Andrea Coscelli on recent CMA activity in the telecoms, media and technology space
Speech given by Andrea Coscelli, CMA Acting Chief Executive, at the GCR Live 5th Annual Telecoms, Media & Technology conference in London.
This has been an important year for competition policy and practice in the telecommunications and technology sectors. We have seen significant mergers being approved and blocked by competition authorities, initial conclusions being reached on how digital communication strategies and structures must adapt to meet changes in demand, and more focus than ever in the EU on the digital single market. The sector continues to have huge importance for the UK and global economies, and for consumers at a personal level. The CMA will also now begin to work with the UK government on the implications of changes to UK legislation as a consequence of the EU referendum result in our areas of activity.
The year has also been characterised by authorities working together to an even greater degree, and by us recognising where our strengths and weaknesses lie in interactions with and involvement in regulated sectors. This year illustrates success in these areas that we should aim to emulate and improve on going forward.
I would like to highlight some examples of regulators and industry participants working together to achieve the right outcome for consumers, covering the CMA’s experience in merger and market reviews.
A busy year for mergers home and abroad
The BT/EE investigation
In January this year, the CMA unconditionally cleared the merger between BT and EE. This was a challenging case in terms of the complexity of the issues (with the parties operating across different markets and at different levels) and the degree of interest from third parties and the wider public. The case also gave rise to challenges and innovations regarding our own processes.
While BT and EE did compete pre-merger, the actual horizontal overlaps were small, and therefore most of our substantive work was in exploring the vertical relationships between the parties and other market participants. The main focus of our investigation was in 2 areas: wholesale mobile and mobile backhaul.
First, we looked at wholesale mobile, a service that EE provides to mobile virtual network operators (MVNOs) including BT and Virgin Mobile. We assumed that Three and O2 would keep competing as separate entities (that is, we assumed that the prevailing conditions of competition would remain following the EC’s review of the acquisition of O2 by Three). EE is also a potential provider to other MVNOs, including TalkTalk and Sky. There is always a competitive tension for mobile network operators (MNOs) in hosting an MVNO: the MNO earns wholesale revenue, but is likely to lose some retail customers. All of the MNOs host MVNOs to varying extents, and for most MVNOs, we did not think the merger would change EE’s incentives to host them. However, for the likes of Virgin, Sky and TalkTalk, we know that BT competes strongly with them in a number of products where EE has only a small presence, ie fixed broadband, pay TV, and fixed line telephony. The question we therefore had to answer was whether EE would now have an incentive not to host the mobile arms of these firms, or to do so on worse terms.
As you’ll know, bundling of fixed and mobile products has not yet been embraced in the UK. We found that the merger would only affect EE’s incentives if consumers’ choice of mobile provider started to seriously influence their choice of provider for fixed products.
The evidence in general supported the view that fixed-mobile bundles would grow in prevalence, but we found that they would likely continue to be constrained by consumers’ willingness to purchase the 2 services separately. Therefore, we did not think that a merged BT/EE had the incentive to refuse to supply one of these firms.
We also considered whether BT/EE might try to raise prices to ultimately result in consumers switching to EE after receiving worse terms from other MVNOs passing on the increased costs. We found that EE could potentially harm MVNOs that supply fixed-mobile bundles, but we ultimately thought that the likelihood of losing the MVNO customers entirely would outweigh any potential benefit at the retail level.
Second, we looked at mobile backhaul – the service that carries traffic between a mobile base station and the MNO’s core network. BT is the primary supplier to each of the four mobile network operators (ie EE’s competitors).
We looked at a number of ways in which BT could have tried to harm EE’s rivals post-merger, including considering input and customer foreclosure. The findings that led us to find that no SLC was likely can be summarised as follows:
- First, we found that these services are subject to existing regulation – both price regulation and non-discrimination obligations (mobile backhaul is just one type of data carried by BT, alongside data where BT already competes). We did not find that this regulation is currently ineffective.
