Business | Telecoms

Seeking another path

With in-country mergers blocked, mobile-phone firms in Europe must now find other ways to grow

|PARIS

THREE was a magic number. At least, that was what mobile-phone operators and regulators in Europe believed a few years ago. Letting just a trio of rival companies compete inside each national market would supposedly produce decent outcomes. Customers would see enough competition to deliver low prices and innovative service; firms, despite mature markets with already high penetration rates, would get profits plump enough to allow them to invest in infrastructure, such as for rolling out 4G and 5G services.

Allowing so few operators was intended to bring other boons. One argument of proponents was that if companies could bulk up in-country they would try cross-border mergers next, creating European rivals to American giants such as AT&T and Verizon. Another was that having just three firms would actually limit the dominance of the biggest fish—usually the former monopoly, such as Deutsche Telekom or British Telecom—because the two smaller players would challenge the biggest, not scrap with other minnows. Another claim, just as hard to prove, was that regulators, by waving through mergers, would encourage dynamic markets. Mergers offered an exit for those who invest in, or launch, smaller telecoms firms. Blocking mergers, in contrast, would deter them.

For a time European regulators accepted the received wisdom. So mergers took place in Austria in 2013, then in Ireland in 2014, reducing those markets to three operators from four. Firms in bigger countries prepared to move. Orange, France’s leading operator, held talks from January to buy Bouygues, the third-largest, for an expected €10 billion ($11.3 billion). In Britain CK Hutchison, which operates the brand Three, agreed last year to pay £10.25 billion ($15 billion) for O2, the second-ranked operator, owned by Spain’s Telefónica. And in Italy another merger involving Hutchison was proposed. In each case, the number of operators would have fallen to three.

None of these big mergers is now likely. French officials quietly scotched the Orange-Bouyges deal in April, before it troubled Europe’s regulators: they apparently fretted that Martin Bouygues, a billionaire industrialist, would get too much clout in the newly merged firm. Orange is partly state-owned and is seen as a national champion. Last week the EU’s competition commissioner, Margrethe Vestager, scrapped the British merger, anxious that a lack of competition would hurt consumers. Most in the industry expect she will block the proposed Italian merger between Hutchison and VimpelCom too. In March she launched an “in depth” study into the effect it would have on competition.

Ms Vestager is not alone in doubting the magic of three operators. Britain’s regulator also opposed the Three/O2 merger. And research last year by the OECD suggests users prosper with four operators. After Austria lost its fourth, costs for consumers promptly rose. When France gained a disruptive and innovative fourth player, Free, in 2012, prices fell quicker than before, even as spending on infrastructure rose. In both countries four operators offered customers better international roaming deals than three did. As for spending on networks, other analysis from OFCOM , Britain’s communications regulator, has found “no linkage between consolidation or higher concentration in mobile markets and an increase in investment”.

Some in the industry are dismayed. “Both EU and UK regulators seem only concerned with consumer pricing and don’t think of the bigger picture,” complains Bengt Nordstrom, who advises firms on mergers. He warns that blocking unions of smaller firms will mostly help market leaders, which he says typically grab over 50% of industry revenues already. And markets dominated by former monopolies, he worries, will foster too little competition in building networks and laying fibre cables to prepare Europe for future digital growth.

If in-country mergers are off the table, firms need other ways to prosper. One option might be for more to share networks, thereby cutting costs. Another is for more mergers of fixed-line and mobile business. In Britain BT, a fixed-line operator, has bought EE, a mobile firm. In the Netherlands Liberty Global combines fixed and mobile. Vodafone, the most successful example of a pan-European mobile firm, present in 14 countries, is in fixed-lines too. Vodafone’s boss, Vittorio Colao, said on May 17th his firm had just enjoyed the “first quarter of positive revenue growth in Europe since December 2010”, after spending £19 billion on infrastructure.

Yet fixed-mobile mergers are no cure-all, argues James Barford of Enders Analysis, a consultancy. Whereas in-country mergers of mobile companies offer lots of efficiencies, combining fixed and mobile delivers more modest benefits. Worse, these tend to accrue to more dominant firms, notably old fixed-line incumbents.

What really counts, says Mr Barford, is how firms are placed to transmit huge quantities of data to customers, mostly for watching video clips and TV. He estimates that telecoms firms already make about half of their revenues from data, and mobile-data volumes are rising by 60% to 70% a year. The mobile business is increasingly about transmitting bytes, which depends on how much of the spectrum a firm controls and how efficiently it is used. Small firms with rights to the spectrum could thus look for new sorts of partners. Outsiders—perhaps private-equity firms with deep pockets, says Mr Nordstrom—may want to team up with them to roll out television, internet, mobile, fixed and other flashy services. So there is life beyond in-country mergers.

This article appeared in the Business section of the print edition under the headline "Seeking another path"

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