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Telecoms regulation in the spotlight as market consolidation occurs
Pat Treacy & John Townsend

Mergers between telecoms companies are occurring across the EU. In the UK, the recent announcement of the acquisition by BT (the UK’s fixed line incumbent) of  large mobile operator EE (the “BT/EE merger”) will potentially create an ‘all-singing-all-dancing’ merged company covering fixed line and mobile phones, premium broadcast content and broadband. The Competition and Markets Authority issued a preliminary invitation to comment on 4 March which closed on 18 March. Although no formal investigation has been initiated, given the scale of the players it is likely that the Competition and Markets Authority and/or Ofcom may wish to look at this further. In addition, given the ultimate parent of EE (being a joint venture between Orange and T-Mobile, the French and German incumbents), and the European Commission’s interest in monitoring telecoms regulation across the EU, there may be some liaison between the UK competition authorities and the European Commission.

Merger related discussions have also been reported between two smaller mobile companies 3 and O2 which would lead to further concentration on the UK market. The UK until now has been unusual for both (a) the larger number of telecoms players on the market compared to other EU countries and; (b) BT’s unusual position as a business and consumer fixed line operator without a mobile arm. Other mergers are in train between different telecoms companies in Spain, Denmark, Germany and Ireland. Such consolidation affects the structure of the market, and competition authorities will take an interest in what kind of features might in certain circumstances adversely affect competition. As a result of this transaction, and others like it, the number of telcos active in many EU Member States will fall, but there may well be consumer benefits in terms of innovation and efficiencies. The number of telcos active in many EU Member States could fall from four or three to as few as three or two. Such changes raise important questions about how telecoms companies are regulated, and how such transactions should be treated as a matter of merger control.

New challenges for telecoms regulation

Industry consolidation often raises concerns for competition authorities that a reduced number of industry players may cause higher prices for consumers. In the telecoms industry, mergers may affect the price of bundled services which consumers now often purchase in a single package. These services include fixed and mobile telephony, internet access through broadband, and premium broadcast content.  Additionally, consumer trends are eroding the profitability of telecoms companies. Consumers now use nominally ‘free’ third party software such as ‘whatsapp’ or ‘snapchat’ to communicate, rather than paid for services like SMS messages provided by telecoms companies.

Regulation determines the way products and services are offered to businesses and consumers. Perhaps more than in many industries, telecoms regulation (which sets prospectively future competition) is mandated by the European Commission and then implemented in a dual layer of regulation by national regulatory authorities (NRAs). This determines the number of telecoms players, their terms of access to network services, their profitability, and the way in which they can compete across communications markets.

The EU regulatory context

The prioritisation of the digital single market agenda by the new European Commission seeks to ensure that common policies in broadband and other markets are co-ordinated with good practice in EU Member States. The BT/EE transaction (and potentially the 3/O2 transaction) is taking place within the context of changing EU regulation, which underpins the national regulation enforced by NRAs. However, there is no pan-European regulator of telecoms markets. Instead, there is a loose association of NRAs in the form of the Body of European Regulators of Electronic Communications (BEREC) which simply co-ordinates common approaches and policies across EU Member States. BEREC also co-ordinates mandatory consultation processes under Articles 7 and 7a of the Telecoms Framework Directive, where certain joint approaches must be agreed, and advises the European Commission on recent developments in telecoms regulation.  This process is contentious, and the consolidation in telecoms markets across the EU may allow BEREC to seek a greater role. BEREC has already called for additional regulation to reduce the delay in reaching agreement on key proposals, which can often exceed 12 months.  For the merged entity, there may be significant new regulatory burdens. As with other sectors, it may be that increasing co-ordination of national policy with policy made in Brussels is inevitable.

Conclusion

These developments add up to substantial regulatory uncertainty for telecoms companies, in conjunction with falling revenues and profitability on some services. It is difficult not to have some sympathy as they attempt to find the value in products and services which may become legacy at alarmingly quick rates. These are interesting times for the industry, and the European market in 2017 may seem very different to that today.