If you started reading this post in hopes of learning about Nemo and Dory, you are going to be disappointed. This is about a different kind of fish, but without gills of any sort. This post take a sneak-peak at how competition rules deals with consolidation within the European telecommunications industry, a market that hosts over two-hundred operators that services five-hundred European consumers.
There is no denying that the EU telecom market is in deep fragmentation, especially when compared to the US market where only four major operators exist. Over the past five years, there has been considerable move by the EU telecom sector for in-market consolidation seeking to create greater investments for next-generation of networks. However, based on a holistic analysis of the approach adopted by the European Commission, it is evident that ‘competition’ is being harped as the driver for future investment as opposed to consolidation.
Before moving into the complex stuff, it is important to understand what is meant by consolidation. Simply put, consolidation is all about horizontal or vertical integration between different telecommunication operators through mergers and/or acquisitions. This includes arrangements between cable operators, mobile operators, broadband providers and any player (or who is known in the industry as an “undertaking”) within the telecom sector.
Consolidation is particularly considered a necessary requirement in the fast moving landscape of telecommunication and as a means of lowering costs and gaining competitive advantage particularly over foreign operators seeking to establish themselves in the internal market of the EU. For example, EU mobile operators seem to be inclined to consolidate their services with fixed line operators in order to boost their offers for quad-play services. Such consolidation is expected to bring down customer acquisition costs (the cost borne by an operator sign-on a customer) in the highly fragmented mobile market.
However, in light of the European Commission’s aspiration for a Digital Single Market, it is vital to revisiting the almost-tabooed concept of consolidation within the telecom industry. With this purpose in mind, I will first briefly outline the regulatory landscape applicable and thereafter look at examples of consolidation manoeuvres sanctioned by the Commission over the past to illustrate the regulatory landscape in practice. I will conclude by analysing what the future holds for consolidation in telecoms industry and the ways in which the regime should be revised.
The regulatory landscape
Since the liberation of the telecommunication market in the 1990s, the European Union has observed a strict stance in terms of ensuring the intended goals of the liberalisation remains intact. The liberalisation directives apply to access-related issues wherein the incumbent operator (the fancy word used in the industry practice to refer to the original state-owned operator) is compelled under the new regime to negotiate in good faith interconnections with new entrants to the markets where they originally held a monopolistic share prior. This aspect of harmonisation is understood to create equal conditions that would facilitate effective competition in the telecom sectors of the EU member states. Such harmonisation measures invariably meant a synergy with the general competition law to ensure that the liberalised markets will not recede to any form of monopolistic nuance. Article 15(1) of the Framework Directive, for example, has sought to define ‘markets’ in line with the general competition law principles, a stance further complimented by the 2002 Competition Guidelines.
Consolidation within the telecoms market can be approached on three grounds. Firstly, the ex-ante (pre-emptive) regulation based on EU Merger Regulation and secondly, further ex-ante (retrospective) regulation based on the Framework Directive on SMP (significant market power) obligations, and finally ex-post regulation based on general competition law on abuse of dominant position.
The Directive defines SMP as individual or joint holding that exceeds 50% market share giving the power to act independently of competitors and customers and thereby enjoying a position equivalent to a dominant position. This definition echoes the definition of dominance adopted by the Commission and the European Courts in the execution of Merger Regulation and TFEU (Treaty on the functionality of the EU). The cumulative effect of the provisions is to ensure that competition within the market is not hampered by any venture between undertakings/operators that establishes an SMP or dominance. Therefore, consolidations based on mergers and acquisitions (M&A) are formally assessed according to the impact they serve on competition.
However, the provisions of the Merger Regulation is resorted only in specific instances where the combined turnover of the parties to the merger claims a minimum of 5 billion euros in the preceding financial year exceeds. However, the regulation will have no application where the effects of the merger are limited to one member state. This condition implies that consolidation of smaller telecom operators have more potential to obtain consolidation clearance as opposed to pan-European operators seeking consolidation to further their presence on the market. It further implies that consolidation of smaller operators would result in creating more competition against the undertaking with SMP.
In addition to the threshold requirements, a significant emphasis is placed on the legitimate interests of the consumers such as ensuring plurality of media, consumer choice and protection. The Commission decision often runs on the premise that competition stimulates the right kind of competition, and provide strong impetus for investment and innovation with the aim of increasing subscriber base. Therefore, in the face of declining revenues with the advent of applications such as Whatsapp, Facetime and iMessage (known as OTP) dominating the services market, the room for clearance for consolidation on the basis of cost-reductions remains considerably meagre.
Regulation in practice
As observed, consolidation, at the very outset should not reduce the number of undertakings in each Member state and must not hinder the competition at any cost. The ‘more-the-merrier’ approach is meant to facilitate competition and increasing consumer choice.
