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EU blocks 3UK/O2 deal

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Strand, JohnStrand Consult20050628Foto: Torben KlintTelecom investors have focused their attention on the decision to the proposed merger of Hutchison 3UK and Telefonica UK (O2).  EU Commissioner for Competition Margrethe Vestager announced at noon CET today—via Twitter—that she would block the deal.  This is bad news for the European telecom industry and the larger goals of the European Commission’s Digital Single Market, writes John Strand.

However it is good news for the shareholders of British Telecom (BT), which DG Comp has protected as the only player in the UK that can offer a quatro play solution (broadband, video, wireless, and telephony).  No other actor in the UK has the infrastructure or scale to compete with BT, just recently awarded an approval for the acquisition of Everything Everywhere (EE), the largest UK mobile provider.

Strand Consult is on record that Margrethe Vestager and her team at DG Comp do not understand the telecommunications market and what it takes to compete with a player such as BT/EE or the advantages that a quatro play provider can enjoy when its only competitors are single play dwarves (see the next issue of Telemedia magazine out later this month)

The most galling thing about the announcement is that Vestager declares its purpose is “To serve UK consumers – affordable prices and innovation.”  While the documents about the denied merger have yet to be released from DG Comp, we do not expect there to be any empirical evidence that blocking mergers in the competitive mobile industry leads to lower prices and more innovation. In anything, it is the opposite.  Following the deterred merger in Denmark last fall, all operators raised their prices within one month. Strand Consult which has studied them mobile industry for 20 years describes what drives innovation; it is technological development, not the number of providers on the market.

What Vestager’s statement does reflect, however, is that the European Commission, sensing the deep disappointment across Europe about Brussels, will do anything it can to appear to be consumer-friendly, even if it means pursuing a policy that ultimately will not work.  We suspect that many are tired the Commission’s populistic pandering on issues such as net neutrality and roaming, as they have seen nearly a decade of economic decline in the EU. Indeed many in the UK want to leave the EU all together.  DG Comp’s blocking the merger will likely be interpreted by some in UK as more meddling from Brussels on what is a “national affair.”

Strand Consult recommends that Hutchinson sue DG Comp and expose the commission authority’s lack of transparency and lack of knowledge about how modern telecom industry operates.  The Black Box of DG Comp has persisted for far too long.

This announcement comes on the heels of an averted deal between Telia and Telenor in Denmark last fall, which DG Comp claimed would increase prices in Denmark.  Earlier this year the UK Competition and Markets Authority approved the merger of British Telecom (BT) and Everything Everywhere (EE) without remedies, a £12.5 billion deal combining the country’s largest fixed line and mobile businesses.  Unlike the BT/EE deal, the 3/O2 deal needs EU approval.  This research note, based in part on leaked documents from DG Comp, reveals that the agency is making decisions about an industry, which it does not understand, and this bodes poorly for the merger.

Strand Consult has followed the consolidation of the European telecom market for many years and has frequently criticized the unpredictable black box of DG Comp. Predictable regulation is a prerequisite for investment in a capital intensive industry such as telecommunications industry which requires a long time horizon.

In spite of much discussion about the need for investment, the European Commission has not succeeded to create a conducive environment to build and run telecom networks. The problem stems from a conflict in leadership and policies from competing agencies within the Commission. Using empirical evidence and ongoing surveys of member states, DG Connect attempts to design a modern framework for telecommunications.  Meanwhile DG Comp, using its rules of thumb, determines the future by deciding which mergers happen.  Whether enterprises can succeed to merge is a crucial factor in whether they will invest.

One of the documents Strand Consult reviewed is called Hutchison – Telefonica UK oral hearing from March 2016 containing DG Comp’s outlook on the UK market. It is not an exaggeration to say that if an undergraduate student in a marketing or business program submitted such an assessment, she would flunk. No person working at a telecom operator, nor investor for that matter, would consider competition in such simplistic, monolithic terms. DG’s Comp’s analysis is not only misleading, it shows that the agency does not understand what drives competition in the market.

It is clear that DG Comp sees the Hutchison/O2 the deal in UK from the paradigm of the market vertical. That is that the telecommunications market consists of distinct networks (mobile, fixed line, broadband, TV, etc.) which have little to no influence on the other. In practice, however, the modern telecom operation is assembled horizontally, offering bundled products commonly known as triple and quatro play solutions. DG’s Comp’s obsolete view is likely rooted in the fact that its employees have limited understanding of how the telecommunications market works in practice and don’t understand how triple and quatro play provider benefit consumers, or they refuse to update their framework as it would create political challenges.

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