Significant merger activity in the telecoms sector provides a window into merger regulation and control on a global scale, writes Kalpana Tyagi

The past few years have been dynamic for the telecommunications sector worldwide. Significant concentration enhancing horizontal and non-horizontal merger activity has taken place in the telecoms sector notably across three jurisdictions – the EU, the US and India.

These mergers traditionally involve players in the same market, but ever more frequently they comprise players in related markets, such as a merger between a mobile network operator (MNO) and a cable operator, or two neighbouring markets, such as a merger between a fixed-line telecoms player and a media company.

India’s telecoms sector has recently been centre stage for all aspects of competition law. For example, there were alleged claims of predatory pricing against Reliance Jio Infocomm (Reliance Jio), which in turn claimed that Airtel, Idea and Vodafone, and the industry body Cellular Operators Association of India (COAI), colluded to prevent its successful market entry by refusing to provide sufficient network connectivity.

The former complaint was dismissed by the Competition Commission of India (CCI), but the latter is pending appeal before Delhi High Court. In July 2019, the Digital Communications Commission (DCC) confirmed penalties totalling €30 billion (US$425 million) on Bharti Airtel and Vodafone for allegedly refusing Reliance Jio sufficient points of interconnection in 2016.

The DCC, acting as an advisory body, accepted the recommendations from the Telecom Regulatory Authority of India (TRAI) and suggested that the Department of Telecommunication (DoT) impose the fine. The DoT accepted the DCC recommendations, and levied the fine proposed on Airtel Bharti and Idea/Vodafone.

Concurrently, the industry also saw two big-ticket mergers in the sector – the Vodafone/Idea merger, and Airtel’s acquisition of Norwegian Telenor – both being cleared without conditions by the CCI. The Indian telecoms sector, thus, has shown a great deal of activity in terms of both ex-ante (merger control) and ex-post (abuse of dominance – predatory pricing, refusal to deal, and anti-competitive agreements). This feature focuses on ex-ante merger control in telecoms and media.

Mergers between two MNOs or two fixed-line operators, such as the merger between Idea and Vodafone in India, or AT&T and T-mobile in the US, or Telefónica Deutschland/ E-Plus in Germany, are referred to as horizontal mergers.

Idea/Vodafone was a five-to-four merger (5-4) that established India’s largest MNO, the merged Idea/Vodafone. The merger following a detailed review and received unconditional clearance from the CCI. Both AT&T/T-Mobile and Telefónica Deutschland/E-Plus were four-to-three (4-3) mergers, and were respectively prohibited by the US Department of Justice (DoJ), and conditionally cleared by the European Commission (EC).

The key issue with horizontal mergers is the change in level of concentration following the merger. To answer this question, the competition authorities are more or less unanimous regarding the change in the level of concentration following a merger that the Herfindahl Hirschman Index (HHI) is a good indicator of the potential adverse impact on the relevant market.

The final decision in these 5-4 or 4-3 telecoms mergers, though, is far from settled and interestingly, often the remedial design – that is the design, nature, approach and scope of merger remedies – may be the key to balance the pro- and anti-competitive effects of the transaction.

On the non-horizontal front, the telecoms sector has been equally vibrant. Unlike horizontal mergers, there is a lot of noise and little consensus when it comes to assessing their impact on competition. Convergence in the telecoms sector, and the accompanying regulatory changes prompted MNOs and fixed line players to seek vertical and conglomerate integration.

Some recent notable mergers include the acquisition of Ziggo by Liberty Global in the Netherlands (Liberty Global/Ziggo) and the more recent AT&T/Time Warner merger. Whereas AT&T/Time Warner was a pure vertical merger that was recently unconditionally approved by the US courts, Liberty Global/Ziggo involved both horizontal and non-horizontal aspects and received the conditional approval of the European Commission.

On 6 December 2018, about six months after Judge Leon’s decision, a three-judge panel of the US Court of Appeals for the District of Columbia Circuit dismissed the DoJ’s appeal in entirety. As the DoJ formally announced it would not appeal the circuit court’s decision, the AT&T/Time Warner merger, the first (and unsuccessful) vertical merger challenge in 41 years in the history of US antitrust enforcement, has evidently set the ground rules for the review of media and telecom mergers.

Regulator’s perspective

The reasons why we see such an accelerated pace of consolidation across different jurisdictions are varied.

In India, following the entry of Reliance Jio, incumbent operators in India have resorted to significant M&A activity. To consolidate its position and regain the top spot from the newly formed entity, Bharti Airtel acquired Telenor India Communications from its Norwegian parent company, Telenor. Airtel also acquired Tata Teleservices (TTSL) and Tata Teleservices (Maharashtra) from the parent group, Tata Group of Companies.

Both these acquisitions were expected to strengthen Airtel’s spectrum and customer base in the Indian market. More recently, Reliance Jio purchased valuable infrastructure assets from Reliance Communications (RCom). Earlier, in 2013, Reliance acquired substantial stakes in TV18, a transaction that was unconditionally approved by the CCI on competition grounds, but left many of the media plurality-related issues unresolved.

In the US, Comcast/NBCU/JV was a joint venture between Comcast, at the time the largest video programming distributor and a leading telecom operator in the US, and NBCU, a tier-one content producer and aggregator. The DoJ was principally concerned about the impact of the joint venture on competing over-the tops’ (OTT) continued ability to offer meaningful competition in the downstream market for the distribution of content. OTTs deliver film and TV content via the internet without requiring users to subscribe to a traditional cable or satellite pay-TV service. To alleviate the DOJ’s concerns, the parties offered a range of remedies including FRANDly (fair, reasonable and non-discriminatory) access to the online video programming distributors.

