07 October, 2015

ETNO ThinkDigital Blog Post - New CERRE study: Concentration in the mobile communications industry generates a true economic trade-off

"A merger will have static price effects to the detriment of consumers but also dynamic benefits for consumers, as investments can enhance their demand for services." Professor Bruno Liebhaberg, #ThinkDigital

Setting the Scene

Europe is experiencing a wave of merger activity in the telecommunications industry that may lead to the consolidation of the EU’s telecommunications market. In mobile telecommunications in particular, the EC has recently cleared 4-to-3 mergers in the Netherlands, Austria, Ireland and Germany but its concerns regarding the impact on prices and competition have, just last month, prevented a similar merger in Denmark. A 4-to-3 merger is currently under scrutiny in the UK, and another one might soon be examined in Italy. Earlier decisions had dealt with, and approved, 5-to-4 mergers in Austria, the Netherlands, and the United Kingdom.

The debate extends beyond Europe. A 4-to-3 merger in Australia was approved in 2009. In the US, the federal regulator (FCC) blocked a merger between AT&T and T-Mobile in 2009 and then indicated that it would not allow a merger between T-Mobile and Sprint in 2014. The latter deal may, however, be reignited soon due to further changes in the US telecoms competitive landscape.

Prices, investments, and market structure: finding the right balance

These mergers have been discussed in the context of considerable debate regarding the relationship between market structure and market performance. Competition and regulatory authorities typically focus on the pricing implications of mergers, as they are concerned that increased concentration comes with higher prices for end users. However, authorities seem to have paid less attention to the impact that such mergers could have on efficiencies, and, especially, investments. Mobile operators argue that their revenues continue to decline due to increasing competition from global Internet players, such as Skype and WhatsApp, offering alternative services. At the same time, operators argue that they are investing large sums into their broadband networks to meet the demand for data traffic. Consolidation, via mergers, is for them an attempt to maintain profitability levels and keep up with investments.

A new CERRE report highlights the relationship between prices, investments, and market structure. It is co-authored by Tommaso Valletti, a Joint Academic Director of CERRE and Professor of Economics at Imperial College London and at the University of Rome as well as a member of the Economic Advisory Group on Competition Policy (EAGCP) at the European Commission, Frank Verboven, Professor and Chairman of the Department of Economics at the University of Leuven, and also a member of the EAGCP, and Christos Genakos, Assistant Professor at the Athens University of Economics and Business, and Research Economist at the London School of Economics’ Centre for Economic Performance.

It looks at the potential differences between more and less concentrated markets. The conclusions are very important: while prices of mobile services have been declining constantly over the past decade, the study shows that, compared to markets in which there were no major changes in concentration, mergers lead to significant growth in investment per operator as well as an increase in prices, though at a lower rate.

This pioneering study uses an empirical approach by looking at the experience of thirty-three countries in the period 2002-2014. The report’s authors have collected what is, to their knowledge, the largest dataset employed to-date for works of this kind. It provides relevant and comparable information at the operator level, between countries and over time.

The dataset spans a time period long enough to capture changes in market structure (especially entry via licensing, and exit via mergers) that provides ideal variation in the data to assess how market structure impacts on prices and investments, holding other factors constant.

The study helps quantify the likely horizontal effects of a merger which are only one - albeit important - element of the competitive assessment of complex mergers. The authors find that an increase in market concentration in the mobile industry generates a true economic trade-off. While a merger will increase prices, investment per operator will, according to the authors’ analysis, also increase. For example, an average hypothetical 4-to-3 symmetric merger, according to the data collected, would suppose an increase in the bill of end users of 16.3% when compared to a situation in which no merger would have occurred. At the same time, capital expenditure (the proxy used for investment) would go up by 19.3% at the operator level.

Supporting the Digital Single Market

European merger policy has often maintained a de facto primacy of low prices over dynamic benefits in the form of more investments. This has inhibited investment at a time when the Digital Single Market constitutes a policy priority in Europe.  Enhanced by the statutory independence of CERRE, the widely acknowledged expertise of its authors and a robust methodology and analysis, the report’s conclusions are very important. They highlight the fundamental trade-off which needs to be properly addressed by regulators when assessing consolidation cases in the mobile communications industry: a merger will have static price effects to the detriment of consumers but also dynamic benefits for consumers, as investments can enhance their demand for services. This new CERRE study should be seen as a contribution to the always complex task faced by competition authorities. As such, it constitutes a perfect illustration of the mission of CERRE (www.cerre.eu), as our think tank is entering a new growth phase in its development.

By Professor Bruno Liebhaberg for ETNO #ThinkDigital, 07.10.2015

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Biography

Professor Bruno Liebhaberg is the founder of CERRE. He also teaches European regulation and business environment at the Université Libre de Bruxelles’ Solvay Brussels School of Economics and Management (SBS-EM, ULB).

Professor Liebhaberg started his career as research assistant at the London School of Economics and Political Science (LSE) and as a lecturer at City University London.  He then joined the European Commission. He dealt first with trade defence policy and GATT (now WTO) negotiations, and, subsequently, joined the private office of President Jacques Delors. He advised the latter on the completion of the EU internal market, on policy aspects relating to industrial affairs and, in particular to the opening of the network industries’ markets.

Professor Liebhaberg then set up and developed a European strategy consultancy. The latter’s clients were the senior management of international public and private institutions and organisations, cabinet ministers and political leaders. In that capacity, Professor Liebhaberg’s contributions have primarily consisted in the identification and implementation of creative, pragmatic and forward-looking solutions to complex policy issues, in particular in the areas of regulation, competition and trade. Those contributions have been enhanced by Professor Liebhaberg’s inside knowledge and understanding of the workings of international institutions and of their staff’s drivers and constraints. They have also benefited from his close personal contacts and easy access to many regulatory, political and industry players in member states and third countries, as well as in EU and international institutions.

Bruno Liebhaberg holds a Master in Management Sciences (“ingénieur commercial”) from the Solvay Brussels School of Economics and Management (SBS-EM, ULB) and a Ph.D in Industrial Relations from the London School of Economics and Political Science.

About CERRE

Providing top quality studies and dissemination activities, the Centre on Regulation in Europe (CERRE) promotes robust and consistent regulation in Europe’s network industries. CERRE’s members are regulatory authorities and operators in those industries, as well as universities.

CERRE’s added value is based on:

• its original, multidisciplinary and cross-sector approach;
• the widely acknowledged academic credentials and policy experience of its team and associated staff members;
• its scientific independence and impartiality;
• the direct relevance and timeliness of its contributions to the policy and regulatory development process applicable to network industries and the markets for their services.

CERRE's activities include contributions to the development of norms, standards and policy recommendations related to the regulation of service providers, to the specification of market rules and to improvements in the management of infrastructure in a changing political, economic, technological and social environment. CERRE’s work also aims at clarifying the respective roles of market operators, governments and regulatory authorities, as well as at strengthening the expertise of the latter, since in many Member States, regulators are part of a relatively recent profession.