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3UK/O2 merger block suggests that a healthy level of competition in a national mobile market will never be enough for Brussels.
Do we now live in a world in which there is no such thing as a sensible, sustainable level of competition?
On holiday earlier this week, I was discussing the pros and cons of CK Hutchison’s plan to merge 3UK with O2 in the U.K. with an elderly woman we happened to be sitting next to at dinner.
Yes, I know how that sounds, but trust me when I say that she brought up the subject, which is itself something of a paradigm shift. A decade ago explaining to a stranger what my job entailed would have elicited the response "so, can I buy your magazine in Smith’s?" or would have seen her turn to her – slightly deaf – husband and translate thusly: "she does something with computers." Times have changed though and now we’re all talking telecoms, even septuagenarians on a walking tour in Madeira…and the cool kids, of course.
But I digress. Having expounded on the benefits, in my opinion, of the 3UK/O2 merger – at that stage the deal was still alive, but we knew the European Commission block was imminent – my dinner companion thought for a moment and said, "so, you’re arguing for a return to a state monopoly then?"
Obviously I swiftly corrected her, although I suspect she was merely playing devil’s advocate. But later, after the deal was quashed on Wednesday, it occurred to me that Brussels is taking a similar stance, in that it is overlooking the middle ground between market dominance and hyper-competition.
In fairness, the U.K. is perhaps not "hyper" competitive. However, with four mobile network operators, one longstanding MVNO, a couple of fixed broadband and TV companies growing their MVNO arms, and a raft of low-cost virtual operators from the likes of supermarket chains and specialist ex-pat providers, consumers are spoilt for choice when it comes to selecting a mobile package. And given that Hutch brokered a series of capacity deals with Sky, Virgin, Tesco Mobile and UK Broadband, as well as making various other pro-competition pledges – although admittedly its promised price freeze didn’t mean much in real terms – it is hard to see how the EU can justify blocking the merger on competition grounds.
In a statement, Brussels insisted that Hutchison’s proposed remedies failed to address its concerns.
"The takeover would have removed an important competitor, leaving only two mobile network operators, Vodafone and BT’s EE, to challenge the merged entity," the Commission said. "The significantly reduced competition in the market would likely have resulted in higher prices for mobile services in the U.K. and less choice for consumers than without the deal."
Which begs the question, how much competition is enough for Commissioner Vestager?
Hutch – which is mulling its next move in the U.K., "including the possibility of a legal challenge," it said – must now be seriously concerned about its prospects in Italy, where it is seeking to form a 50:50 joint venture with Vimpelcom’s Wind that would create a new market leader in the mobile space.
Last year, after the collapse of Telenor and Telia’s plan to merge their Danish businesses, again due to EU objections, Vestager insisted that each M&A case in Europe would be assessed "on its own facts and merits," but a pattern is clearly starting to emerge.
As part of our annual review in December, Total Telecom noted that, with a decision on the 3UK/O2 deal looming, "the industry won’t have long to wait before it learns if Denmark is a blip or a portentous precedent." The latter now seems more likely.
It is difficult to imagine that the commissioner will give the green light to any future deals that reduce the number of facilities-based players in any European mobile market, which will leave the 28-member bloc in a highly fragmented state…unlike our cousins across the Atlantic.
It has been said many times before, but the U.S. has four main mobile networks serving around 300 million people, while the EU has a population of half a billion, including only four markets with in excess of 60 million people and many in the 5 million-10 million range or smaller, and yet all these markets are deemed to require four mobile operators each. U.S. mobile operators are generating the kind of ARPUs that facilitate investments in networks and services, whereas in the EU, well… Vestager’s statement on Wednesday that the 3UK/O2 deal "would also have hampered innovation and the development of network infrastructure in the U.K., which is a serious concern especially for fast moving markets," is starting to look counter-intuitive.
I pointed out the discrepancy between the U.S. and Europe to the elderly lady on holiday earlier this week, but she just smiled and started talking about how much she loves her iPad. Now there’s a company that understands scale, I thought…and changed the subject.
