On which markets did the Commission have concerns?
The Commission had concerns on two markets in Germany, namely the retail market for mobile telecommunications services and the wholesale market for network access and call origination.
The Commission identified the following concerns on the retail market:
- First, the merger, as originally notified, would eliminate competition between the merging parties and remove two close competitors, who are, at the same time, important competitive forces. In particular E-Plus, the smallest of the four Mobile Network Operators (MNOs) active in Germany, has been playing a challenger role in the German market for quite some time. The company successfully managed to adapt to changes in the market towards aggressive and innovative data focussed offers. Although to a lesser extent than E-Plus, Telefonica has also been an important competitive force to date, launching innovative and aggressive offers. The merger would remove these important competitive forces and result in a larger merged company that would be of approximately the same size as the other two German MNOs, Deutsche Telekom and Vodafone. The Commission's investigation showed that this would reduce the incentives of the merged entity and of Deutsche Telekom and Vodafone to compete on the German retail market.
- Second, the Commission had concerns that the competitive pressure exerted by non-MNOs, that is so say Mobile Virtual Network Operators (MVNOs), Service Providers and Branded Resellers, would remain limited. Given their dependency on access to the MNOs’ networks, the competitive pressure they are able to exercise today is already to some extent limited and will likely be further reduced as a result of the merger.
As a result, the Commission considers that competitive pressure on the German retail market would likely be reduced, resulting in higher prices for consumers.
In relation to the wholesale market, the Commission examined whether the merger would give rise to horizontal non-coordinated effects on the German market for wholesale access and call origination. Despite the rather low market shares of the merging parties on that market, the Commission nevertheless considers the reduction from four to three suppliers of wholesale access to constitute a significant change in the market structure, which increases the concentration level in an already very concentrated market. Moreover, the transaction would eliminate two important competitive forces at the wholesale level and would have a negative impact on the merged entity’s, and the other two MNOs’, incentive to grant MVNOs and Service Providers access to their respective mobile networks at commercially attractive conditions. In addition, MVNOs and Service Providers face major challenges if they want to switch their existing customers to another host MNO, which essentially means that, even if competing MNOs were to offer attractive wholesale access conditions post-transaction, it would be very difficult for the parties’ wholesale customers to switch to other MNOs if the merged entity were to raise prices.
Ultimately, there was no need to take a definite view on this as the remedies also effectively address any possible non-coordinated effects on the wholesale market.
Why is the Commission still looking at these mergers on a national basis?
Telecoms regulation and spectrum allocation are still national to a significant extent. From a user’s perspective, mobile devices switch to a new network operator every time a border is crossed within the EU. Users need a new contract when taking up residence in another Member State in order to avoid roaming fees. For these reasons, mobile network operators still compete on a national basis, even if they are owned by larger transnational operators. In view of this context, the Commission has no option but to assess telecoms mergers in the national markets where they take place.
What is needed to bring Europe’s telecoms industry the scale it claims to need is a genuine single market for telecommunications. Amongst others, the Connected Continent telecoms package contains measures on roaming charges, net neutrality and the streamlining of spectrum allocations. These measures are still under discussion between the Parliament, the Council and the Commission.
In a genuine Single Market with EU-wide spectrum allocation, and the removal of national barriers, the Commission would be able to assess the impact of most mergers in the telecoms sector on the whole of the EU. The Commission would assess the impact of most mergers on the whole of the EU – and not on individual national markets. As long as this does not happen, the Commission has to assess those mergers on a national basis. The parties to this case or other merger cases did not contest this.
The merged company would have a market share of around 30%. Why is such a merger problematic?
Telefónica and E-Plus are two of the four MNOs present on the retail mobile telecommunications services market and the wholesale market for access and call origination in Germany. These markets are highly concentrated and there are significant barriers to entry.
The proposed merger would lead to a market structure with three MNOs with a similar strong position. Deutsche Telekom and Vodafone would have a market share of roughly 25% each, while the merged company would have a market share around 30%.
While the proposed merger would not lead to the creation or strengthening of a (single) dominant position of the merged company, the Commission concluded that the merger, as originally notified, would result in a significant impediment to effective competition. This is because, in addition to the loss of competition between the merging parties, which currently are close competitors at the retail level, the merger would remove E-Plus and Telefónica as important competitive forces from the market and change their incentives to compete aggressively. Likewise, the incentives of Deutsche Telekom and Vodafone to compete aggressively would decrease. Finally, the ability and incentives of non-MNOs, that is to say MVNOs, Service Providers and Branded Resellers, to exercise competitive pressure on MNOs at the retail level are already limited today and would further decrease post-transaction. At wholesale level, switching existing customers from one MNO to another is extremely challenging. If the merged company were to increase its prices post-transaction, MVNOs and Service Providers might not be able to switch their existing customers even if another MNO were to offer attractive wholesale access conditions.
