Study Finding Mobile Tie-ups Lead to Higher Bills, but More Investment Draws Mixed Reaction

CERRE's report fails to consider certain key aspects of the industry, Strand Consult (Copenhagen) CEO John Strand said in an interview. If antitrust regulators take the study to heart, it could lead to more M&A approvals, CERRE Director General Bruno Liebhaberg told us. Strand, however, said European M&A and investment will suffer until the European Commission clarifies its transactions policy. Incumbents and alternative players split over the value of the study.

CERRE looked at data from 33 Organisation for Economic Co-operation and Development countries from 2002 to 2014, it said. It said when mobile markets became more concentrated, "prices increased to end users with respect to the case in which no concentration happened (absolute prices actually decreased in all cases during the analysed period)." And capital expenditures rose, it said. While acknowledging that past results don't necessarily apply to future M&A, CERRE said the results were significant statistically and economically. A hypothetical average four-network-to-three symmetric deal in the study's data would have raised consumer bills by more than 16 percent, with capital expenditure going up by around 19 percent compared with what would have happened without a merger, CERRE said.

All things being equal, "a merger will have static price effects to the detriment of consumers, but also dynamic benefits for consumers as investments can enhance their demand for services," the study found. But European M&A policy has often considered low prices more important than benefits derived from more investments, Liebhaberg said in a written statement. Asked whether the findings, if taken into consideration by competition authorities, might lead to fewer merger approvals in Europe, Liebhaberg emailed, "Not necessarily; I would think on the contrary." He said CERRE has seen or is anticipating M&A between mobile players in "more than a dozen EU member states."

The report is important but the academics who wrote it don't take into account some factors that those in the telecom industry know about, Strand said, saying he isn't being negative. He criticized the study for mixing up short-term with long-term investment and for treating the question of consumer prices incorrectly. Telcos make long-term investments for three reasons, he said: (1) to build infrastructure, to meet spectrum license build-out requirements; (2) to upgrade networks as technologies shift from 2G to 3G to 4G; and (3) to defend historical investments in situations where a business isn't doing well but the operator needs to hang onto its customers.

These investments are all related to long-term issues, so relying, as the study did, on fairly recent mobile M&A in Austria, Germany and Ireland was incorrect, Strand said. It's impossible to talk about consumer price levels because every operator has different offerings and changing traffic levels, he said. The report said consumer bills are rising in Austria, but an earlier report from HSBC concluded that prices are increasing because customers are consuming more traffic, he said.

The more significant issue in M&A is the differing perspectives of the European Commission's Competition and Connect directorates, Strand said. EC telecom experts are clear about the challenges to and what's happening in the mobile sector, while Competition Commissioner Margrethe Vestager and her staff look at the telecom market in ways that don't "work for that industry," he said. The collapse of TeliaSonera/Telenor has European operators questioning which directorate is making the decisions now, he said. On whether the Danish case could have turned out differently if the EC had considered the report's conclusions, Liebhaberg said: "Each case has to be assessed on the basis of its own merits, but it is indeed possible that a different outcome could have resulted if our study's findings had been available at the time, which of course was not the case."

The Danish case "creates so much uncertainty" about what conditions consolidations will be approved under, said Strand, whose consultancy handles telecom, media and IT issues. If the EC insists on having four mobile networks in each country, there's a big chance that pending M&A in the U.K. and Italy won't fly, he said. All this could have an adverse effect on M&A and European investment, he said. The EC should make a strong statement about what its mobile transaction policy is, he added.

The study confirms the correlation between efficient market structure and higher levels of investment, a European Telecommunications Network Operators' Association spokesman said. He said M&A control "should thoroughly assess parameters like technological progress, investment, innovation, quality and efficiency." But experts involved with alternative telecom players questioned several aspects of the survey. They said the authors appear to suggest that capex increase automatically implies investment in infrastructure, which isn't correct. The study failed to account for some issues that might have changed the results, such as network-sharing agreements, spectrum availability or consumer welfare after M&A, they added.