On 2 July 2014, the European Commission granted conditional approval of the German acquisition of E-Plus by Telefonica Deutschland. This merger is set to create Germany’s biggest network, reducing the number of operators from four to three, positioning Deutsche Telekom in second place and Vodafone in third. This follows approval of a similar merger in Ireland with the acquisition of Telefonica Ireland by Hutchison 3G Ireland where the number of networks were also reduced from four to three.

With the approval of both mergers (albeit subject to conditions), the Commission appears to accept that a level of concentration in markets well known for high barriers to entry is not necessarily bad for competition. The underlying philosophy is that competition between three as opposed four networks will not automatically result in a lessening of competition at the expense of consumers if those remaining market participants are better equipped to compete vigorously with each other. The conditions imposed in relation to each merger are aimed at sharpening their ability to compete. This is likely to “light the blue touch paper” on a wave of consolidation in the struggling EU mobile sector.

During its investigation into the proposed merger, the Commission identified the following concerns:

  • By bringing together the third and fourth largest mobile network operators in Germany, the merger would lead to a change in competitive dynamics and a reduction in competitive pressure as E-Plus’s aggressive and innovative competitive strategies would be extinguished and Telefonica’s competitive force also reduced.
  • The reduction of four to three mobile network operators would further concentrate an already concentrated market with high barriers to entry.
  • The merger would further weaken the competitive position of other market players including, mobile virtual network operators (MVNO’s), service providers and branded resellers.

Despite opposition from the national German telecoms regulator who believe reduced competition will lead to higher prices for consumers, the Commission emphasised that the conditions imposed on the merger would protect competition.

The Phase II investigation, which was launched on the 20 December 2013, has now concluded and has conditionally approved the merger on the basis that Telefonica have agreed to the following three commitments:

  1. Telefonica must sell, before the acquisition is completed, 30% of the merged entity’s network capacity, to up to three new or existing MVNO’s in Germany at fixed payments. Telefonica’s commitment to wholesale a fixed capacity as a dedicated ‘pipe’ rather than on a pay as you go basis, ensures mobile virtual network operators ability and incentives to compete aggressively on the market are increased. In addition it seems to establish a sizeable new competitor from the outset, given that 30% capacity corresponds to a market share of up to 11%.
  2. Telefonica must offer to divest radio wave spectrum and certain assets either to a new mobile network operator or to the mobile virtual network operators who have taken up the network capacity (see above). This commitment will facilitate the entry or enable the development of new entrants into the German market in the future.
  3. Telefonica must extend existing wholesale agreements with Telefonica’s/ E-Plus partners, including offering 4G capacity at wholesale and remove all clauses preventing partners from switching customers. These commitments ensure that German MVNOs and service providers can gain security for their current services and also use the 4G incentive as a negotiating tool in relation to Deutsche Telekom and Vodafone.

The conditions imposed by the Commission in this particular case mirror the previous approval of the acquisition of Telefonica Ireland by Hutchison 3G Ireland. There, similar conditions were required in a merger which also reduced the major competitors in the market from four to three.

Although the markets concerned are national, the Commission is keen to deal with large mergers in the mobile telecommunications sector, in order to ensure consistent application of the merger control rules in the EU.