The European Commission can approve or block the proposed merger of T-Mobile and Tele2 Netherlands, but whatever the case, the decision will have big consequences for future consolidation on the European telecoms market. Is the fixed-mobile convergence trend so strong that possible negative effects on the mobile market can be set aside? That's the question for the Netherlands, and sooner or later, the entire European market will face the shift to fixed-mobile convergence.
T-Mobile NL and Tele2 NL have been working on the merger for nearly a year. A short history below, based on Telecompaper's coverage:
- The merger was expected long before it was announced.
- We estimated Tele2 NL's value at EUR 1.1 billion.
- The potential synergies are significant.
- Competition concerns can be resolved with remedies or concessions.
- T-Mobile needs to propose a 'remedy partner'.
- Are remedies enough when it's more about the growing fixed/FMC market than the shrinking mobile market?
- T-Mobile makes clear it will rely on promises, such as keeping the Tele2 brand and unlimited offer at EUR 25 pm.
Strong number 3 or 4
The problem can be summed up simply: is this regulatory decision going to hinge on the fixed/FMC market (fixed-mobile convergence) or is the mobile market more important? For the former, the important thing is creating a strong number three to compete with the established duopoly of KPN and VodafoneZiggo. In such a case, approval of the Tele2/T-Mobile deal is clear.
If the mobile market is the dominant consideration, then creating a strong number four player may take precedent in the regulatory decision. This could mean strengthening a large MVNO (and creating even further distance with the number five). If the companies do not provide remedies for this, and just make promises, then the merger is likely to be blocked. The claim that Tele2 NL cannot continue alone is an attempt to convince the EC that rejecting deal would result in the same problem of just three mobile operators.
In other words: will the Dutch market after 30 November continue with Tele2 as a mobile operator? Or as a sub-brand of T-Mobile?
There is little point in speculating now whether the merger will be approved; the EC's deadline is rapidly approaching. In either case, the Commission's arguments will be studied closely to see whether there is room for further consolidation in Europe.
Promises vs remedies, FMC vs mobile
Does T-Mobile really think that it doesn't need any remedies? Has it been able to convince the Commission that this is really about the FMC market? And that with just a few promises?
Or is T-Mobile not prepared to deliver a remedy that would result in a strong number four player on the mobile market? Designating a player like Iliad, Simpel or EQT to take up that role could put the company in an even worse situation.
Secondly, is the most important reason for the takeover to give T-Mobile more scale on the FMC market? Or is eliminating a competitor, especially in the unlimited segment, more important? In its communication with the EC, T-Mobile will emphasise the first and downplay the second with its promises. If it really is about scale, why doesn't T-Mobile just buy Tele2's fixed business, which Tele2 appears little interested in expanding. Such a deal could already be completed.
When it comes to a focus on mobile, a crucial question is whether four-to-three consolidation drives up prices. Our own research shows that this type of consolidation not always leads to higher prices, specifically in Ireland. As to the Dutch market, we concluded that prices over the past two years have fallen, due to the unlimited offerings from T-Mobile and Tele2.
Unlimited and the Tele2 management
Third, how relevant is Tele2's unlimited data plan at EUR 25 per month? This is already a price level well above what the majority of Dutch consumers spend: 80 percent spend no more than EUR 20 per month, according to the Telecompaper consumer panel. The plan, along with T-Mobile's own unlimited offer at EUR 35 (which also includes EU roaming) mainly puts pressure on prices at the high end of the market. Vodafone can testify to this, after reporting a 17 percent fall in business ARPU in Q3. While the unlimited plans may put pressure on prices, they do not stimulate competition at the lower end of the market.
Fourth, Tele2 Group recently made known that its Dutch business is not sustainable on a standalone basis. This is clearly intended to show the Commission that it risks ending up with three mobile operators regardless of how it decides on the merger. This could be an important factor for the Commission. Is the Netherlands just too small a market for four mobile networks?
Tele2's comments may also boomerang on the company, pointing to signs of mismanagement or a reluctance to invest. Was Tele2 in 2012 (around five CEOs ago) not prepared for the path from MVNO to MNO when it bought spectrum? Didn't it say the market opportunities were significant? What happened to that ambition? And why did the company not focus on the FMC market (after acquiring Versatel and BBned) and the changing market conditions to compete better against KPN and VZ? Tele2 (as well as T-Mobile) points to the high wholesale prices charged by KPN, but it was aware of that already at the start.
Salient detail: Tele2's mobile business reached EBITDA breakeven in Q3 2018. This creates a good moment for a sale, for example to a private equity company, if the Commission does choose to block the T-Mobile deal.
