EC decision on E-Plus, O2 merger suggests wholesale competition enough

Thursday 19 June 2014 | 14:06 CET | Background

The European Commission is expected to grant conditional approval to KPN's sale of German mobile operator E-Plus to Telefonica Deutschland, allowing the third and fourth largest mobile operators in Germany to merge. According to Reuters' sources, the conditions will be limited to the merged company reserving a certain amount of network capacity for wholesale customers. MVNOs such as Freenet, United Internet, Drillisch and Liberty Global will have access to at least 20 percent of the network capacity, but the company will not be required to divest any spectrum holdings. The EC is expected to announce its decision 02 July, or by 10 July at the latest. 


To put the decision into perspective, we take a closer look at the number of customers on the German mobile market at the end of Q1 2014. 

The four network operators (Telekom, Vodafone, O2, E-Plus) had in total around 139 million Sim cards in the market. This includes their various sub-brands and wholesale customers (independent MVNOs). The MVNO market, which we define broadly to include MNO sub-brands, counted 52 million lines, or 37 percent of the total.

Looking first at the total MVNO market:

  • The 52 million Sims include 23 million at the sub-brands of the MNOs, equal to 44 percent of the MVNO market and 16 percent of the total mobile market.
  • The four largest independent MVNOs (Drillisch, Freenet, United, Liberty), including their sub-brands, had 17 million customers, good for 33 percent of the MVNO market and 12 percent of the total market.
  • The remaining 12 million customers were spread across a large number of independent MVNOs, such as retailers, media companies and challengers on the fixed market. This represents 9 percent of the total market.
Looking now at the combination of E-Plus and O2:
  • Together they had around 45 million customers. That includes M2M Sims and their sub-brands, as well as wholesale (independent MVNOs).
  • Their combined networks host around 33 million MVNO customers (including independent MVNOs and MNO sub-brands).
  • The around 80 independent MVNOs have together 11.5 million customers. This means around a quarter of the end-users on the E-Plus/O2 network are served by an independent MVNO.

This last point suggests that reserving just 20 percent of the network capacity for wholesale customers may be on the low side. No requirement to sell spectrum however lightens the burden of the regulatory conditions. Given the reservations expressed earlier by the German competition regulator (Bundeskartellamt), the EC's decision on the merger could still generate some friction.

We conclude that the regulators have given up on the idea of trying to encourage an independent MVNO to become a full network operator (as Tele2 is doing in some countries). In other words, wholesale competition, rather than competition based on infrastructure, is seen as enough to keep the market competitive. This perspective suggests further consolidation at the infrastructure level (eg, network sharing) cannot be ruled out in Germany. 

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