher prices.
Moreover, there are significant barriers to enter the market because of:
- the high costs of the investments needed to deploy alternative next generation broadband networks;
- the cost for equipment and networks to benefit from direct access to Telefónica's copper network that are unlikely to be amortised; and
- regulated wholesale prices and conditions for indirect access to Telefónica's copper network.
In addition, barriers to entry into multiple-play markets involving a mobile component, such as triple-play and quadruple-play products, are high. It appears to be difficult to obtain reasonable wholesale prices for mobile telecommunications services – including 4G technology.
The Commission also took into account that the offers of Orange and Jazztel for the provision of mobile telecommunication services are complementary to each other. Therefore, the merger creates certain efficiencies that are beneficial for consumers. In fact, Orange will provide mobile services directly to Jazztel's customers, without Jazztel having to procure such services at wholesale level. Jazztel's customers will therefore benefit from more competitive multiple-play services including a mobile component. However, the Commission found that, despite this alleviating factor, the loss of competition caused by the merger as initially notified would still remain significant.
To address the Commission's concerns, Orange offered commitments that will enable a fourth nation-wide competitor to enter the retail markets involving fixed internet access services in Spain.
The remedies submitted by Orange are based on two technologies:
- Divestiture of optical fibre
Orange commits to divest an FTTH (fibre-to-the-home) network that covers between 700 000 and 800 000 building units. It consists of parts of Jazztel's current FTTH network, covering 13 local exchange areas in five of the largest cities in Spain: Barcelona, Madrid, Malaga, Sevilla and Valencia. The size of the FTTH network is similar to the size of Orange's current FTTH network in Spain and exceeds the current overlap between the parties' FTTH networks. This ensures that the divested FTTH network is a standalone business that can be operated independently from Orange. In order to be able to serve its own customers, Orange will have a protected right to use up to 40% of the capacity of the divested FTTH network, measured at the level of each local exchange area, for 35 years. For this, Orange will then have to pay a one-time fee and a recurrent fee covering maintenance costs.
- Granting wholesale access to copper network
Orange commits to grant the purchaser of the FTTH network wholesale access to Jazztel's asymmetric digital subscriber line (ADSL – a technology that allows data transmission over copper lines) network for an unlimited number of lines. Access is provided as a national bitstream service and will rely on the regulated direct access to Telefónica's copper network. This service will provide access to approximately 78% of Spanish territory.
Orange will provide the service initially for 4 years, renewable for an additional period of another 4 years. During the initial 4-year period, the purchaser will pay:
- a specified monthly access fee per line not exceeding Orange's incremental cost per subscriber (i.e. the extra cost associated with providing service to one additional customer);
- a fixed fee to be agreed upfront between Orange and the purchaser. This fixed fee shall not be related to the number of lines used by the purchaser.
If the purchaser makes use of the option to extend the service by four additional years, it will pay only a monthly access fee per active line.
Under current market conditions in Spain, most internet access services are bundled with fixed voice services and mobile telecommunications services. Therefore, the Commission in its analysis considered it important to ensure that the purchaser will be able to compete by offering such multiple-play packages.
In this respect, the wholesale access service to Jazztel's ADSL will allow the purchaser to provide fixed voice services using Voice over Internet Protocol (VoIP) technology. Orange committed to provide VoIP prioritisation technology on Jazztel's network and to ensure quality of service.
- Optional access to Orange's mobile network
If the purchaser does not already benefit from access to a mobile telecommunications network including 2G, 3G and 4G services, Orange will provide the purchaser with wholesale access to such mobile services on competitive terms and, in any case, at terms as favourable as those that Orange is currently granting to Jazztel.
These commitments address the Commission's competition concerns since they ensure that the purchaser will have similar incentives to compete under the same conditions that Jazztel and Orange have today: in particular, the purchaser will have to face the same acquisition costs for new subscribers.
The Commission acknowledges that considerable investments are necessary to deploy fixed high-speed networks such as FTTH networks. Both Orange and Jazztel are currently deploying their own FTTH networks. Orange's current fibre network is significantly smaller than Jazztel's FTTH network. Orange claimed that the merged entity will significantly expand its FTTH deployment compared to the non-merger scenario.
The Commission has carefully investigated this claim and analysed the possible size of the high-speed fibre network of the parties in both a merger scenario and on a stand-alone basis. The Commission has found no convincing evidence that the merger would lead to the deployment of high-speed networks in a significantly larger area than the area that Orange and Jazztel would have likely rolled-out without the merger.