Consolidation in the telecom market is heating up around the world, particularly in Europe. Historically, when evaluating mergers, regulators would review the number of competitors and the market share of proposed entities. This approach may have been appropriate when an operator had a single network offering a single service, such as telephony or linear television.  However today’s world is different. Networks deliver competing services.

Authorities may also require “remedies” as conditions for merger approval. The notion is that the authority needs to somehow correct an imbalance or inequality created by the merger. However remedies in themselves can create new and unintended imbalances and inequalities.  Therefore it is time for operators, regulators and competition authorities to update their knowledge on what creates competition in the telecom market.

This research note describes the four factors which increasingly contribute to competition in the telecommunications market and why these factors should be included in the assessment of the consolidation and the design of remedies. The four factors are (1) competition from over the top (OTT) providers, (2) network technology evolution, (3) whether the parties are single play vs. full service providers, and (4) future regulation.

1. Competition from over the top (OTT) providers
OTT providers compete with operators across a range of communication and content services.  Users can easily complement, if not substitute, OTT services for traditional telephony and video services.  For example Skype can be used for long distance; Facebook/Whats App for messaging, and YouTube and Netflix for video. One advantage for OTT providers vs. network providers is that they can offer their services without making investments in the underlying network on which their service is delivered.

2. The evolution of network technology
Operators have invested significantly to upgrade their networks to deliver a range of new services. In the old days, cable TV providers only used their platform to deliver linear TV.  Today they can offer broadband, telephony and video on demand.  The network platform and the customer base are evolving and expanding the operator’s business and competition.

3. Single Play vs. Full Service Providers
There is a big difference in being a quatro play operator vs. a single play mobile operator.  Operators differentiate in the kinds of products they offer, an important factor that needs to be considered in merger analysis. For example a single play mobile operator only offers mobile products whereas a fixed lined operator can offer broadband, TV, telephony, and wireless.  Being a one-stop shop for consumers is a different business model than being a pure play.

4. Changing Regulation in Investment Time Horizon
Regulation of the telecommunications industry is not static. Operators which buy a license and build a network frequently find that they undertake an investment at one point in time only to find the authorities “change horses in midstream” or “change the rules of the game” down the road.  In practice this makes it very difficult for operators to plan in advance for network investment—and makes shareholders more risk averse. As operators see the specter of a range of politically-motivated regulation, whether wholesale pricing or net neutrality—they may find their business case reduced.

In looking at remedies from recent European mergers, it appears that regulators and competition authorities have not taken these four factors into consideration.

OTT services sharpen competition. However they can also make it less attractive to invest in infrastructure. Operators cannot earn the same returns as they have in the past, as consumers can substitute free services from OTTs in lieu of paid operator services.

How mobile operators can reduce cost for mobile masts and improve mast regulation

Moreover operators have to manage systematic and structural inequalities. One is the proliferation of flat rate business models. These models are popular, but in effect they amount to low-consumption customers who use little traffic to subsidize high consumption customers who consume a lot of traffic. Another inequality is the disproportionate impact of OTT video traffic on networks.  Whereas multicasting technology used by cable operators makes efficient use of bandwidth, traffic from a single video provider such as Netflix can devour more than a third of the network capacity.  Netflix’s transformation to a streaming video provider would never have happened if it were not for telecom networks. See Strand Consult’s research note. In any event OTTs with their extensive reach and customer bases are operators in their own right. Strand Consult describes this here.

The evolution of network technology
There are many suppliers that research and develop the network technologies that are the foundation for mobile and fixed networks. The race to develop the next generation of technology is one of the key tenets of competition and a driver of investment. Technological developments also help consumers realize greater value for their money. In a world where prices are falling, competition between different technologies has never been greater. Technological advancement is key driver of competition in the American market. Strand Consult describes it in this research note.

Single play vs. full service providers
Whether an operator is a vertical player offering only one type of product is very different from a horizontal operator offering a wide range of services.  It is important to remember that the market for single-play products is still larger than that of quatro-play.  However quatro-play customers are more desirable as they have an higher ARPU and lower churn.

Whether an operator is single or full service can have a crucial impact in the marketplace.  Assessing this parameter adequately can be a complex undertaking.  Many critics of consolidation fail to recognize, let alone understand, how operators attempt to differentiate by offering a variety of services. A number of the mergers right now involve vertical pure play mobile operators attempting to differentiate by offering their own OTT solutions, such as TV over the internet offered through a variety of apps. This is an important input to competition.

Future regulatory requirements for the telecom industry
The telecom industry bears heavy responsibilities as a result of extensive sector-specific regulation. Authorities seem to take for granted that operators will continue to invest with mounting regulatory obligations. A key example is net neutrality, a concept that is notoriously hard to define and is associated with different provisions in every country.  It is not reasonable to expect operators to invest in networks if they are barred from experimenting and deploying business models which cater to different needs and budgets. Strand Consult’s research note explains how many operators will hold back on investments as regulators make increasingly onerous demands.

Current  and future regulation of wholesale prices for fixed-line and mobile market can have a major impact on competition and companies’ willingness to invest. Regulators in a number of countries have chosen to regulate the wholesale market by requiring the consolidating operator to sell their wholesale traffic on very favorable terms to MVNOs. The kind of regulation can impact the parties that are not a part of the consolidation. Read the research note describing this trend.

It can sometimes be the case that a lack of regulation can be a problem. This was previously the case in Denmark where mobile operators failed to deploy needed mobile masts because of obstacles at the local level.  Lacking an overall framework for network deployment, operators faced a series of arbitrary blocks and delays and inconsistent site rental prices. Strand Consult’s report How mobile operators can reduce cost for mobile masts and improve mast regulation describe how these challenges were addressed and a framework for better mobile coverage for created. It is now easier and cheaper to build and operate mobile networks in Denmark.

As technology changes the market, the risk for regulatory errors increases.  Remedies may do more harm than good. The question is whether authorities dare to involve the elements described here and in other research notes. Put simply, the factors described here create a complex operating environment that challenges the way authorities assess consolidation. Regulators and competition authorities need to consider these four factors when they assess competition in a given market, lest they catalyze a situation described in this research note.

To learn more about this subject and access Strand Consult’s special reports on this topic, including an analysis of the current merger between Telenor and Telia, contact Strand Consult.