EU Commission to investigate testbed Orange-MasMovil merger

The EU competition authority launched on Monday (3 April) a Phase 2 investigation on whether the merger between Orange and MasMovil in Spain breaches the EU Merger Regulation and reduces competition in the country.

The investigation is seen as a test case of whether the European Commission intends to take a less strict line on mergers in the telecoms sector following calls for consolidation from major operators.

The two telecom companies are the Spanish market’s second and fourth-largest mobile operators, and the merger, announced in July 2022, would make them the most significant player in the market, ahead of legacy operator Telefonica.

In other words, the merger would reduce the number of network operators from four to three, taking away a significant competitor, which the Commission fears might lead to higher prices and poorer services for Spanish consumers.

In response to the news, Orange said they would inform the Commission of the deal’s benefits.

“This transaction is beneficial both for Spanish consumers and the telecom sector as it will ensure the sustainable roll out of 5G and fibre on a wider scale within a very competitive market.”

Preliminary concerns

The preliminary phase of the EU merger probe identified several initial concerns: the merger of two close competitors might impact the retail supply of mobile services and access to fixed broadband and lead to multiple-play bundles like convergences between fixed and mobile services.

The Commission fears that the company resulting from the merger would have the means and incentive to restrict access to their mobile networks to virtual operators, telecom companies that do not own network infrastructure but access it via commercial agreements with network operators.

Virtual mobile operators are usually more agile and can offer cheaper mobile services than legacy operators. Therefore, restricting their ability to compete would inevitably lead to a reduced offer for low-hand users and increased wholesale prices.

“We want to ensure that Spanish consumers continue to benefit from affordable and high-quality telecom services, including from virtual operators that need competitive wholesale access to fixed and mobile networks to offer their services in retail telecom markets,” said EU competition chief Margrethe Vestager.

The Orange-MasMovil case is not only relevant to Spain. It might provide a testbed for the entire European telecom market, where large operators have been pushing for greater consolidation of the sector that they say is plagued by excessive competition leading to low-profit margins that do not incentivise investments.

Broader context

In 2016, the EU competition department blocked a similar merger in the UK between Three and O2, a subsidiary of the Spanish Telefonica, arguing that a four-to-three tie-up of mobile operators would change the market dynamics, namely in terms of competitive pressure on low-hand users.

The Commission’s decision was overturned before the EU General Court, a ruling the EU executive appealed before the EU Court of Justice. The final verdict is not out yet, but the Advocate General, an influential legal advisor to the Court, largely sided with the Commission in its opinion.

However, the situation has changed since then, as the EU has set ambitious targets of ubiquitous high-capacity networks by the end of 2030, with national governments increasingly pressuring mobile operators to speed up the costly rollout of 5G.

“If the merger is allowed to proceed, it could trigger a string of similar mobile mergers across Europe. That means there is a lot of pressure: the Commission may decide that the merger would help support faster 5G and fibre rollout in Spain. But if they get it wrong, then only the firms’ shareholders will win,” Zach Meyers, a research fellow at the Centre for European Reform, told EURACTIV.

For Meyers, the odds might be set against the merger, as raising prices might be particularly unpopular during raging inflation. Recent comments from Internal Market Commissioner Thierry Breton suggested he might support cross-border mergers rather than domestic ones.

At the same time, Vestager reiterated time and again competition, not consolidation, drives innovation. Since she took office in 2015, virtually all four-to-three mobile mergers have been blocked except in the Netherlands, where the resulting entity was still the third-largest operator.

However, according to telecom legal expert Innocanzo Genna, the initial concerns raised by the Commission might signal a change of approach, whereby competition in a mobile market is not assessed based on the number of operators but on the presence of a competitive wholesale market.

Genna remarks how that used to be the approach of the Commission before Vestager took office when Brussels cleared several four-to-three mergers while forcing the concerned company to open up their networks to more mobile virtual operators.

The European Commission has until 21 August 2023 to finalise its decision.