E-Plus played a challenger role before the expansion of data consumption but now, it is lagging behind in terms of network roll-out and it has only launched its 4G network very recently. Why did the Commission consider it to be an important competitive force?
E-Plus has not ceased to be an aggressive and innovative competitor in recent years. The company has heavily invested in improving the quality of its 3G network, has successfully adapted to the changes the market is currently undergoing and continues to successfully play a challenger role through attractive and innovative offers at retail and at wholesale levels notably as regards its data offerings. Its 4G network was commercially launched in March 2014. The Commission considers that, in a stand-alone scenario, E-Plus would have pursued its current strategy with the aim to also roll-out a competitive 4G network.
The merged company would remain as a larger company only facing competition from Deutsche Telekom and Vodafone as remaining mobile network operators. This would have changed the competitive dynamics considerably and lessened the overall competitive pressure on the market. This pressure is important for consumers to benefit from attractive prices and services. For these reasons, the Commission was concerned about the loss of competition between the merging parties and the removal of E-Plus as an independent network operator but also of Telefónica as important competitive forces on the German market.
Investing in future technologies and network roll-out is costly. Would Telefónica and E-Plus have been able to make the necessary investments absent the merger?
It is true that considerable investments are necessary to maintain and improve mobile networks. The Commission does not have any indication that Telefónica and E-Plus would not have been able to sufficiently invest in future proof networks in a stand-alone scenario. In particular, while E-Plus appears to have been facing a more difficult financial situation for a short period of time in 2013, its financial outlook in a stand-alone scenario would have been positive.
Did the Commission include the need for network investment in its competitive analysis? Will robust competition enforcement not distort the incentives for mobile network operators to invest?
The Commission takes account of the impact of a merger on network quality for consumers. It can do so in the analysis of efficiencies that a merger may bring about.
The Commission carefully investigates the efficiencies that merging parties claim. In this case, it looked at whether the merger would bring material additional benefits in terms of network coverage, speed and quality compared to the situation absent the merger. The Commission considers that quality improvements would be limited and essentially concern a gradual increase in coverage for 4G services for E-Plus' customers and a limited increase of coverage for 3G services and speed of 4G services for all customers of the merged entity. In addition, such quality improvements are in any event to a very large extent not merger specific since they could be achieved by alternative means such as network sharing agreements.
Mobile telecoms companies across Europe are already investing in 4G/LTE networks, without merging their operations. What today's decision does show is that network investment and competition can go hand in hand. The commitments in this Decision ensure that German consumers can continue to benefit from the attractive prices and services that healthy competition brings about.
What are the main elements of the remedies? How do they solve the Commission's concerns?
First, Telefónica commits to enter into capacity based wholesale agreements with one or several (up to three) Upfront Mobile Bitstream Access MVNOs ("Upfront MBA MVNOs") in Germany prior to the closing of the merger. These agreements foresee that the Upfront MBA MVNO(s) can purchase against an upfront payment up to 30% of the total capacity of the merged company's network for up to ten years after the completion of the proposed transaction. This capacity corresponds to a market share of up to 11%, while Telefonica's market share is around 15% today.
This remedy ensures that one or several (up to three) Upfront MBA MVNO(s) will enter or develop in the German market and, together with the three remaining MNOs and the other non-MNO players, will be able to ensure a sufficient degree of competition on the German retail mobile telephony market. This will ensure that the elimination of E-Plus would not give rise to a significant impediment of effective competition. This remedy also addresses the main reasons identified in the decision for considering MVNOs and Service Providers to be less effective competitors than MNOs: indeed, with the remedy, the Upfront MBA MVNO(s) in Germany will have access to all current and future technologies and speed classes for mobile transmission of data which Telefónica currently offers and will offer in the future. The Upfront MBA MVNO(s) will be able to devise retail tariffs in nearly total independence from the host MNO. In other words, the remedy increases the Upfront MBA MVNOs' ability to compete. In effect, the remedy "forces" the Upfront MBA MVNO(s) to compete very aggressively on the market, as they have to commit upfront to purchase a significant amount of capacity (much larger than what they need to serve their current customer base). In doing so, the remedy creates a strong incentive for the Upfront MBA MVNOs to compete aggressively to acquire subscribers to fill this capacity.
Second, Telefónica commits to extend existing wholesale agreements with Telefónica's and E-Plus' wholesale partners and to offer 4G services to the wholesale market in the future. In addition, Telefónica commits to allow its wholesale partners to switch their customers hosted on Telefónica’s and/or E-Plus’ networks from one business model to another without any penalty. Further, Telefónica commits to eliminate the contractual clauses in the agreements with wholesale partners of either Telefónica or E-Plus, which could prevent the MVNOs/Service Providers from switching their customers from one MNO to another.
