Consolidation is finally top of the agenda

Citation

Curwen, P. (2015), "Consolidation is finally top of the agenda", info, Vol. 17 No. 5. https://doi.org/10.1108/info-03-2015-0019

Consolidation is finally top of the agenda

Article Type: Rearview From: info, Volume 17, Issue 5

A regular column on the information industries

It has been a constant refrain in previous rearviews and articles – see illustrative references below – that if technology waits for no man, then consolidation among network operators must surely follow. However, there have inevitably been false dawns because consolidation requires not merely the presence of willing buyers and sellers but an accommodating regulatory regime and, until recently, this combination has been rare on the ground.

Nevertheless, it does finally appear to be the case that the need for consolidation has risen to the top of the agenda and that all concerned are taking a more realistic approach to this issue. The primary driving force is, as ever, technology. Long-Term Evolution (LTE) is now up and running, as indeed is its Advanced version (LTE-A) in many countries. To accommodate it, new licences have had to be issued and new spectrum bands – primarily the 800 MHz and 2.6 MHz bands – opened up. However, it is not just that operators are faced with additional licence fees and the associated roll-out costs of upgrading networks – at a time when many 2G and 3G licences are also coming up for renewal at much higher fees than when previously issued – but in addition, this is taking place at a time when regulators are forcing down the prices that can be charged to customers by, for example, heavily reducing highly profitable roaming and termination charges.

The extensive analysis by Curwen and Whalley (2015) demonstrates conclusively that the issue of 3G licences throughout Europe, broadly defined, has barely affected competition in most countries – a conclusion that also holds true in the rest of the world. Only Hutchison Whampoa has made any kind of impact in Europe, and then only due to its willingness to lose large quantities of money in the process. In the case of 4G – predominantly LTE – there is clear evidence that regulatory bodies have learned from this experience and have accepted that only 2G/3G incumbents are in a position to roll out new national networks. However, what they are struggling to accept is that even incumbents come in all shapes and sizes and that many lack the resources to invest at the required level.

This feature of a great many individual markets is closely tied up with the strategies of the 25 or so main international operators. As noted in the references, you can only buy what is available and sometimes this forces you to pay over the odds. Hence, over the medium to long term, parts of the portfolio of networks owned by any given operator may come to make little strategic sense because, for example, of a lack of control, geographic isolation relative to other assets or simply unsustainable losses.

This may not matter when debt levels are manageable and there is scope to cross-subsidize. But when heavy investment is needed to improve networks, as is currently the case, an operator’s thoughts will necessarily turn towards rationalization of its asset portfolio. This may be achievable via mergers, asset sales, network-sharing or a variety of other devices, but structural remedies are bound to loom largest, as these involve sums running to hundreds of millions or possibly billions of dollars.

In some cases what will happen is that a network will be sold to a non-incumbent, in which case the number and relative size of the existing networks will – at least initially – remain unaffected. As it follows logically that most of the networks put up for sale are either relatively or absolutely unprofitable, it might seem surprising that any such purchases take place. However, the buyers may prove, for example, to be a well-funded incumbent in another country that seeks to become internationalized or a financial intermediary that believes in its ability to turn around the fortunes of a struggling network and sell it on at a profit.

In the case of Europe, a significant example of this phenomenon is to be found in the behaviour of América Móvil which, facing competition in its Mexican home market and elsewhere in Latin America, has taken a majority stake in Telekom Austria and a minority stake in KPN. Another example is the Altice Group, which acquired France’s SFR from the Vivendi Group and followed up by making an offer for Portugal’s TMN in November 2014.

While such restructuring does not affect the number of incumbents directly, it does have an indirect effect because a previously weak operator will find itself with an enhanced ability to compete and this, in turn, will force the other incumbents to reconsider their own strategies.

The clearest example of a radical restructuring is to be found in the UK. Two networks, owned by highly internationalized operators in the form of France Télécom and Deutsche Telekom, decided that they would be better able to compete with Telefónica, Vodafone and Hutchison (3UK) by engaging in a 50/50 merger. The resultant Everything Everywhere rapidly evolved into EE only for the decision to be made that the market was excessively competitive and, hence, that the network should be put up for sale. It is of no small interest that the buyer will almost certainly turn out to be fixed-wire operator BT, which long ago shed its mobile subsidiary O2 – currently owned by Telefónica. But Telefónica UK is itself under offer from Hutchison (which itself has a network-sharing agreement with EE). Hence, assuming that all of the restructuring takes place, what was not long ago a country with five networks will end up with only three.

Meanwhile, the largest European country, Germany, has also found itself left with only three networks after Telefónica was permitted to take over E-Plus (KPN). Equally, Hutchison has been permitted to buy both Orange in Austria and Telefónica in Ireland. In Denmark, TeliaSonera and Telenor have agreed a 50/50 merger subject to regulatory approval while, in Italy, Hutchison is negotiating an on-off merger with VimpelCom (Wind).

It can be argued that there is a potentially high price to be paid for permission to merge – the remedies exacted typically include the return of some spectrum for re-allocation to a new entrant (should one ever express an interest), the opening up of networks to mobile virtual network operators (MVNOs) and so forth. But this cannot hide the basic reality which is that regulators now accept that they cannot dictate the structure of a market. Obviously, they retain in principle the power to prevent mergers, but at the end of the day, if an operator wants to sell out, but cannot do so, it is not going to invest and will effectively lose its capability to compete. On the whole, permission to merge subject to stringent remedies would appear to be a preferable option.

As indicated above, consolidation is not confined to Europe. Indeed, it can be argued that Europe is following the path already evident in the USA where there are currently only four incumbents with national footprints, and two of these – AT&T and Verizon Wireless – are considerably larger than the other two – Sprint and T-Mobile USA.

China is not strictly relevant, as the low number of incumbents for such a vast country, three in total, is the result of an administrative rather than a market-based decision. India, the world’s second-largest market, is a different matter altogether. Because licences are issued for 22 separate “circles”, there are too many incumbents. At the time of writing (March 2015), a massive auction is taking place involving both licences up for renewal and licences in new spectrum bands. Eight operators are involved in the bidding but several others have chosen not to participate. After offers worth $15 billion had been speedily lodged, financial intermediaries began to express their reservations about lending to the bidders, arguing that operators seemed primarily concerned with retaining existing licences and protecting existing revenue streams with consequent damage to their future profitability and ability to invest. Mergers are now inevitable.

A note of caution should be introduced at this point. Not everyone is persuaded that consolidation leads to increased network investment. For example, the new anti-trust commissioner in the European Commission has gone on record with the claim that she has seen a number of examples where the opposite is true. She may accordingly prove to be less willing to approve merger proposals than her predecessor. Nevertheless, the reality is that she is clearly swimming against the tide of history and that consolidation has become an unstoppable force.

Peter Curwen

Peter Curwen is Professor at the Newcastle Business School, Northumbria University, Newcastle upon Tyne, UK.

Reference

Curwen, P. and Whalley, J. (2015), “The licensing of mobile operators in Europe and the consequences of new entry for competition”, Info, Vol. 17 No. 3.

Further reading

Curwen, P. (2001), “Will European incumbents ever get together?”, Info, Vol. 3 No. 6.

Curwen, P. (2011), “Question for Vodafone: are minority stakes worthwhile?”, Info, Vol. 13 No. 2.

Curwen, P. (2013), “The battle for spectrum leads to M&A in the USA”, Info, Vol. 15 No. 3.

Corresponding author

Peter Curwen can be contacted at: mailto:pjcurwen@hotmail.com