T-Mobile Netherlands has made a number of promises regarding its proposed takeover of Tele2 in order to gain approval from regulators. After analysing the context of the promises, we recommend government officials take these seriously. Based on T-Mobile's guarantees and possible remedies, the deal reducing the Dutch market to three mobile operators is likely to win approval.
The background
Deutsche Telekom confirmed in November 2017 that it was looking at options for T-Mobile NL. A possible merger with Tele2 NL was a public secret given the number of advantages and synergies from such a deal, the coming of 5G and a window of opportunity ahead of the next spectrum auction. A month later the takeover was announced, in exchange for a 25 percent stake in the combined company and EUR 190 million for Tele2. We estimated at the time that Tele2 Netherlands was worth around EUR 1.1 billion. Significant cost reductions appear unavoidable if the deal goes ahead.
The European Commission is expected to decide on the merger late this year. The Commission's earlier endorsement of the joint dominance concept in the telecom regulatory framework, which is the basis of the Dutch regulator ACM's latest analysis of the market, appears to point to approval for the T-Mobile/Tele2 merger. There is no better way to counter the strong duopoly but with a strong number three player. The business market will also notice the impact. If the merger does require competition remedies, recent deals in the German and Austrian markets could serve as an example.
The relevant market
Creating a strong third operator is an important argument, but the regulators will look at other elements in their decision as well. To start, the government prefers not to intervene and to let the market runs it course. The 4G licences prohibit any mergers in the sector for five years, a deadline that has now expired. However, prior to the 4G auction, the aim was to encourage a new entrant on the market, so have the market conditions changed since then? The market has indeed changed, with the shift towards fixed-mobile convergence and rise of OTT providers on the content market, raising the importance of economies of scale.
Next question: what is the relevant market for the competition decision? If it's mobile, the decision could go two ways. Nevertheless, approval is still likely, given the growing importance of scale. If the regulators focus more on the FMC market, approval could be immediate, as the combination of Tele2 and T-Mobile is still small in the FMC and fixed segments.
Opinions remain divided over whether three or four mobile operators is the optimum number for a competitive market. The EC has opted for both in previous decisions, blocking deals in some countries and approving mergers (with conditions) in others. In the US, T-Mobile and Sprint are trying the same thing, after an earlier failed attempt to merge. In the UK and Denmark, where mergers were previously blocked, operators are likely to try again at some point too.
In the fixed market, two networks is already an achievement. A third or more providers can be realised with open wholesale access. For the ACM, open access on the Dutch market should include both KPN and VodafoneZiggo's networks. This may stimulate the willingness to invest, not only in passive fibre networks but also in services.
Focus on profitability
There are also two financial aspects that should be taken into account. First, the continued losses from Tele2's mobile network. Lack of scale is clearly the most important cause, while poor management may also play a rolee (six CEOs in eight years at Tele2 NL). Second, T-Mobile Netherlands' profitability. The push for increased scale is driven primarily by the need to improve profitability in order to pay a higher dividend to its German parent company. Both issues are not per so problems for the (Dutch) government, but the state would do well to ensure to right conditions for sufficient scale and profitability on the market, or risk seeing investment curtailed.
Remedies or guarantees
If the EC isn't convinced the merger should be blocked, there is still the possibility of attaching conditions to the approval. T-Mobile is mainly interested in Tele2's customers, less in its spectrum (even if it lacks high spectrum, this can be fixed in the auction planned for 2019) and little in its network. If an interested candidate emerged, these assets could be combined to create a new operator. French operator Iliad has done something similar in Italy, with quick success, and there must be other entrepreneurs out there interested in shaking up the Dutch market (John de Mol, Xavier Niel, Petr Kellner, ...).
Another option is to help a MVNO grow its position with guaranteed access to the T-Mobile network, a remedy already used in Austria and Germany. The existing MVNOs Simpel and Youfone are possible candidates for this.
These remedies depend on the willingness of a new or existing player to invest. Another option is T-Mobile's own promises to invest, but the question is whether these would have a sufficient impact. T-Mobile NL has made the government several pledges, before the merger takes place:
- Sharper competition for the 'duopoly'
- No lock-in for customers through a mandatory modem or long contract
- Faster roll-out of 5G
- Using 5G to provide fixed-wireless access in rural areas
- Geographic expansion of the active layer on Dutch FTTH networks
- Continuing the Tele2 unlimited mobile plan at EUR 25 per month for at least three years
- Free access to its NB-IoT network
What's important is how to make these pledges concrete and enforceable, with clear agreements about what would happen if the company does not live up to its promises. US operator Charter has seen what happens when such agreements are not met.
