In February 2015 TeliaSonera, the Finnish-Swedish telecoms player, was given a green light to take over Tele2’s mobile operations in Norway. The Norwegian Competition Authority had voiced significant concerns over the deal, signalling that far-reaching concessions were called for. The final package of commitments includes a set of agreements with ICE, a smaller niche player, which the authority hopes will become a credible number three player in the Norwegian market.
As a three-to-two merger, the case seems to have few precedents, if any, among the numerous mobile mergers that have taken place across Europe in recent years. The decision also includes an interesting discussion of the relevant counterfactual.
Three network operators
The Norwegian mobile market – the market for mobile subscriptions to end-users – has only three significant players.
Telenor is the incumbent operator with slightly more than half of the market. TeliaSonera and Tele2 are the number two and three players. All of them are mobile network operators (MNOs), which means that they control network infrastructure and all the other elements needed to provide mobile services to the end-user, including allocated frequencies (also called ‘radio frequencies’ or ‘radio spectrum’). Each of the three MNOs operate multiple mobile brands, and all of them serve both the consumer segment and the business segment.
In addition to serving end-users, the MNOs provide wholesale access to players that do not have a complete physical network infrastructure or allocated frequencies. These players, which are referred to as ‘mobile virtual network operators’ (MVNOs), rely on such access in order to provide services to the end-user.
A third group of players, so-called ‘service providers’, is often distinguished from MVNOs. Service providers operate under their own brand name, but do not provide their own service to the end-users. Instead they rely on a MNO or a MVNO to produce the service.
The MVNOs and service providers in the Norwegian mobile market are much smaller than the MNOs and in total make up only 9.5% of the end-user market.
From three to two network operators
The distinction between network operators and other players may seem somewhat technical. After all, the service provided to the end-user is essentially identical. However, MNOs and other players have a very different cost structure.
MNOs are making huge investments in building and upgrading their infrastructure (which is why there are often significant cost savings to be made from mergers in this industry). These are fixed costs. The cost of adding a new subscriber – the marginal cost – is close to zero. In contrast, MVNOs buy wholesale access from an MNO and thus have a much higher marginal cost.
As a result of this difference, the Norwegian Competition Authority took the view that the MVNOs were unable to restrain the three MNOs’ pricing effectively. The same applied to service providers.
With only three MNOs in the Norwegian market, together making up more than 90% of the end-user market and 100% of the wholesale market, the TeliaSonera/Tele2 deal was a three-to-two merger.
Or was it?
At the time when the transaction was agreed, in July 2014, Tele2’s position as an MNO was in jeopardy. Frequencies are allocated through auctions and in an auction a few months earlier, Tele2 had lost important frequencies in the 900 MHz band (being stingy can sometimes prove costly). Without these frequencies Tele2 would not be able to produce its service to its subscribers. With only a few months left until the expiry of its licences for these frequencies in October 2014, time was running out for Tele2. In the months following the auction failure, Tele2 explored various alternatives and, as we know, ended up selling its Norwegian operations to TeliaSonera.
Against this background, the parties argued that the transaction did not remove an MNO from the market, since Tele2’s days as an MNO were coming to an end anyway.
The authority thus had to consider what would have happened had Tele2 not sold its business. In other words, what was the relevant counterfactual?
In merger control, the “counterfactual” refers to the situation absent the transaction: how would the market have developed over the next years had the merger not taken place? Even if a merger should reduce competition compared to current market conditions, it would not make sense to block the merger if the counterfactual scenario would be no better, i.e. a similar reduction of competition would have taken place anyway.
Normally the assessment of the most likely counterfactual scenario does not take a prominent place during a merger review, because the most likely counterfactual is often the current market structure. In the case of Tele2, however, what would happen to its business after it lost its frequencies was up in the air.
On the same day that Tele2 agreed to sell its Norwegian operations to TeliaSonera, the parties also signed an MVNO agreement as a fall-back in the event that the transaction would be blocked by the authority. The parties argued that this MVNO agreement constituted the relevant counterfactual: the effects of the transaction should be compared with a scenario in which Tele2 remained independent and maintained its customer base, but operated as an MVNO relying on access to TeliaSonera’s infrastructure and frequencies.
The authority did not agree.
In the authority’s view, the MVNO agreement with TeliaSonera was a result of the transaction: had the parties not agreed on the transaction, they probably also would not have entered into the MVNO fall-back agreement. The authority argued that its view was supported by various internal documents obtained from the parties.
Instead, the authority believed that absent the transaction Tele2 would have been able to maintain its position as an MNO. In other words, the effects of the transaction had to be compared against a scenario in which Tele2 remained an MNO.
