Affected market: Multi-media including telecoms
The OFT’s decision on reference under section 33 given on 5 May 2006. Full text published 22 May 2006.
NTL Incorporated (NTL) consists of the merged business of NTL Incorporated and Telewest Global, Inc (see [Note 1]). NTL provides multichannel TV, fixed telecommunications services and data services including internet access. NTL also has a subsidiary, Flextech, which produces and supplies TV programming.
Virgin Mobile Holdings (UK) [plc] (Virgin Mobile) is a mobile virtual network operator (MVNO) which provides mobile telecommunications services in the UK. It uses the Virgin name under licence from Virgin Enterprises. As an MVNO, it does not have an allocation of radio spectrum, so provides mobile communications services over T-Mobile's network. Virgin Mobile controls the retail pricing, customer management and billing. Virgin [Mobile's] UK turnover in the year ending 31 March 2005 was £521.3m.
NTL (see [Note 2]) proposes to acquire the entire share capital of Virgin Mobile and will enter into a separate agreement with Virgin Enterprises for a 30 year licence to use the Virgin name in respect of its supply of multi-channel TV, Internet access and telecommunications services. NTL notified this transaction on 7 March 2006, the administrative deadline expires on 8 May 2006.
As a result of this transaction NTL and Virgin Mobile will cease to be distinct. The UK turnover of Virgin Mobile exceeds £70 million, so the turnover test in section 23(1)(b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.
This transaction does not give rise to any horizontal overlaps if fixed and mobile telecommunications services are considered to be in separate markets.
Fixed telecommunications services involve a connection from the customers’ premises to a local exchange (known as the local loop). The collection of local loops is referred to as the local access network. Local exchanges are typically connected to a core network and BT is currently the only fixed telephony provider to have local network coverage across the whole of the UK (except for Kingston upon Hull) (see [Note 3]). NTL has however built its own network which covers certain geographic areas enabling it to offer multi-channel TV, internet access and fixed telecommunications services (so called triple play).
Mobile telecommunication services are provided by mobile network operators (MNOs) and MVNOs. MNOs are granted a licence by OFCOM to use the radio frequency spectrum and operate full mobile networks. MVNOs do not hold licenses themselves but access the mobile network of one or more MNOs to provide mobile telecommunications services.
Internet access can be achieved in a fixed location through narrowband or broadband. The internet can also be accessed in a non-fixed location over mobile handsets, and several operators are now offering this facility.
Multi-channel TV is the availability of multiple channels beyond the five main analogue terrestrial channels. It can be free to air (e.g. Freeview and Freesat by Sky) or pay-TV. It is traditionally viewed in a fixed location but can be viewed on mobile telephones (e.g. Vodafone provides 20-channel TV through 3G (see [Note 4]) handsets).
Substitutability of fixed and mobile telecommunications
OFCOM, the industry regulator, considers that while it is likely that there will be increasing convergence between fixed and mobile telecommunications services, at present they are insufficiently close substitutes for them to fall within the same economic market. NTL supports this view while third parties were mixed.
A report on the communications market published by OFCOM in February 2006 found that around 10 per cent of households only own a fixed telephone (down from 28 per cent in 2000) and 9 per cent of households only use mobile telephones (up from 5 per cent in 2000) (see [Note 5]).
There is however some evidence to suggest that there is some scope for demand-side substitution between fixed and mobile telecommunications services, although this is partial rather than total. NTL’s latest SEC 10K filing refers to the price constraint imposed by mobile telecommunications services in terms of the downward price pressure on fixed telecommunications services.
It may be possible that mobile telephony serves as more of a constraint for certain market segments where some customers are likely to be more price sensitive than others such as residential versus business.
Furthermore, it is also possible that the competitive constraints within the industry as a whole will change in future given the dynamic nature of the industry. For example, a report conducted by Analysys in 2004 found that 3G technology holds significant capacity, quality and cost benefits which will enable mobile operators to better compete with fixed line operators (see [Note 6]).
The evidence the OFT has found suggests that a hypothetical increase in the price of fixed line calls may lead to partial but not total substitution to mobile telecommunications services. It is possible that as prices for mobile calls fall, more customers would chose to switch from fixed line telecommunications to mobile telecommunications services. However as no competition issues arise whether or not fixed and mobile telecommunications services fall within the same economic market, it is therefore unnecessary to reach a conclusion.
Triple/Quadruple (or Quad) Play
NTL provided data showing that of its multi-channel TV, internet access and fixed telecommunications services, [32.4] per cent of NTL customers purchase three services (so called triple play);  per cent of NTL customers purchase two services, of which the vast majority choose telephony and TV. The remaining [26.6] per cent purchase one service only.
This suggests that bundling is an important, albeit recent development in the market. In the long term it is possible that suppliers will also offer quadruple play (triple play plus mobile telephony) however, the extent to which triple or quadruple play can be or will be defined as separate markets does not affect the subsequent analysis below and it is not therefore necessary to reach a conclusion on this point.
Fixed and mobile services are offered on a national basis and the geographic frame of reference is therefore considered to be national.
