The GSMA on Tuesday called on the European Commission to rethink its approach to mobile consolidation, after research concluded that investment in new network technology, rather than the number of market players, is the bigger driver of retail price reduction.
A study carried out by Frontier Economics on behalf of the lobby group found that mergers typically encourage investment in areas like emerging technology because the combined entity is stronger financially and generates greater economies of scale.
"If we look at the [connection] speed increases from the beginning of 3G to what 4G LTE-Advanced can deliver, it’s about a 500x increase. This clearly has a massive downward pressure on cost per megabyte," explained Gabriel Solomon, head of regulatory affairs at the GSMA.
"The actual cost of delivering a call today is much, much lower than what the cost was 10 years ago, and that reduc tion in cost, where there’s competition, gets passed on as lower prices to consumers," added George Houpis, director of Frontier Economics.
Speaking to Total Telecom, Solomon and Houpis cited the creation of EE from the 2010 merger of Orange and T-Mobile in the U.K. as an example of consolidation benefitting consumers.
As part of the merger agreement, the companies announced a £1.5 billion ‘Network Evolution Programme’ to prepare the ground for 4G. In addition, the merged entity had sufficient spectrum to proceed with an LTE rollout ahead of regulator Ofcom’s LTE spectrum auction, giving it a first-mover advantage.
"The knock-on effect is that when EE does that, the others in the market have to react, and they have reacted," Houpis said.
"The competition authorities should really pay quite a lot of attention to the investment incentives that result from a merger," he said, with the caveat that mergers should be evaluated on a case-by-case basis, and that it is not a given that every merger will result in lower prices.
Furthermore, the GSMA and Frontier Economics insisted that there is no robust evidence that four-player markets enjoy lower prices than three-player markets, with Solomon highlighting Sweden as a four-player market with broadly the same effective price per minute as the Czech Republic, which has three players.
Houpis said there is a tendency on the part of competition regulators to rely too heavily on the Gross Upward Price Pressure Index (GUPPI), which predicts a percentage increase in prices resulting from consolidation.
GUPPI "is based on a theoretical model of how competition might work in a market, and that model has a lot of shortcomings," he said. "You can’t just look at those predicted price increases as an indication of what might happen."
Frontier has looked at some of the regulatory analyses of proposed mobile mergers, Houpis said, and some of the GUPP I forecasts "are just not credible."
When consolidation does take place, the European Commission often imposes remedies designed to safeguard competition, such as mandating wholesale access on favourable terms and enforced spectrum divestment.
"Wholesale access and spectrum divesting can actually reduce the incentives for firms to pursue a competitive advantage," Solomon warned.
"You have to strike the right balance between ensuring the investment incentives stay in place…and addressing the regulator’s concern about a reduction in the intensity of competition," added Houpis.
Using the U.K. as an example again, he highlighted that Orange and T-Mobile were required to divest some spectrum as a condition of their merger.
"If the remedy was so strong it meant that EE was not able to develop and launch LTE and take that competitive advantage, it would have removed a significant benefit of the merger," he said. "You have to strike the right balance."