This counterfactual is fleshed out in some detail in the decision. In the frequency auction where Tele2 lost out, ICE (a niche player offering only mobile broadband services) had been allocated several frequencies, including in the 900 MHz band. However, ICE had only a limited infrastructure network and used a type of technology that cannot be used for regular mobile services (voice, etc.). In other words, Tele2 lacked the frequencies it needed whereas ICE had more frequencies than it could make good use of on its current infrastructure. As a result, Tele2 had entered into a short term agreement with ICE ensuring access to the necessary frequencies for the initial period after Tele2’s licences expired, but this agreement was limited to six months.
In the authority’s view Tele2 and ICE would – absent the transaction – have strong incentives to reach a mutually beneficial longer-term agreement which would allow Tele2 to continue to operate as an MNO.
However, in order for Tele2 to maintain its MNO position, an agreement with ICE would not be sufficient. Tele2 would in addition have to buy national roaming (to cover geographical areas that Tele2’s own network infrastructure did not reach).
The authority took the view that Tele2 would have bought this from Telenor rather than from TeliaSonera. The authority also believed that Tele2 would continue to invest in further developing its network infrastructure in order to reduce its dependence on the roaming agreement.
The authority’s counterfactual assessment is interesting. The authority draws up a very detailed scenario as the most likely counterfactual, and this scenario is not limited to unilateral decisions by Tele2, but involves the company being able to reach agreements with specific third parties. Since the details from the negotiations and from internal documents are redacted in the decision, it is difficult to assess whether there was a sufficient factual basis for the authority’s conclusion.
Objections to the deal
Since Tele2 was considered an MNO in the counterfactual scenario and the transaction was thus a three-to-two merger, it is hardly surprising that the authority had significant concerns. The authority concluded that it would restrict competition both in the end-user market and in the wholesale market.
- In the end-user market, the authority concluded that the merger would give rise to both unilateral effects (removing the competitive constraints between the parties would reduce the incentives to compete aggressively) and coordinated effects (with only two large players sharing most of the market, they would be more likely to coordinate and raise prices even without any explicit agreement).
- In the wholesale market – the market for access to and call origination on public mobile telephone networks – competition was already weak. In the authority’s view the transaction would give rise to both unilateral and coordinated effects also in the wholesale market.
TeliaSonera had argued that it would be able to realise very significant cost-savings and other efficiencies, but the authority was not convinced that these would be sufficient to counter-balance the negative effects on competition.
The commitments package
After several months of commitments discussions between TeliaSonera and the authority, including several formal offers from the company, the transaction was ultimately cleared on the basis of a significant commitments package.
The most important commitments involved the completion of several agreements that had been entered into with ICE. The agreements included:
- the divesture of Tele2’s Network Norway brand for business customers (an asset transfer involving the customer base, brand, distribution, etc.);
- the sale of infrastructure (base stations);
- a national roaming agreement covering geographical areas that ICE’s own network infrastructure does not reach; and
- the sale of a small number of retail outlets.
The authority concluded that the agreements would enable ICE to become an MNO and compete both in the end-user market and in the wholesale market. In short, while the transaction would remove one existing MNO, the commitments were intended to ensure that a new MNO would be created.
The objective of facilitating new MNO entry has also been pursued by the Commission when it has negotiated commitments in recent mobile mergers:
- In Hutchison 3G / Orange Austria the Commission accepted remedies intended to encourage the entry of a new MNO player (although the entry has apparently failed to materialise in the aftermath of the clearance decision).
- Similarly in Hutchison / Telefónica (O2), which concerned the Irish market, the commitments package also included commitments intended to ultimately facilitate new MNO entry (building up a strong MVNO that would have potential in future to become an MNO).
- This was also the case in Telefónica Deutschland / E-Plus, involving the German market.
However, in each of these Commission decisions the commitments included the sale of frequencies. This was not necessary in the Norwegian case, as ICE already had sufficient frequencies.
In the three Commission cases, the packages also included commitments to provide a set amount of network capacity to MVNOs at fixed payments. TeliaSonera’s commitments package included an undertaking to provide wholesale access to MVNOs, but no undertaking to provide a specific amount of network capacity to such players.
In December, while the Tele2 deal was still pending, Telenor and TeliaSonera announced plans to combine their activities in Denmark. The Danish deal, which is currently being reviewed by the Commission, is yet another indication that the wave of consolidation in European mobile markets will continue over the next years (together with e.g. the pending cases Orange/Jazztel and BT/EE).
The TeliaSonera/Tele2 clearance may give reason for some optimism on the part of operators considering mergers in already concentrated markets. While the three Commission decisions mentioned above involved four-to-three mergers (in terms of the number of network operators), the Norwegian case is an example that a three-to-two merger has been accepted, although on condition of a significant commitments package.
What remains to be seen is whether this package will be enough to make ICE a real challenger in the Norwegian market.