This remedy improves the position of MVNOs and Service Providers to whom one of the parties currently grants wholesale access as it provides them with planning security for 2G and 3G services. Furthermore, the opportunity to be granted access to 4G services, even if not made use of, can be used by MVNOs and Service Providers active in Germany in order to improve their negotiation position vis-à-vis Deutsche Telekom and Vodafone.
Third, Telefónica commits to offer an agreement to be concluded with a new MNO entrant or subsequently with the upfront MVNO. According to Telefónica, this remedy is supposed to facilitate the entry of a new fourth MNO into the German market. For this purpose, Telefónica commits to make the following offers: (a) a spectrum offer consisting of the lease of 2x10 MHz in the 2.1 GHz band and of 2x10 MHz in the 2.6 GHz band; (b) a national roaming offer; (c) a divestiture of sites offer; (d) a passive radio network sharing offer; and (e) a sale of shops offer.
The MNO offer, in conjunction with the upcoming frequency auction to be organised by the German telecoms regulator, may potentially facilitate the entry of a new MNO into the German market in the future or allow the upfront MVNO(s) to develop as an MNO.
Finally, the Commission considers that, taken together, the Upfront MBA MVNO remedy and the non-MNO remedy also address the possible competitive concerns raised by the proposed transaction on the market for access and call origination on public mobile networks.
Do you consider that the Upfront MBA MVNO(s) will exercise the same competitive constraint as E-Plus did before the merger? Is there not a difference between competition by MNOs and MVNOs?
A number of Service Providers and MVNOs are currently active in the German market and have a significant number of subscribers. The aim of the commitments is to remove or reduce the elements that currently preclude these players from competing on an equal footing with an MNO. The remedies specifically aim at changing the wholesale model under which the upfront MBA MVNOs will operate in a way that will allow them to compete on a more equal footing with MNOs as well as at materially increasing their incentives to compete.
The Upfront MBA element of the remedies addresses the main reasons identified in the decision for considering MVNOs as weak competitive constraints on MNOs: indeed, up to three MVNOs in Germany will have access to all current and future technologies and speed classes for mobile transmission of data, which Telefónica currently offers and will offer in the future. These MVNOs will be able to devise retail tariffs in nearly total independence from the host MNO. In other words, the remedy increases the MVNOs' ability to compete compared to the current “pay-as-you-go” system under which MVNOs and Service Providers pay MNOs on a per usage basis. The remedy will "force" these MVNOs to compete very aggressively on the market, as they have to commit upfront to purchase a significant amount of capacity (much larger than what they need to serve their current customer base). Hence, the remedy creates a strong incentive for the MVNOs to acquire subscribers to fill the fixed capacity purchased in advance.
Why did the Commission consider that a so-called “capacity based model” for the new MVNOs in Germany was more effective than the traditional business models of MVNOs and Service Providers active in Germany?
MVNOs and Service Providers in Germany and more generally in European markets typically operate under a pay-as-you-go-model. This means that they pay for network access dependent on the actual usage of their subscribers. Under such model, each usage by a subscriber constitutes a variable cost for the MVNO that it pays to its host MNO. It differs greatly from the model of Telefónica as MNO, which owns network capacity and has the incentive to fill that capacity.
Under the model now accepted by the Commission, MVNOs would also have a fixed amount of capacity at their disposal. The minimum capacity that the MVNOs have to commit to upfront is significant. This gives them incentives to fill that capacity by offering attractive prices and services to their subscribers. Although they remain hosted by Telefónica, these MVNOs are free to use their significant capacity to offer a wide range of prices and innovative services. The Commission concluded that with this, their incentives will come very close to those of Telefónica operating as an MNO in Germany.
How will the Upfront MBA MVNO agreement be implemented in practice? Did any operator express an interest in this business model?
One or several (up to three) MBA MVNOs will commit to purchase the capacity for a minimum of five years, with the possibility to extend the agreement up to ten years. They will commit to purchase a significant minimum amount of capacity. Telefónica needs to conclude the agreement(s) with the Upfront MBA MVNO(s) before it can complete its own acquisition of E-Plus. For the duration of the agreement, Telefónica will provide the Upfront MBA MVNO(s) with all technical assistance they may require from time to time, and will also provide ancillary services they may reasonably require. This should assist the Upfront MBA MVNO(s) in launching their commercial operations as quickly as possible.