- Second, to the extent that BT could still harm EE’s rivals notwithstanding such regulation, backhaul services account for a small proportion of MNOs’ costs and is to a large extent a fixed cost. We recognised that the cumulative effect of small harms might be significant. However, we found that on balance the overall impact on rival MNOs would not be large enough to significantly reduce their competitiveness. We therefore did not expect there to be any increase in prices paid by consumers and no gain to EE, which meant that BT would lack an incentive to behave in this way.
- Finally, we could not identify any way in which BT could significantly favour EE over the other MNOs in terms of innovation in backhaul services.
Overall, external parties have praised the rigour with which the CMA tackled a very complex set of issues, and I would echo those praises. While there were, no doubt, challenges for the case team and the Inquiry Group during the phase 2 investigation in analysing a multitude of complex theories of harm, I consider the findings of the investigation to be a successful outcome for consumers and for the industry. As you will be aware, this investigation was one of a relatively small number that have been subject to a fast-track reference from phase 1, at the request of the parties. While it was therefore not subject to a full investigation, which can last 40 working days (plus 10 for remedies), the phase 1 team carried out detailed analysis prior to notification, including holding third party hearings and conducting site visits. Given that the phase 1 process took 3 weeks, compared to the usual 8 weeks, there is no doubt that parties benefit from requesting the fast-track procedure be used in appropriate cases (Ladbrokes/Coral being another example that also had a phase 1 of around 3 weeks). However, as an authority we are mindful that we are starting with a smaller evidence base than if a full phase 1 investigation had been conducted, and, while this may not hinder the overall outcome, it does make quickly scoping and de-prioritising areas at the start of phase 2 more difficult. We found that the fast-track emphasised the benefit of transferring staff from phase 1 to phase 2 in enabling us to hit the ground running on certain theories of harm. We are also working to continue to integrate the end-to-end processes more seamlessly, looking at the mix of staff working across cases and tools.
The investigation also gave us the opportunity to continue the traditions of working closely with the European Commission (which I will return to later in the context of Three/O2) and drawing on expertise from regulators. While not having a formal role in merger control, as the telecom regulator, Ofcom played an important advisory role as the expert across a number of areas – particularly in relation to backhaul and spectrum. However, we were always clear that our task was to look at this merger’s impact on competition and to reach an independent view. As part of that, we carefully assessed Ofcom’s regulations where they impacted on BT and EE’s businesses, and we treated Ofcom’s submissions as we would submissions from other third parties, recognising of course its significant expertise in this market and its role as a public authority.
EU Telecoms mergers and the Three/O2 experience
This year also saw a relatively rare move by the European Commission to block a proposed merger – the acquisition of O2 UK by CK Hutchison Holdings. The CMA and I strongly support the Commission’s decision, which came after months of close liaison between the CMA, Ofcom and the Commission on substance and on possible remedies. Ultimately, we believed – as did the Commission – that the merger would give rise to a significant impediment to effective competition in retail and wholesale telecoms markets in the UK and that the remedies proposed by Hutchison failed to adequately address these concerns.
I do not intend to go into great detail on the substance of the case (the Commission’s decision having not yet been published), but can say that, while this is a market that currently functions well with four competing MNOs, a reduction to three, combined with high barriers to entry, was a restriction of competition likely to bring about increased prices and/or a reduction in quality or other non-price factors. We believed that the merger would have removed an important competitive constraint in the form of a challenger in the market that has been actively competing, and in our view (and Ofcom’s) would have continued to do so. Even more problematically, in my opinion, given its significant impact on the remaining market players, the merger would have allowed the parties to straddle both network sharing arrangements, misaligning incentives to cooperate and giving the merged entity the ability to frustrate its rivals.
In terms of whether remedies could address such concerns, as you will have seen from Alex Chisholm’s letter to Commissioner Vestager, we strongly believed, based on all the evidence we were privy to, that the only appropriate remedy was the divestment of either the Three or O2 mobile network business either in its entirety or possibly allowing for limited ‘carve-outs’ from the divested business. The divestment would have needed to include the mobile network infrastructure and sufficient spectrum to ensure a commercially viable fourth MNO in the UK.
