A welcome redial for European telecoms
Commissioner is right to take a tougher line on mobile mergers
In the past two years, Europe’s mobile operators have raced to consolidate their industry. Encouraged by the indulgent attitude of the regulator in Brussels, they have launched a wave of deals across the continent. As a consequence, country after country has seen the number of networks in its market contract from four to three.
Germany, Austria and Ireland have all crossed this threshold, generally seen as the point at which competition ceases reliably to operate. They have done so in the teeth of opposition from national regulators. Because the deals involved supranational competitors they ended up with the European Commission, which approved them subject to undertakings. For all the advantages dangled by the purchasers, the result has been as simple as it was expected: prices have gone up.
Now, under a new commission, Brussels is thinking again. Last week, Margrethe Vestager, the Danish competition commissioner, halted plans that would have put together the Danish networks of the Scandinavian operators, TeliaSonera and Telenor.
Significantly, she said the deal could only have passed muster if the purchasers had shed sufficient assets to create a new mobile operator in the country. That, of course, would have rendered the whole exercise largely redundant. Her decision puts a host of similar mergers still lodged in the pipeline — including CK Hutchison’s purchase of O2 in Britain — firmly at risk.
Ms Vestager is right to toughen the rules on undertakings. Not only has Brussels been too liberal about those it has sought, it has neglected implementation. For instance, Hutchison pledged that it would bring in a new operator to piggyback on its spectrum after buying Orange Austria in 2013. More than two years have passed and the undertaking remains unfulfilled.
Part of the problem is that markets with a triumvirate of networks look unappealing to new entrants, who often come in as minnow-sized virtual operators, unable to drive pricing or service quality. Had the Danish merger gone through, for instance, it would have created a forbidding structure, with the two largest players holding almost 80 per cent.
Ms Vestager’s scepticism is also welcome when it comes to the operators’ argument that mergers are necessary to finance new networks and services. In the past, both Jean Claude Juncker, the commission president, and Angela Merkel, the German chancellor, have peddled this claim. But there is no evidence to support it. True, returns on capital employed have fallen in European mobile from a very high 20 per cent to 10 per cent in the past five years. But this still exceeds operators’ cost of capital — at least for those that are sensibly capitalised.
Ms Vestager should now turn her stringent eye to Britain. CK Hutchison’s planned merger of its Three network with that of Telefonica’s O2 demands serious scrutiny. Three is an excellent example of how competition can both spur and reward fresh thinking. Created explicitly as an additional operator in 2000 to hold prices down, it has built a profitable business. It has done so by innovating. Three was among the first operators to spot the importance of the smartphone and to design products and tariffs to support its expansion. It is alone in offering customers an upgrade to 4G without charge.
Regulation needs to preserve these incentives, not smother them by pursuing a nebulous policy of promoting European champions. If Ms Vestager’s policy genuinely resets EU regulation in a more open direction, European consumers will have reason to offer her their thanks.