The question of whether or not to allow mobile network operator consolidation remains highly contentious and is coming to a head with ongoing competition investigations into acquisition bids and recent statements from public leaders. "Balancing" the interests of consumers, operators and the broader economy in the short and long terms largely comes down to preferences for those who hold power in an environment of conflicting agendas and economic theories with rapid change and significant uncertainties in the sector.
Elected political leaders including German chancellor Angela Merkel are in public disagreement with the head of the European Commission's competition authority, Joaquín Almunia, respectively advocating and resisting proposed takeovers. Telefónica Deutschland's proposed acquisition of KPN's E-Plus and Hutchison Whampoa's planned purchase of O2 Ireland are among the transactions currently being reviewed. The flow of proposed deals is increasing. Most recently, Orange is reportedly seeking to acquire Bouygues after the latter's failed attempt to acquire SFR in France. In the US, a touted merger between Sprint and T-Mobile is no less controversial following the 2011 collapse of AT&T's attempt to acquire T-Mobile USA in face of stern resistance from the Federal Communications Commission and the Department of Justice.
Oligopolies are not necessarily bad. Arguments in favour of mergers include economic efficiencies and stronger profits that can better support 4G investments and more jobs, high spectrum fees and tax receipts to governments. Angela Merkel said a balance needed to be achieved between market power and competition so that European businesses "can score internationally". Easing the financial pain suffered by European operators from regulated price controls on roaming and call termination charges, as well as severe price undercutting by new challengers has significant political appeal in some constituencies.
Arguments in favour of blocking mergers include preserving lower prices, consumer choice and (also) jobs. In an old refrain, Joaquín Almunia blamed national rules for preventing European companies competing at the regional level. He said it would be misguided to reform competition rules because it would result in costs being transferred to consumers.
In a recent speech he said that "[a] different course of action is required. The first and most important step to take must be tearing down the barriers that still fragment the Single Market along national borders." Commission officials yearn for fewer national regulations and conditions with a dream of borderless communications markets across the European Community; but mobile communications cannot be made a pan-European market by edict. Impediments include the fact that mobile is an infrastructure-based marketplace which is also fragmented by language differences, national distribution, and advertising.
Joaquín Almunia can burnish his legacy as a tough antitrust "tsar" with enforcements against these currently proposed transactions. The deals are seemingly blockable due to the fact that they further reduce a relatively small number of competitors and other factors. But how can anybody be so sure it really would be best, all-round, doing so? Is it really necessary to "reform competition rules" to allow these transactions? The absence of a pan-European market, or even the laudable desire to have one, is no good reason to prevent economically-efficient mergers which are in national interests.
It is without doubt that market challengers to the top few leading national operators including Clearwire in the U.S. and Free in France were very disruptive market forces with their low prices. In the case of Free in particular, the ensuing national price war took its severe toll on incumbents Orange, SFR and Bouygues. However, unless these and other smaller players have sustainable business models, market consolidation through acquisitions such as that of Clearwire by Sprint or somebody's demise is inevitable.
The UK's last network-market entrant, 3 UK, has also been a disruptive competitive force, but it remains a weak performer with around 12% mobile network operator market share and 21% EBITDA margin despite infrastructure sharing arrangements. MVNOs, such as Virgin Mobile and Tesco in the UK, have priced aggressively and taken significant customer share but have very different business models and investment capital requirements to their MNO hosts.
In the context of mobile broadband including 4G, with the need for extensive coverage (i.e. in-building and rural) and urban densification for high capacity, key questions are how many players, and who will foot the bill to build and maintain this costly infrastructure, buy spectrum and run network operations?
Rules and analysis
Competition reviews demand rigorous market and economic analysis, but conclusions about prospective outcomes can be unreliable. History is a particularly poor guide to the future, particularly for "what if's" with consolidation and other changes in market structure. For example, half a decade ago everything was mostly driven by voice and text traffic and revenues, but now data overwhelms, and over-the-top services are increasingly important.
The industry's economics and business models are also in flux as a result. Static economic models may be of little use and "effects-based" assessments can be difficult and defective in these circumstances.
Comparisons among different national markets provide some insight into the effects of having more or fewer operators, but these cannot be definitive. For example, China has only three operators but prices per minute and ARPUs are relatively low. However, China's gross national income per capita was only $5,720 (€4,171) in 2012, versus $52,300 in the U.S., $45,200 in Germany, and $39,100 in Ireland, for example. How does China's rural overage compare with the US, other large-area nations and smaller ones in Europe?
There is even uncertainty and contention among antitrust enforcers and others on fundamentals such as what constitutes "price". For example, European competition officials and some commentators disagree with U.S. perspectives by regarding the relatively low prices per minute and high ARPUs that result from fixed-price bucket plans with "receiving-party pays" charging as being more expensive than the much higher price per minute arrangements with "calling-party pays" that yield significantly lower MoUs and ARPUs, but with which users pay, on average, ongoing charges for more SIMs.
The battle lines are drawn with entrenched positions, but who will blink first? Vivendi's SFR has been sold to Altice's Numericable, rather than to Bouygues, due to the threat of a lengthy and unfruitful competition review, despite the latter reportedly being clearly the favoured purchaser by the French government.
If the still-proposed deals are not rejected outright or the parties scared off, what concessions, for example spectrum sales and infrastructure-sharing requirements, might be extracted by competition authorities?
Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. Find WiseHarbor on Twitter @WiseHarbor.