Tele2/T-Mobile merger's regulatory approval may follow German model

Monday 15 January 2018 | 13:06 CET | Market Commentary

The plan to merge Deutsche Telekom and Tele2's activities in the Netherlands raises again the regulatory question of how many mobile operators are enough. There are a number of reasons why competition regulators should or should not approve the merger, and we can look at other European markets for some clues: countries where acquisitions reducing the market from four to three mobile operators were approved (Austria, Germany) and those where it was not approved (Denmark, UK). In all these cases, the European Commission took the decision. In addition to the number of mobile operators, the EC may also look at the trend towards fixed-mobile convergence, on which the Tele2-T-Mobile deal is partly based, to create a third integrated player on the Dutch market able to compete with KPN and VodafoneZiggo. 

Austria: divest assets and offer MVNO access

The takeover of Orange Austria by 3 Group was approved by the European Commission in 2012 with a number of conditions. These included the merged group making 30 percent of its network capacity available for up to 16 MVNOs in the first ten years after completing the takeover. In addition, 3 Austria sold spectrum (6.4 MHz in the 900 MHz band, 10 MHz of 2,100 MHz and 10 MHz of 2,600 MHz) and Orange’s no-frills brand Yesss! to Telekom Austria. 

When the takeover was approved, Austria has just a handful of independent MVNOs and since then the market has grown to 40 virtual providers. The MVNOs are using not only the 3 Austria network, but also rivals T-Mobile and Telekom Austria became more active on the wholesale market for hosting virtual operators. 

The launch of one MVNO in particular, HoT by the Austrian discount supermarket Hofer in early 2015, especially shook up the market. The mobile price index conducted by regulator RTR (indexed to 2011) shows a drop of more than 100 points since the start of 2015 to a level of less than 77 points as of September 2017. 

Germany: network capacity sold to MVNO

The takeover of E-Plus by Telefonica in Germany was approved by the European Commission in July 2014 with the condition that at least 20 percent of the merged companies' network capacity be sold to MVNOs. The contract needed to include payment by bandwidth upfront rather than the more common model where MVNOs pay by usage. 

In addition, existing wholesale MVNO contracts at Telefonica and E-Plus had to be extended through 2025 and include access to the 4G network. Soon after, a deal was announced for MVNO Drillisch to take 20 percent of the network capacity as well as an option for another 10 percent. After that the regulatory approval for the takeover was confirmed. 

Drillisch later acquired E-Plus’s brand Yourfone with 235,000 customers and 301 shops from Telefonica, of which two-thirds franchises. This created a new, strong mobile player alongside the three network operators in Germany, with the capacity to create its own offering. Drillisch grew from 2.3 million mobile customers at the start of 2015 to 3.8 million in 2017. 

Drillisch gained further scale in the past year by merging with United Internet's 1&1, an ISP and MVNO. The deal takes the group to more than 8 million mobile customers. At the same time, we see a falling trend in mobile prices in Germany. Our latest EU Mobile Benchmark report shows the downward trend in Sim-only prices confirmed since the new market conditions took shape at the start of 2015. 

German remedy possible in mobile-only focus . . .

The German market situation is closest to the Netherlands: four MNOs and many MVNOs, including a few large virtual players like Simpel and Youfone. The difference is that in Germany there were three active wholesale players: Deutsche Telekom, Telefonica and E-Plus, whereas in the Netherlands, KPN is the dominant wholesale provider. 

So if the European Commission decides to focus on the mobile market, its approval for the T-Mobile-Tele2 deal may depend on ensuring sufficient mobile players remain with the power to determine their own prices and product development. This could lead to remedies such as a requirement to provide access to a certain number of MVNOs over the next five years or reserve 20 percent of the network capacity for one large MVNO. Whatever the case, the EC will want to ensure that prices in the Netherlands continue on a downard trend, as they have since 2014 when Tele2 first decided to became a mobile network operator.  

. . . unless the EC focuses on FMC

The European Commission may also decide to focus on the fixed-mobile convergence market. FMC has become increasingly important on the Dutch market in recent years, and the market is dominated by the two largest players KPN and VodafoneZiggo. Together they account for almost 88 percent of all multiplay households in the country, according to the latest research by Telecompaper

Almost half of postpaid Sims at KPN are part of a FMC package, and Vodafone has 30 percent of its postpaid Sims on a Ziggo package. The merger of T-Mobile and Tele2 would create a third player with the necessary scale to bundle fixed and mobile services and help avoid the looming duopoly in the market. 

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