I would like to take the opportunity to praise the Commission for investigating this complex and multifaceted case with skill and for the case team’s openness and pro-activeness in working with us and with Ofcom. This was a feature of the case from the outset and one that I hope can be used as a model for co-operation between authorities going forward. In particular, the CMA reviewed and analysed evidence put forward by the parties and third parties, met a number of times with the Commission and other interested parties, communicated its own view and views of other stakeholders such as Ofcom, assisted with survey design, and participated in the Oral Hearing and Advisory Committee meetings. The Commission was also able to benefit directly from Ofcom’s expertise in this area through the secondment of one of its staff to the case team, and we were able to assist by the secondment of a CMA economist to the Commission’s Chief Economist Team. This sharing of expertise and resources between authorities (also seen between the CMA and Ofcom in BT/EE) should be encouraged as it benefits both the authorities themselves and businesses who gain increased efficiencies and consistency.
Some of this interaction is public, such as our comments made at the Oral Hearing, while some, such as our substantive submissions, were communicated only to the Commission and the merging parties. In mentioning the letter to Vestager, I should point out that while it is relatively unusual for us to publish communications between ourselves and the Commission regarding live cases, we felt that the circumstances lent themselves to such transparency. Having opened up a dialogue publicly by publishing our Article 9 request, and having received various requests by other public authorities in the UK to clarify our position on the case, we thought our stakeholders would benefit from seeing how our views had changed or, in this case, solidified.
Lessons for future telecoms mergers
The Three/O2 merger, while slightly unusual due to the presence of the network sharing arrangements, followed a general trend towards consolidation in mobile telecoms markets across Europe, with mergers in Ireland, Germany and Austria that were cleared by the Commission subject to remedies and an abandoned merger in Denmark. While we obviously believe that every case must be evaluated on its merits and that there are differences in the operation of the mobile telecoms markets around Europe, prior to the robust decision in Three/O2, we had concerns (which we shared with the Commission) that merger control decisions in this area could create an impression that competition authorities were minded to accept more general consolidation in the mobile communications sector, which was not justified by the evidence.
Three/O2 has hopefully reversed any such impression, since we remain concerned about the detriment to consumers of reduced competition in these markets particularly when network sharing agreements already allow significant cost synergies for the market players. We know the benefits that effective competition brings in a market where new technologies and innovations are being developed, such as the introduction of 5G. Our experience tells us that we should also be cautious about down-playing the importance of disruptive smaller players such as Three.
In this context we will continue to follow the current four-to-three Italian joint venture (Hutchison/Vimpelcom – in phase 2 proceedings) with interest and, as we have done in all of the preceding investigations, make any interventions, whether on substance or on remedies, that we consider necessary to assist the Commission in its assessment.
Choosing what works to make markets better for consumers
The Openreach question – a role for the CMA?
The digital communications markets have this year received a great deal of attention with Ofcom’s strategic review, the initial conclusions of which I read with interest, as I am sure you all did. One of the key questions was, of course, Openreach – how to make sure Openreach (controlled by BT) does not act to the advantage of BT. Ofcom has proposed to encourage ‘fibre to the premises’ networks by improving access to Openreach’s network, and to reform the relationship between BT and Openreach.
Some stakeholders have asked whether we will or should get involved in this study. Ofcom could, of course, refer this market to us for an investigation into whether any features prevent, restrict or distort competition, and in fact the threat of a reference to the Competition Commission in 2005 was what prompted BT at the time to establish Openreach in lieu of a referral. In regulated sectors governed by a separate regulatory body, such a reference may be appropriate in areas of complexity, if the regulator’s scope of review is too narrow to deal with the suspected problem or if the review would benefit from a wide range of possible remedies. Both regulatory tools and competition can improve customer outcomes, and it is a question of what is more appropriate in the particular circumstances. The CMA and the regulators work together flexibly through the UK Competition Network to identify the appropriate approach.
An example of this is in the energy market, where Ofgem made a market investigation reference (MIR) to the CMA. While conducting a comprehensive review of such a large and complex sector has been a major undertaking, the issues we have identified and remedies we are currently putting in place following the conclusion of the investigation last month demonstrate the real added value that an independent CMA investigation can bring, even in a regulated sector.
