MVNO Simpel can play key role in conditions for T-Mobile/Tele2 merger

Wednesday 17 January 2018 | 14:55 CET | Background

The proposed merger of T-Mobile and Tele2 Netherlands still needs approval from regulatory authorities. While it's as yet unclear whether the Dutch regulator ACM or the European Commission will take the decision, the deal is likely to face conditions for competition clearance, as both the Dutch government and the EU have previously opposed reductions in the number of national mobile operators from four to three. However, they could consider it more important that a third, strong player on the multiplay market is created in the Netherlands. Our analysis of the possible regulatory conditions for the merger suggest the MVNO Simpel could play a role.

From the regulator's perspective, there are two markets to consider:

  • Competition on the mobile retail market will be reduced as the number of mobile network operators drops to three from four. At the same time, competition on the multiplay/FMC market should increase, with the creation of a stronger third player.
  • Competition on the mobile wholesale market will also be reduced, with a choice of three network hosts rather than four. This market is not regulated. If the retail market becomes more dependent on MVNOs to stimulate competition (as there are fewer MNOs), then the wholesale market needs to be healthy, so MVNOs can shop for good network deals (and avoid a margin squeeze). The regulator can choose to regulate the wholesale market (require MNOs to offer capacity at regulated tariffs) or require a share of network capacity to be reserved for MVNOs, as was done earlier in Germany. 

As discussed in our earlier article, the situation in the Netherlands is similar to Germany in 2014. As the chance is high that the T-Mobile/Tele2 deal will face remedies, we look in this article at what those conditions could be. Based on the two markets outlined above, Telecompaper sees three potential remedies, as employed previously by the European Commission:

  • Selling network assets
  • Reserving network capacity for MVNOs
  • Requirements for good/better wholesale network access conditions

A requirement to sell network assests has been imposed in the past in order to support the creation of a new player in the market, such as Iliad in Italy after the Wind/3 Italia merger. However, the Netherlands already got a new, fourth mobile operator a few years ago - Tele2. After five years on the market, Tele2 has been unable to breakeven, even at the EBITDA level, let alone in cash flow. This appears to rule out the option of requiring network divestments.

Reserving network capacity for MVNOs has also been tried by the EC, for example in Belgium (Telenet/Base), Austria (3/Orange) and Germany (E-Plus/O2). In Germany, the merged companies were required to provide at least 20 percent of their network capacity for one or more MVNOs. This gives the MVNO certainty about the potential volume of its business and the ability to develop its own propositions and pricing. The regulator's hope is that the MVNO will develop into a competitive alternative to the MNOs and help prevent an increase in retail prices after the merger.

The same as Belgium or Germany, the Netherlands has an active MVNO market. As of Q3 2017, we counted 44 active players, of which 35 were independent. However, many of these VOs are too small to form serious competition as a fourth player in the market, as companies such as Medialaan in Belgium or Drillisch in Germany do. Only six of the Dutch VOs have more than 100,000 customers. Among these, AH Mobile has little focus on mobile and operates more as an extra service for supermarket clients, while Lebara, Lycamobile and Vectone are all prepaid providers targeting ethnic markets. While Lebara and Lycamobile have been targeting the mass market more recently, Telecompaper does not expect a prepaid player will take up the role of delivering acquisition conditions. Lebara started offering postpaid services last year, but needs more time to develop its position if it wants postpaid to become more important than its prepaid business. 

The two remaining candidates are Simpel and Youfone. Youfone expanded its offering last year with fixed services, but is a small company compared to Simpel. Youfone uses the KPN network, but could be interested in exploring the merger conditions with the support of new investors such as a private equity firm. 

Out of all the virtual players, Simpel has shown the strongest growth in recent years, and CEO Jasper de Rooij told Telecompaper that he expects the steady growth to continue in 2018. Simpel has built up a significant customer base by offering data packages with attractive volumes and prices for average consumers. Simpel uses the T-Mobile network. As part of the merger, T-Mobile could offer Simpel guranteed network capacity or new contract conditions, to support further growth of the MVNO. Simpel could continue to target the market with attractive prices then. With Simpel as the remedy to the merger, there remains a significant player that can help dampen any price inflation from the reduction in the number of MNOs. 

Requiring the operators to offer better wholesale contracts would mean a significant improvement in the position of many MVNOs and could also attract new players to the market. MVNOs have complained repeatedly about the difficulties in obtaining good network deals, especially for data services. However, given the market is unregulated, a decision to impose new requirements on wholesale access would be difficult to implement compared to simply reserving network capacity. 

Fourth option: sell Ben

Still another option is for T-Mobile to sell its brand Ben, for example to the private equity fund EQT which recently acquired the fixed operators Delta and Caiway. A sale would need to include a wholesale contract with the right terms to create a strong fourth player. However, a sale is complicated by the Ben organisation being fully integrated into T-Mobile's operations, making it a less easy option than diverting network capacity or arranging a new contrct with Simpel.

In a similar vein, EQT could just buy an existing MVNO once it has the assurance of network capacity and decent wholesale conditions. A player like M7 could also see an opportunity here to serve better the FMC market in the Netherlands.

FMC market benefits key to regulatory approval

If the regulators decide to focus on the FMC market, approving the T-Mobile/Tele2 merger could be a simpler decision. The Dutch market is dominated by the duopoly KPN/VodafoneZiggo, and the merger would create a strong third player on the FMC market. Regulation of the wholesale mobile market could also ensure the continued existence of a thriving MVNO market and emergence of a strong fourth mobile player. A situation similar to Germany is also possible, where the companies partner with a 'favoured MVNO' to be the fourth mobile player via guaranteed access to for example 20 percent of the spectrum held by the merger partners. 

If the regulators decide to focus on the retail mobile markt, the merger could be blocked, as the Netherlands previously tried to support a fourth operator. Prices have clearly fallen, but after five years the fourth operator is still not profitable. Even with a focus on the mobile market, the regulators may conclude that the merger can only go ahead with conditions attached. 

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