However, consolidation within related markets could face restrictions where it leads to reduction in the number of undertakings/operators. The general assumption is that reduction of one operator must be compensated. This is generally done either by restructuring or further consolidation arrangements. Basically a lot more paper-work for the lawyers. This approach is aptly illustrated in the Vodafone/Mannesmann acquisition decision in 2000 where Mannesman had to rid its holding in Orange to France Telecom since Vodafone already had its network in France.
I would refer you now to the recent consolidation effort between BASE (a Belgian Mobile operator) and Telnet (a cable operator where Liberty Global (another mobile service provider) had a controlling stake. The competition between BASE and Telnet has led to reduction of prices in the mobile market, thus the proposed consolidation had the potential to reduce this competition particularly in the Mobile Virtual Network Operator market (MVNO do not own wireless infrastructure but basically piggy-back on another provider who does). To compensate for this risk, further consolidation was administered between BASE and the Belgian broadcaster Medialaan by way of selling it BASE’s stake in Mobile Vikings (an MVNO on BASE network).
When the Danish TeliaSonera and Telenor which finally abandon their quest for consolidation (which would have resulted in reducing the providers from 4 to3) before the EU Commission, it was considered as a blow to the telecom sector’s pro-consolidation wishes and a conquest for the Commission’s preference towards competition over mergers.
In light of the stringent regulation surrounding competition in the EU telecoms industry, consolidation has come to be backed by structural remedies in order to be approved by the EU Commission. From the above illustrations it is evident that creation of more MNOs and MVNOs or sale of spectrum by bigger operators to smaller operators has been considered as plausible means of addressing competition concerns raised by both horizontal and vertical mergers. However, such structural remedies often lead to reducing the benefits of the overall investment and underutilisation of resources due to these reservations.
However, I am of the view that despite the Commission’s approach towards achieving more innovation through competition, Europe has ended up playing catch-up against US and Asian markets in technological innovations. Given the increased influence of OTP in the industry and reducing revenues, it is necessary that the regulatory framework allows for more investor-friendly structural remedies that would accommodate consolidations within the heavily fragmented internal market. Accordingly, the ultimate question would be balancing operator sustenance against consumer interest. If the current ex-ante approach continue to dominate the telecoms industry, in the long run it may lead to further infiltration of the market by non-EU operators merging with the European operators leading possible heavy repatriation of revenue out of the region. Furthermore, lack of investments would seriously affect innovation. However, the existing ex-post regulation based on general competition rules such as rules on abuse of dominant position would be more adept at ensuring consumer welfare in instances where consolidation leads to SMP or dominance.
Therefore, in light of the impending single digital market concept, I find it prudent that greater reliance should be placed on ex-post regulation as opposed to ex-ante regulation, so that consolidation for the sake on investment and innovation will not run amok endangering the interests of the consumers. After all it is no easy task when there is more than one big fish in a small pond.
 Capgemini, Communications Industry: On the Verge of Massive Consolidation (2014). https://www.capgemini.com/resource-file-access/resource/pdf/ma_pov_05082014.pdf
 Paul L. Nihoul and Peter B. Rodford, EU Electronic Communications Law: Competition and Regulation in the European Telecommunications Market (Oxford University Press, 2d ed. 2011). para 3.09
 Viz Article 4(1) of Access Directive.
 Thoralf Dabler and David Parker, Harmony or Disharmony in the Regulation and Promotion of Competition in EU Telecommunications? , 12 Utilities Policy 9 (2004). p.11
 Para 5 of the Guidelines. See also Paul L. Nihoul and Peter B. Rodford, EU Electronic Communications Law: Competition and Regulation in the European Telecommunications Market (Oxford University Press, 2d ed. 2011). para 3.171
 Christian Koenig et al., EC Competition and Telecommunications Law: A Practitioner’s Guide (Kluwer Law International 2002). p.277
 Ian Walden, Telecommunications Law and Regulation (Oxford University Press, 4th ed. 2012). p 530
 Ibid, p.531
 Competition in telecom markets | European Commission (European Commission Oct. 2, 2015), https://ec.europa.eu/commission/2014-2019/vestager/announcements/competition-telecom-markets_en
 Anon, Europe Clears Vodafone Takeover of Mannesmann – Apr. 12, 2000, CNN, Nov. 23, 1999, http://money.cnn.com/2000/04/12/worldbiz/vodafone/.
 European Commission – Press release – Mergers: Commission clears acquisition of mobile network operator BASE by Liberty Global, subject to conditions (Feb. 4, 2016), http://europa.eu/rapid/press-release_IP-16-241_en.htm.
 World Business, Finance and Political News from the Financial Times– FT.com Europe, 2016, http://www.ft.com/intl/cms/s/0/ed4fc186-773a-11e5-933d-efcdc3c11c89.html
GSM Association Copyright, European mobile network operator mergers A regulatory assessment (2014), http://www.gsma.com/publicpolicy/wp-content/uploads/2014/12/European_mobile_network_operator_mergers-A_regulatory_assessment-WEB_FINAL.pdf.