Mobile consolidation

For most of the past 20 years, competition authorities in mobile markets have focussed on securing the entry of additional competitors. Markets with high entry costs, like mobile telecoms, would not be expected to accommodate a very large number of firms but some degree of competition between a number of firms – more than one but not many – delivers better results.

Entry into mobile is restricted by the availability of radio spectrum. Opportunities arise by releasing spectrum from broadcasters or the military. But later entrants then face the challenge of competing with established firms. This was fine when demand was growing but today later entrants have to compete for existing customers of established operators.

But by the time of 4G (after 2010), interest in entering mobile markets had largely evaporated. The amount of new spectrum available was more limited and there had been some poor commercial returns by new entrants to 3G. Rather than promoting entry, 4G was driving the market towards consolidation. Firms like Hutchison were reluctant to invest in 4G when they had struggled commercially with 3G. Other firms, like Telefonica, felt that they could deploy their capital more profitably in emerging markets in Latin America.

Pressures on later entrants increased following global financial crisis after 2007. Moreover, by 2010, operators were also feeling the effects of competition from over-the-top applications such as WhatsApp and tighter regulation of international roaming charges and interconnection rates. But the main driver of consolidation was simply that late entrants found themselves unable to achieve sufficient scale to be profitable within a single technology cycle.

Rather than winning customers from rivals, the other way to achieve both scale and cost savings is through mergers with rivals. These savings mean that a rival operator can invariably offer a higher purchase price for the asset than a buyer that does not already have operations in the market. The other option for sub-scale or unprofitable firms was to exit the market by selling out to another party who is outside the mobile market. An example of this was EE, which was acquired by BT.

Consolidation can provide an escape route for sub-scale firms but it has less obvious benefits for consumers. The European Commission is concerned that prices will not be as low after the merger as they might otherwise have been. The advocates of mergers claim that, in the longer term, the cost savings from combining assets and operations will offset some of the upward pressure on prices that might otherwise be associated with a reduction in the number of firms. The Commission has generally rejected these efforts, finding that any savings will more likely bring higher profits for the owners of merging firms rather than being passed on as lower prices.

The other and more interesting claim relates to future investment. Advocates of mergers claim that the merged firm will be better able to invest because of its greater scale and/or higher levels of profitability – claims that are extraordinarily difficult to assess.

Consequently, competition authorities have only been prepared to approve mergers if the parties are also prepared to take various steps to replace the firm that is exiting with another entrant. But why, when one set of investors were seeking to exit, would another set be persuaded to enter? The predictable lack of interest has prompted authorities to promote various models which would allow new firms to enter the market at lower cost and risk by using the merged firm’s existing network as a Mobile Virtual Network Operator for an extended period.

The most interesting and immediate question is what happens to those firms whose merger plans have had to be abandoned. Do they sell to a party from outside the market at a lower price? Do they find another way to grow or to become profitable? In Europe, such firms can pursue the ‘failing firm’ defence, arguing that without a merger the firm will exit the market altogether.

The current debate reveals how little we actually understand about what determines the performance of these markets. We know monopolies are generally to be avoided, but we know very little about what might ensure higher levels of investment, how these investments might translate into prices, quality or other outputs which consumers care about.

This is a summary of a full article which first appeared in The Journal, December 2016. To read the article in full please visit the ITP site (free for members). 



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