There are currently five MNOs operating in the UK, namely: 3; 02; Orange; Vodafone and T-Mobile. There are however nine MVNOs currently operating in the UK, namely: BT, Easymobile.com, Onetel Mobile, Fresh Mobile, Tesco Mobile, Toucan Mobile, M&S Mobile, Virgin Mobile and Sainsbury’s Mobile.
The MNOs currently serve over 90 per cent of active mobile customers (see [Note 7]) and Virgin Mobile’s share of those customers is 6.4 per cent, while the remaining MVNOs hold 3.6 per cent.
As regards fixed telecommunications services, NTL’s share of supply of fixed call volumes is around 12 per cent (see [Note 8]) while BT’s share of fixed call volumes is around 65 per cent.
If the supplies of fixed and mobile telecommunications services are considered together, then NTL’s share of call volumes comes to around 9.8 per cent, while Virgin [Mobile] stands at 0.4 per cent with BT holding around 52.2 per cent (see [Note 9]).
The market shares above indicate that, even taking fixed and mobile telecommunications services together, the merger does not lead to any substantial change to the structure of the market or competition within it.
Some third parties have suggested the parties are potential competitors. However, post transaction, there will continue to be strong competition from BT and other larger operators which indicates that the loss of the parties as potential competitors does not raise concerns.
Some third parties considered that this transaction would give NTL first mover advantage in relation to the provision of Quad play. The OFT also considered whether this transaction could raise concerns that NTL would offer only a bundled package and that some customers would be forced to take the whole bundle in order to gain access to for example multi-channel TV.
First, although in the short term, NTL plans to maintain Virgin Mobile as a stand-alone entity; NTL’s long term plans are to offer a Quad play package under one single charge (fee) and NTL plans to become the first to offer such ‘quad play’ services in the UK. However as it currently stands, the number of NTL’s customers who have subscribed to ‘triple play’ services is still relatively low at around 32 per cent; it is therefore unlikely that NTL could profitably offer a ‘pure bundle’ and withdraw stand alone services for customers. Second, the evidence the OFT has found indicates there are several other operators of varying sizes who can offer or have plans to offer similar packages such as: BSkyB with its recent purchase of Easynet (see [Note 10])); BT already offers mobile telephony, internet and has recently announced agreements with content providers such as Paramount, Warner Music and the BBC and plans to launch services later this year. Third, statements contained in NTL’s latest 10K SEC filing show it is expecting to face increasing competition and further entry into triple play. Moreover, OFCOM (see [Note 11]) agrees that NTL does not currently have significant market power in any of the markets/sub-markets in which OFCOM has reviewed.
In conclusion, for the reasons outlined above, the OFT believes that this transaction will not raise concerns as a result of product/service bundling.
Some third parties were concerned that the merger may increase barriers to entry vis-à-vis access to NTL’s upstream business such as the content from the Flextech channels.
However, given that it is not evident that NTL currently has market power in the upstream markets, nor that the merger will result in an increase in market power in these markets, the OFT does not believe the transaction will give rise to foreclosure concerns.
THIRD PARTY VIEWS
A majority of third party respondents had no concerns about this merger except for those dealt with above. OFCOM had no concerns about this transaction.
NTL offers multi-channel TV, fixed telecommunications services and data services including internet access; while Virgin Mobile is only active in the provision of retail mobile telecommunications services.
Views from third parties were mixed as to the extent of substitutability between fixed and mobile telecommunications services. However, regardless of the exact frame of reference, the parties’ shares of supply are small (as is the increment to NTL’s share of supply) and there remain a number of strong competitors providing mobile and fixed telecommunications services. NTL and Virgin Mobile may also be potential competitors however there will remain other competitors who pose stronger competitive constraints on the parties.
The transaction will additionally enable NTL to begin offering quad play services to customers; however the evidence the OFT has found shows that NTL does not currently have market power and would have no incentive to offer only a bundled service. Furthermore several other operators, including BT will have the ability to offer similar packages on their own or jointly with other providers.
Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under 33(1) of the Act.
- That transaction was cleared by the Office on 30 December 2005.
- The acquisition of Virgin Mobile will take place through NTL Incorporated and NTL Investment Holdings Limited (a wholly owned subsidiary of NTL Incorporated).
- BT is required to grant access to its local loop to third party providers.
- 3G is a short term for third-generation wireless, and refers to near-future developments in personal and business wireless technology, especially mobile communications.
- Page 62, The Communications Market 2005, Interim Report February 2006 - OFCOM.
- The Road to Fixed-Mobile Substitution Starts with 3G, Analysys, 2004.
- Active customers are defined by Virgin Mobile as customers who have made an outbound call or text within the last 90 days.
- In terms of customer numbers, BT has a share of supply of over 80 per cent, NTL around 11 per cent. In terms of access and call revenues (combined), BT has a share of supply of around 70 per cent, NTL around 13-14 per cent.
- The parties confirmed to the OFT that NTL and Virgin [Mobile] combined would not hold a post transaction share in any sub-segment which would be higher than these figures and the OFT has found no evidence to the contrary.
- This transaction was cleared by the Office on 30 December 2005.
- OFCOM considers that there is no clear evidence to support the view that triple play or quadruple play markets exist or are emerging.