Even though the 2018 AT&T/Time Warner merger raised concerns very similar to the 2011 Comcast/NBCU/JV, and the DoJ employed a similar framework to assess the resulting harm to competition, the courts – first the district court, and then the circuit court in AT&T/Time Warner – revealed prudence and business sense by refusing to enjoin the merger. This unconditional clearance of AT&T/Time Warner was closely followed by other notable deals, such as Comcast’s takeover of Sky (Comcast/Sky) and 21Century Fox’s acquisition of Disney (21CF/Disney). In 21CF/Disney, a merger with significant horizontal overlaps, the DoJ, following a quick six-month review, conditionally cleared the merger as the parties offered a minimal remedy package to divest 22 of Fox’s regional sports networks in the US.

New Zealand offers a very interesting example of a recent prohibition decision. In 2017, the New Zealand Commerce Commission prohibited a merger between Sky, the country’s leading pay-TV provider, and Vodafone, the top fixed/mobile telecoms operator. The commission relied on a similar analytical framework as the US and the EU competition authorities.

Using “strategic foreclosure theory”, the commission’s assessment revealed that the merger would result in the foreclosure of the competing telecoms service providers. As the commission cannot accept behavioral commitments (section 69A, Commerce Act, 1986), and the parties failed to offer suitable structural remedies, the proposed Sky/Vodafone merger was prohibited by the commission.

In the EU, some notable mergers have been reviewed by the EC. HBO/Ziggo/HBO Nederland was a full-function joint venture between HBO and Ziggo, active in the linear TV sector in the Netherlands. The EC unconditionally cleared the merger as the joint venture neither had the market power, nor the ability or the incentives to engage in either an input or a customer foreclosure strategy.

In Liberty Global/Ziggo, the merger combined the largely non-overlapping “geographic footprints of UPC and Ziggo”, collectively covering over 90% of the Netherlands. To alleviate the EC’s competition concerns, the parties offered to divest Film 1 (subsequently sold to Sony). In addition, the parties offered to ensure the effectiveness of OTT content via its internet network, by maintaining “sufficient interconnection capacity” for OTTs through at least three uncongested routes on its IP network (including one large transit provider) in the Netherlands.

In the Belgian Liberty Global/BASE, the EC assessed the impact of the transaction on fixed/mobile (F/M) bundles as the merger combined Telenet, an owner of fixed telecoms infrastructure, and BASE, an owner of mobile telecoms infrastructure. Interestingly, even though this was a typical telecoms/media merger, and BASE was an MNO, and Liberty Global offered only Mobile Virtual Network Operator (MVNO) services, competition concerns were identified not in the market for multi-play bundles, but in the Belgian market for retail mobile telecoms.

In all the above-mentioned mergers, the EC employed the well-established switching analysis and Nash equilibrium bargaining framework to assess whether total or partial foreclosure, or threatening the use of one, may be a profitable strategy.

Earlier this month, the EC announced in-depth investigations into Swedish telecom company Telia’s proposed acquisition of Bonnier Broadcasting’s TV operations. The commission’s principle concern is whether the merger may lead to a reduction in choice and increase in prices for the retail TV distribution in Finland and Sweden.

In this context, it may also be useful to make a passing reference to Telia’s acquisition of Get and TDC Norway last year. Both Telia and Get/TDC were identified as key players in the Norwegian telecoms and media market. Following a detailed investigation, including an extensive market study, the Norwegian Competition Authority (Konkurransetilsynet) unconditionally cleared the merger.

It may also be interesting to watch if the currents of the AT&T/Time Warner decision flow across the Atlantic. In other words, whether the commission through this decision establishes a more progressive approach to the bargaining theory framework – taking due account of not only the post-merger bargaining advantage of the merged Telia/Bonnier, but also of the emerging monopsony power of the OTTs.

Challenges ahead

The key challenge for the telecoms and media companies in the EU and the US in recent times has been the emergence of the OTTs. OTTs substantially benefit from the last mile connections offered by the telecoms players and the content created by the media companies. Though a good source of revenue for the telecoms and media companies, respectively, the unprecedented success of the OTTs has to a significant extent diminished the position of these telecoms and media players to “pipe providers” and “content providers”, respectively.

To counter this challenge, consolidation in the telecoms sector has been a key trend. Considering the high value of these transactions, these mergers have also been subject to the review of the competition authorities. Both the US and the EU competition authorities conditionally cleared all these transactions. The only notable exception was the AT&T/Time Warner merger – which the DoJ requested the US courts to enjoin. However, both the US district court and subsequently the circuit court refused the DoJ’s request in entirety, meaning that the merger eventually received an unconditional approval.

In India, we are yet to see an impact of these notable merger decisions in the telcoms/media sector. With hundreds of national channels and thousands of regional channels, the most notable concentration to date is the 2012 `2,700 crore acquisition of a stake in Network 18 and TV18 by Reliance – a transaction that received the unconditional approval of the CCI. The merger was, however, subject to heavy criticism on account of its alleged impact on “media plurality”.

With pure mobile mergers, it may be befitting to conclude that there really is no magic number to dial! What is a suitable number of mobile network operators – five or four or even three – is a complex question that has so far been decided by the competition authorities on the basis of the following three factors.

First, what is the level of effective competition – pre-merger and post-merger – in the relevant market? Second, the relevant theory of harm – non-co-ordinated or unilateral effects being the most relevant theory under consideration. And finally, the set of merger remedies submitted by the parties.

If the remedies manage to alleviate the commission’s competition concerns while preserving the merger-specific efficiencies, then even a 4-3 can be the magic number to dial, and clear the congested network.

An Indian-qualified competition lawyer with a specialization in business strategy, Kalpana Tyagi works as a research scholar on artificial intelligence and blockchain technology at CREDI, Center for Legal Informatics, Department of Law, Aarhus University, Denmark.