The market test of the commitments indeed revealed interest from operators to enter the German market on the basis of this model. Parties with a continued interest may include telecommunications companies already active on the German mobile telecommunications markets. Once formally proposed by Telefónica, the Commission will assess whether the candidate Upfront MBA MVNO(s) and the commercial conditions negotiated would fulfil the relevant requirements set out in the commitments.
Has the Commission established a standard practice for remedies in 4 to 3 merger cases in the mobile telephony sector in Europe? How do the remedies offered by Telefónica in Germany differ from those offered by Hutchison 3G UK (H3G) in relation to its acquisition of O2 Ireland?
The Commission assesses each case based on its merits and the specificities of the market(s) concerned. The remedy package submitted by Telefonica is tailored to address competition concerns specific to the German market and distinguishes itself in certain points from the remedy package accepted in the Irish case.
It is also important to note that the remedies in both the Irish (see IP/14/607) and German case significantly differ from the remedies in the Austrian case (see IP/12/1361). This is the result of the experience gained in dealing with these cases, including their implementation.
Timely MNO entry in Germany seems very unlikely, hence the remedy package focusses on the Upfront MBA MVNO component, a remedy that will be implemented with a high degree of certainty and that will address the competition concerns already in the short term.
While the remedy package in the Irish case took account of the role played by Eircom, one of the characteristics of the German market is that Service Providers and more generally non-MNOs already have a very significant presence in the market. In contrast, there are currently no MVNOs active on the Irish market. For this reason the remedy package in the German case includes not only the upfront MBA MVNO component but a non-MNO component aimed at preserving and slightly improving the competitive position that non-MNOs currently hold on the German market.
Also, the capacity-based MVNO remedy is different in Germany and Ireland. For example, in Germany, Telefónica's commitment to sell capacity includes both the necessary capacity to serve the existing customer base of those MVNOs and Service Providers which may pick up the remedy, and an additional 10% incremental capacity to allow these players to grow their market share; in Ireland, no such distinction is needed due to absence of MVNOs with an existing customer base.
What is the status of network investment in Europe, and does more investment require a reform of competition rules?
The European mobile telecoms industry is facing important challenges. Consumers increasingly use their mobile telecoms networks to access Internet services, to communicate via video links or even to watch TV content. The resulting increase in data consumption requires updated mobile networks. 4G Long-Term Evolution (LTE) technologies allow for the consumption of more data at higher speeds and with a better network experience. The availability of high-speed communications networks is a key part of the European Union's Digital Agenda targets.
The roll-out of 4G and LTE networks in Europe occurred slightly later than in other regions in the world, due to the later date at which Member States auctioned the spectrum that is needed for the roll-out. However, European mobile operators are catching up quickly, and the roll-out of 4G and LTE in Europe is accelerating. Deutsche Telekom and Vodafone currently reach at least 70% of the population. Telefónica achieved a population coverage of 40% by the end of 2013. The coverage of E-Plus' 4G network which was launched only in March 2014 is still more limited.
Telecoms companies claim that they need to merge to gain the required scale to make those investments. This can include mergers between mobile network operators in different countries, or mergers between mobile network operators and telecoms companies in neighbouring markets such as fixed telecoms (including cable). The Commission has recently approved a number of these mergers, such as Telenor/Globul in Bulgaria and Vodafone / KabelDeutschland in Germany.
The mergers that are now, and have recently been before the Commission concern mobile network operators in the same Member State. These mergers can increase market power in national mobile markets which are characterised by relatively few competitors and high barriers to entry. They require closer scrutiny to ensure that they raise no competition concern and bring no detriment to consumers.
The Commission considers that competition rules are not the key obstacles that European telecoms companies face in gaining scale in order to invest. Telecoms markets in Europe remain fragmented. The Commission has consistently underlined the need to eliminate the remaining barriers to the single telecommunications market, which for instance relate to the national procedures for the allocation of spectrum and the lack of a genuine European regulatory framework.
These barriers are also what sets Europe apart from countries such as the US and China. In those countries, there are fewer and larger operators that serve more customers whilst making investments in new technologies. These operators function in markets that have no internal barriers; are overseen by a single regulator; and where spectrum is allocated by a single authority. It must also not be forgotten that due to the liberalisation of the European telecoms markets, consumers enjoy quality services at relatively low prices, especially compared to the US. At this stage of the evolution of the European telecoms industry, both competition and investment are needed to ensure that consumers maintain these benefits.
Reforming the competition rules to make it easier for telecoms companies to merge behind national borders is not the solution to these issues. Competition and customer demand are key drivers of investment in new technologies. Relaxing competition rules may therefore not necessarily guarantee that investment take place, while this would shift the cost of making the required network investments on the consumers who would be faced with less competition and higher prices. In the Commission's view, the answer lies with the elimination of the barriers to the internal market and allowing the telecoms companies to tap fully into its half a billion customer base.