First, we identified a wide range of competition issues – the true extent of which only became fully clear through the fresh, in-depth look at the market that the MIR provided. We also dispelled a few myths as to what the problems were. For instance, in our conclusions we did not find an adverse effect on competition in relation to upstream market power, vertical integration and lack of liquidity in the wholesale market.
Second, a review by an independent authority can be a necessary step in re-establishing trust and stability – particularly in a sector such as energy, which is high on the political agenda and has been subject to rapid policy and regulatory change. Our remedies have addressed systemic issues relating to the governance of the regulatory framework – including the relationship between DECC and Ofgem and measures to bolster Ofgem’s independence and role in industry codes – that it would have been difficult for Ofgem alone to raise.
Returning to Openreach, Ofcom is currently conducting a large-scale, detailed review using its expertise in the sector, and we would not wish to duplicate or frustrate its high-quality work. It is also accountable for making this sector work, and has an excellent relationship with the CMA – if it believed we could help resolve any issues, it would not hesitate to ask.
The CMA’s role in regulatory appeals
Since the privatisation of utilities in the UK in the 1980s, a right of appeal to the competition authority has been given to affected companies against certain decisions of the regulators. The CMA’s jurisdiction covers 10 distinct regulated industries, including telecoms. Regulated telecoms companies have not been hesitant to make use of the appeal mechanism, with almost half of appeals to the Competition Commission and the CMA since 2007 being in telecoms (with the appeal regime remaining untested in some other industries).
The CMA has received three appeals/redeterminations since April 2014, including appeals in the telecom sector against a condition imposed by Ofcom that seeks to ensure that BT maintains a sufficient margin between its wholesale and retail superfast broadband charges.
Stakeholders have provided very positive feedback on the quality of the CMA’s work in this area. We know that these cases are extremely important to industry participants and sectoral regulators, and we will continue to ensure that we maintain this high quality.
Changing times – the digital world
Before I make my concluding remarks, I wanted to mention some of the CMA’s work in the digital sector.
The Commission launched its DSM agenda (led by DG CONNECT) in May 2015, seeking to introduce a comprehensive package of measures to facilitate the online single market and stimulate cross-border trade. In parallel, the Commission (DG Competition) also launched a sector inquiry into the e-commerce sector, to ‘gather data on the functioning of e-commerce markets so as to identify possible restrictions or distortions of competition, in particular in relation to cross-border online trade’.
The application of competition and consumer laws (and compliance with those laws by certain powerful ‘digital giants’ in particular) is evidently (and will remain) a matter of considerable public, political and regulatory interest. The CMA has therefore been engaging actively with these issues, responding to Commission questionnaires on the regulatory environment for platforms, online intermediaries, data and cloud computing and its considerations of geo-blocking.
Earlier this year, the House of Lords EU Select Committee also published its report Online platforms and the Digital Single Market, responding to the Commission’s DSM strategy and public consultation. The Committee’s remit was to investigate whether large online platforms (Google, Amazon, etc), in particular those that may act as ‘gateways’ to certain markets, needed additional regulation. The report recognises that online platforms have accelerated e-commerce across Europe, but also highlights areas where it considers current regulation isn’t working. However, it argues against introducing a new regulatory framework for platforms, instead asserting that existing regulations should be updated and more robustly enforced, and making various recommendations to this end. This is a conclusion that the CMA strongly supports and for which we advocated in our evidence to the Committee.
So, a busy year for regulators and businesses in the telecoms and technology sectors and, in my opinion, a successful year in terms of competition and regulatory activity for the benefit of consumers in this area. The new technologies developing in these sectors will continue to shape the UK and worldwide economy and people’s lives. Regulators owe it to the consumers they have a duty to protect to keep abreast of these developments and to understand and react to their impact on the market. To do so, we need to work together to draw on our experience and expertise, choosing the appropriate tools and resources and sharing knowledge. I think this year has seen some excellent examples of this, and I hope we can emulate and improve on these experiences going forward.