Affected market: Telecommunications
Vodafone Group plc (Vodafone) is a mobile network operator (MNO) in the
UK. It operates at both the network (wholesale) and service provider
(retail) level of the mobile communications sector. Project Telecom plc
(Project Telecom) is an independent service provider (ISP) of mobile
telecommunication services in the UK. Project Telecom's turnover for
the year ended 31 December 2002 was £315 million.
Vodafone is seeking to acquire the entire share capital of Project
Telecom for £155 million.
As a result of this transaction Vodafone and Project Telecom will cease
to be distinct. The UK turnover of Project Telecom exceeds £70 million,
so that the turnover test in section 23(1)(b) of the Enterprise Act 2002
(the Act) is satisfied. A relevant merger situation will be created.
The parties overlap in the provision of mobile communication services at
retail level (to personal and corporate users). Vodafone, as an MNO,
also supplies mobile communication services at the wholesale level to
ISPs such as Project Telecom.
On the demand-side, due to the way in which airtime is sold, it is
likely that the supply of mobile telecommunications services to retail
and wholesale customers should be considered separately. Retail
customers (personal and corporate users) would not, in the event of a
price increase by all retail suppliers (including tied service providers
(TSPs)), be able to buy directly from an MNO. Project Telecom buys
wholesale airtime for resale to mainly corporate, but also personal,
customers. Vodafone, through its TSPs, provides mobile telecommunication
services to both corporate and personal customers. Of Vodafone's 12.4
million network customers, [1.5 million – 3 million] (see note
1) are serviced through ISPs like Project Telecom. The specific
characteristics of mobile telephony mean that customers do not consider
land line telephony to be a viable substitute.
On the supply-side, it appears likely that suppliers of mobile
telecommunication services to personal customers could quickly and
easily switch to provide services to business customers. They would have
to bid for contracts that are put out to tender by corporate customers
and may have to develop additional services such as conference calling.
The parties submit that the range of services offered to corporate and
personal customers is similar.
OFTEL maintains that the geographic scope of the market for wholesale
mobile telecommunication services is the UK because of a uniform pricing
policy and a lack of demand and supply side substitutability from
markets outside the UK. It is likely that, for similar reasons, at the
retail level the geographic scope is also national.
For the purposes of analysing the competitive constraints on the parties
pre- and post-merger the appropriate frame of reference will be taken to
be the supply of mobile telecommunication services at the retail level
in the UK.
Post-merger at the retail level, Vodafone would have a [15-20 per
cent] (see note 1) market share, increment [<5 per cent]
(see note 1), by subscriber numbers or [25-30 per cent] (see
note 1), increment of 1.3 per cent, by retail revenues. If
Vodafone's acquisition of Singlepoint is completed, this would increase
Vodafone's share of supply by a further [<5 per cent] (see note
1) by subscriber numbers. Post-merger the parties will face
competition from other MNOs as well as a larger number of ISPs.
Barriers to entry
Third parties had mixed views about the costs of entry at retail level.
Recently there has been a number of firms entering and exiting the
market. BT and Tesco have recently entered into partnership agreements
with T-Mobile and O2 respectively to provide mobile services to personal
consumers. As a result of this new entry and continued growth of
existing ISPs, OFTEL believes that the removal of the requirement on
Vodafone and O2 to sell on a non-discriminatory basis to ISPs has not
created a barrier to entry. OTFEL has found that while personal
customers face some barriers to switching related to number portability
and handset unlocking, they have been reduced over time. Vodafone's
customer churn is around 30 per cent per annum.
Personal customers are unlikely to have any negotiating strength. One
third party thought that corporate customers may have some buyer power
as they purchase services through a competitive tendering process and
have a number of providers from which to choose.
Vodafone is active as an MNO at the wholesale level and as a TSP at the
retail level. Its share of supply at the wholesale level was 29.9 per
cent by volume of call minutes and 33.5 per cent by value for the period
April 2002 - March 2003. OFTEL considers that no MNO or group of MNO has
significant market power. It is therefore highly unlikely that it can
leverage its position in the supply of wholesale airtime to influence
the supply of airtime to retail customers. ISPs can switch between MNOs,
although Orange does not currently supply any ISPs. Moreover, the
transaction results in such a small increment to Vodafone's share of
supply (at the retail level), even if Vodafone did possess some market
power at the wholesale level, the transaction is unlikely to increase
the possibility of foreclosure at the retail level.
THIRD PARTY VIEWS
A number of ISPs are concerned about the transaction, but these related
more to wider sectoral issues, in particular, the removal of the
requirement on Vodafone and O2 to sell on a non-discriminatory basis to
ISPs. MNOs and customers are generally not concerned. OFTEL is
unconcerned about the merger because the increment to market share is
small and it does not view the decline in the number of ISPs as a
concern as there is strong retail competition between the TSPs.
The appropriate frame of reference is taken to be the supply of mobile
telecommunications services at the retail level in the UK. Post-merger,
the parties will have a combined market share of [15-20 per cent] (see
note 1), increment [<5 per cent] (see note 1),
based on subscriber numbers or [25-30 per cent] (see note
1), increment 1.3 per cent, based on retail revenues. The
merged entity will continue face competition from around 50 other ISPs
and the other MNOs. Entry barriers do not appear to be insurmountable as
there have been a number of recent new entrants. Given that OFTEL has
concluded that Vodafone (either singly or as part of a group) does not
have significant market power and the increment to its share of supply
of retail services is small, the transaction does not appear to raise
any vertical competition concerns.
This merger will therefore not be referred to the Competition Commission
under section 33(1) of the Act.
- Figures replaced by a range at the request of Vodafone.