Consolidation in telecoms markets does not always prompt investment, says Ofcom chief

Out-Law News | 09 Oct 2015 | 12:36 pm | 4 min. read

The chief executive of the UK's telecoms regulator has questioned whether telecoms companies need to grow through mergers and acquisitions to be able to invest in next-generation infrastructure.

In a speech at the London School of Economics & Political Science on Wednesday, Sharon White said that although consolidation can deliver benefits such as "improving economies of scale and making it easier to finance investment", Ofcom's experience has been that "competition, not consolidation, drives investment and delivers low prices".

"Our analysis of a dozen countries, inside the EU and beyond, shows no relationship between consolidation and investment," White said. "Only when companies cannot make an adequate return - because competitive pressure is so intense - might we expect investment to suffer. The evidence suggests this is not the situation in the UK mobile market, which last year generated £15 billion of revenue. Even at a time when UK operators are investing billions to roll-out 4G, they are maintaining a healthy average cashflow margin of more than 12%."

Major merger and acquisition deals affecting the UK telecoms market are currently in the pipeline.

BT announced in February that it had agreed a £12.5 billion takeover of mobile network operator EE. That deal is currently the subject of an in-depth competition investigation by the UK's Competition and Markets Authority (CMA).

Separately, Hutchison Whampoa, the Hong Kong-based owner of UK telecom operator Three, finalised a £10.25 billion deal to buy O2 UK from Spain's Telefónica in March. The European Commission, responsible for assessing major mergers that affect the EU market, has been notified of the deal, but the CMA last week asked the Commission to refer the proposed merger to it for investigation. The Commission is due to decide whether to do so by 30 October.

In her speech, White said she was concerned that consolidation in the telecoms market could spur price rises for consumers and not prompt investment in new infrastructure.

"I am concerned that the UK could end up with more concentrated markets that lead to higher prices and reduced choice for consumers, without the promised boost to investment and innovation," she said.

White said "there is emerging evidence" in other countries that consumers are "paying the price of mergers". Austria's telecoms regulator has reported mobile prices rises of 28% since Hutchison merged with Orange in 2013, she said, with some users paying 36% more.

"The crucial test for a regulator like Ofcom is whether prospective mergers promote or harm the interest of consumers," White said. She said Ofcom believes that having four mobile operators in the UK market represents "a competitive number that has delivered good results for consumers and sustainable returns for companies".

White said that telecoms regulatory regime need to be made more flexible to give regulators the ability to resolve competition concerns in markets in which no one company is dominant but where there is "an emerging oligopoly". The European Commission has said it will look into the matter as part of its recently launched review of the telecoms regulatory regime.

"The problem is that the [current] framework sets too high a bar for regulating cases where no one company has market power but the market is still highly concentrated, and  consumers can be made worse off as a result," White said. "To address any concerns, the framework requires us to show that the market structure is likely to result in a degree of coordination between operators. This may require demonstrating tacit collusion, which by definition is hard to prove."

"I hope [the Commission's review] does lead to a revision in the framework so that regulators have the full range of tools to respond to a changing market," she said.

The UK government recently said that new EU telecoms regulations should not "create burdens" for businesses looking to invest in the next generation of digital communications infrastructure.

Ofcom is currently undertaking a strategic review of the digital communications market in the UK. According to a new report by the Financial Times, Vodafone has asked the regulator to require BT to sell off Openreach, its network infrastructure division, according to the report.

In June, in its submission to the Ofcom review, Sky called on the regulator to refer the UK's telecoms market to the CMA for a full competition investigation "as soon as possible", after raising concern about BT's power in the market, which it said stemmed from its relationship with Openreach. BT has said it would be wrong to require it to split up its business. It would lead to "huge uncertainty and fundamentally undermine the case for future investment", it has said. BT has, though, itself called on Ofcom to loosen telecoms regulations as part of its review.

Experts in technology sector M&As Frédéric Ichay and Julien Espeillac of Pinsent Masons, the law firm behind Out-Law.com, said telecoms groups are increasingly viewing consolidation with other operators as a way to combat the threat posed by rival 'over-the-top' communication service providers. Consolidation can also help telecoms companies increase their average revenue per user and keep up with digital content developments, they said.

"Since the development of OTT services, telecoms operators have felt their position in the market to be unsafe," Ichay said. "The likes of Skype, WhatsApp, and Netflix use network services of telecom operators to reach consumers without paying for the cost of that service and maintenance of the network, and telecoms operators have no control over this use. As a result of the success of OTT services, telecoms operators have seen a decline in the average revenue they are generating per user."

"Added to that pressure, there are increasing demands for new digital content," Espeillac said. "Consolidation is an effective way for operators to answer these new challenges. By pooling their resources, telecoms operators can boost their network, offer a more efficient service to consumers and develop new technologies faster than if they go it alone. Consolidation also allows consumers to benefit from so-called 'quad-play' services, because providers can offer consumers access to TV, broadband, phone and mobile services from the one place." 

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