Chillin'Competition

In the field of merger control, it is all about mobile phone operators these days. The hearing on the Three/O2 UK merger took place last week. It is yet another chapter in the wave of ‘four to three’ mergers in the industry. It remains to be seen what the Commission will decide. As much as Brexit (sigh), a declaration of incompatibility cannot be ruled out.

One of the most interesting aspects of the case has to do with the involvement of sector-specific regulators. These authorities – and in particular Ofcom – oppose the transaction, and they do not seem to mince their words (or reports). This is natural and unsurprising. Telecoms regulation is all about promoting competition and making sure that the market remains fragmented. Because the regulatory regime was conceived to undermine the position of the incumbent operator, an increase in market concentration looks like a failure.

A couple of days ago, the Austrian telecoms authority released a report examining, ex post, the effects of the merger between Hutchison and Orange in the country (we should definitely have more of the studies). You will not be surprised to learn that the Austrian regulator sides with Ofcom, and strongly suggests that the merger should never have been cleared. If you are not surprised, I am even less so. I remember presenting at a conference where the head of the Austrian authority did not leave any doubts about his (negative, if you ask) views on the transaction.

Above all, the attempts of regulatory authorities to influence the decision of the Commission reflect the limits of sector-specific regulation. Sectoral regulators wish they could do more about the wave of consolidation in the industry.

I have just mentioned the limits of sector-specific regulation, but Three/O2 UK made me think about the limits of merger control as well. Merger control is very valuable, but is also a very imperfect instrument, in particular in a heavily regulated sector. I would emphasise the following features of the system:

• In practice, efficiencies play no meaningful role in the analysis of transactions: Three/O2 UK is one of these cases in which one can neatly identify potential negative effects (in the form of higher prices) and potential positive effects (such as increased investments and better network coverage). As in other cases, I am afraid that efficiency gains will be of marginal relevance in the analysis. The outcome of the case will depend on the perceived negative effects on competition and on the remedies offered by the parties.
  The principle that efficiency claims can be put forward to outweigh any negative effects is more rhetoric than reality (there is an interesting forthcoming article by Nicholas Levy and two of his colleagues where this point is discussed). My understanding is that the situation is not fundamentally different in the US, and it is similar to what we see in the context of Articles 102 and 101(3) TFEU (Alfonso has written quite a bit about the latter, see here and here).
  Is the limited role of efficiencies in merger control – and EU competition law at large – a problem? In my view, it is not much of a problem provided that the negative effects of concentrations and practices are assessed carefully and rigorously. What matters is that all stakeholders acknowledge the inescapable reality: it is incredibly difficult to advance efficiency claims in competition law proceedings. More importantly, one should not be cynical about this fundamental question. I hear people say – some with a straight face – that it does not really matter whether we prohibit a practice by object or by effect. After all, the argument goes, one can always advance efficiencies. We know better than that.
• Market definition is an imperfect instrument to understand industries: The background to Three/O2 UK is not a mystery. Things are changing in the UK, in particular for the incumbent telecoms operator. After the acquisition of EE, BT has finally emerged as a credible integrated provider that can (properly) offer broadband Internet, mobile phone services and content. It is natural that other players react by trying to gain scale and compensate for the advantages enjoyed by the new BT. The problem is that ‘bigness’ and ‘integrated operator’ do not fit well in the analysis. The CMA could not block the BT/EE merger out of a vague concern with ‘bigness’ and ‘incumbency’, or simply because the incumbent was gaining an ‘edge’ over its rivals. By the same token, the Commission is right to rely upon market definition. On the other hand, I cannot avoid the impression that some aspects of the big picture are being missed – this is probably inevitable, and the alternative definitely unscientific.
• Fighting the inevitable: I can think of many reasons why mobile operators are merging. Some of these reasons have to do with the regulatory choices made by authorities and legislators – there are no free lunches, and the obsession with net neutrality certainly does not come for free. The impression I have from the wave of ‘four to three’ mergers is that the process of consolidation in the industry is inevitable. It would seem that a market structure with four integrated providers is not sustainable in the long run. What is the role of merger control in such a context? Does it make sense to fight the inevitable? Or is it wiser to force firms to compete so long as rivalry is viable? I have not made up my mind on this one.