Australian Communications Consumer Action Network (ACCAN) Australia’s peak telecommunications consumer organisation PO Box 639, Broadway NSW 2007 Tel: (02) 9288 4000 | Fax: (02) 9288 4019 | Contact us through the National Relay Service www.accan.org.au | [email protected] | twitter: @ACCAN_AU Proposed merger of TPG with Vodafone Submission by the Australian Communications Consumer Action Network to the Australian Competition and Consumer Commission 12 October 2018
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PO Box 639, Broadway NSW 2007 Tel: (02) 9288 4000 | Fax: (02) 9288 4019 | Contact us through the National Relay Service www.accan.org.au | [email protected] | twitter: @ACCAN_AU
Proposed merger of TPG with Vodafone
Submission by the Australian Communications Consumer Action Network to the Australian Competition and Consumer Commission
2. New entity likely improves competition The ACCC asked for market participants’ views on the likely impact of the merger on prices and non-
price aspects of competition.
ACCAN considers that it is likely that the merger will result in increased price pressure reducing
overall prices and improving non-price aspects of competition, such as quality of service, product and
service inclusions, and customer service. This will likely lead to a lasting, positive effect on
competition for consumers.
The new entity likely improves competition because it creates a full-service challenger to Telstra and
Optus. The benefits of a full-service challenger are that it:
Creates synergies across complementary networks; and
Provides improved investment capability.
Consequently, the merged entity will have an improved ability to compete with Telstra and Optus.
Moreover, it will have an incentive to compete aggressively to gain market share in order to
underwrite investment in 5G. This is discussed further below.
2.1. Merger creates synergies across complementary networks
The merger of VHA and TPG creates synergies across complementary fixed line and mobile
networks. The synergies of a merged company (versus procuring wholesale products or network
sharing) are:
Increased flexibility – can build innovative products and services without wholesale pricing
or capacity constraints. Also provides long term certainty of asset ownership versus the risks
of changes associated with commercial arrangements;
Lower operating costs- can remove duplicative overhead costs, improved purchasing power
of a larger company, and potential lower network operating costs with asset ownership versus
purchasing capacity;1 and
Broader distribution – can leverage VHA’s retail storefront network.
The synergies are likely to provide consumers with increased product choice, lower prices, and
convenience.
A merged entity provides increased flexibility to offer innovative products and services.2 This is
because with asset ownership there is a greater degree of control over price setting compared to
purchasing access: prices are only constrained by internal requirements to meet investment returns.3
Whereas when access to infrastructure is purchased, pricing is largely determined by the wholesale
1 That is, it avoids the double marginalisation problem. See: Doyle, C. and Smith, J.C., 1998. Market structure in mobile telecoms: qualified
indirect access and the receiver pays principle. Information Economics and Policy, 10(4), pp.471-488. 2 Mergers align incentives, and avoid contractural incompleteness problems, as set out in: Williamson, O.E., 1971. The vertical integration
of production: market failure considerations. The American Economic Review, 61(2), pp.112-123. 3 Klein, B., Crawford, R.G. and Alchian, A.A., 1978. Vertical integration, appropriable rents, and the competitive contracting process. The journal of Law and Economics, 21(2), pp.297-326.
The Australian mobile market is on the cusp of the next evolution of mobile technology: 5G. In order
for mobile network operators to offer 5G services, they will need to invest substantially in spectrum
and equipment.
VHA is in the challenging position of holding the least amount of spectrum, including spectrum that
could be refarmed for 5G.7 It has also stated that it is impacted by the Government’s decision to ban
Chinese mobile equipment manufacturer Huawei from supplying 5G networks.8 Thus, it is likely that
it will be more difficult and expensive for VHA to upgrade to 5G compared to Optus and Telstra. At
the same time, VHA has the smallest network and, likely, the lowest returns9 from which to mount the
5G investment challenge. The merger increases the size and diversity of the customer base as well as
providing cost synergies that together increase the investment capability. This is similar to the
challenge Vodafone faced prior to the rollout of 4G.
4 Ibrahim, Tony, “Why TPG left Optus for Vodafone: Can Voadfone’s network handle 320,000 more users?”, PC World, 1 October 2015, https://www.pcworld.idg.com.au/article/585780/why-tpg-left-optus-vodafone/. 5 de Ridder, John, “Economuse - 2018 Review of Retail Broadband Pricing: Wholesale pricing still a problem for retail pricing”,
CommsWire, 4 October 2018. 6 ACCC, Domestic mobile roaming declaration inquiry, Draft December, May 2017, page 16. 7 ACCC, Allocation limits advice for the 3.6 GHz spectrum allocation, Public version, July 2018. 8 Crozier, Ry, “Vodafone warns investment ‘uncertainty’ after Huawei 5G ban”, itnews, 23 August 2018, https://www.itnews.com.au/news/vodafone-warns-investment-uncertainty-after-huawei-5g-ban-500718. 9 Telstra prices for a number of different plans are the highest with VHA the lowest in most cases (see ACCC, Domestic mobile roaming
declaration inquiry, Draft December, May 2017, pages 30-32). VHA likely has the lowest returns given large customer losses and huge investments to fix network problems after 2010.
In 2009, the ACCC assessed the proposed merger of Vodafone and Hutchison (what is now VHA). At
the time, mobile services were dominated by voice but data was increasing in popularity and
providers were recognizing the need to invest in capacity. The expected adoption of long-term
evolution (LTE or 4G) was imminent with the digital dividend spectrum auction forthcoming.
However, the ACCC stated that it “examined a large amount of evidence which indicated that
Hutchison and Vodafone, on an individual basis, would not be likely to continue to make the
investments in their networks that would be necessary for the delivery of high-speed MBB [mobile
broadband] services. Without the merger, it was likely that Hutchison and Vodafone would become
increasing weak competitors over time relative to Telstra and Optus.”10
Unfortunately, the experience
of VHA shortly after the merger was that it didn’t invest quickly enough to meet consumer demand,
with devastating results for consumers.11
2.3. Merged entity will have an incentive to compete aggressively
The merged entity will have an incentive to compete aggressively to gain market share for two
reasons:
No market share changes from acquisition – the merged entity will largely have the same
market position with respect to each segment, so the incentives remain to challenge Telstra’s
premium; and
Impending investment in 5G – the merged entity will remain in a challenging position to
launch 5G, thus has an incentive to gain market share and grow the market in order to
underwrite the substantial investment.
First, the merged entity will hold the same market share position as the individual brands held prior to
the merger: third in mobile and second in fixed line.
Table 1: Market shares across telecommunications services12
Telstra Optus Merged
entity
Vodafone TPG Others
Mobile
market
share
~41% ~29% ~20% ~19% ~1% ~10%
Fixed line
market
share
~51% ~17% ~22% n/a ~22% ~10%
10 ACCC, Public Competition Assessment: Vodafone Group pls and Hutchison 3G Australia Pty Limited – proposed merger of Australian mobile operations, 24 June 2009, page 15. 11 Michael, Sarah, “How did Vodafone become Vodafail?”, news.com.au, 15 October 2012,
https://www.news.com.au/finance/business/how-did-vodafone-become-vodafail/news-story/eab702db1210f0658bf6b86e6d697138 12 Reproduced from TPG Telecom & Vodafone Hutchison Australia, “Merger of equals”, 30 August 2018.
The reduction in Telstra’s premium is consistent with it responding to consistent market share losses.
As it loses more volume it evaluates a reduction in margin versus further volume losses. It is in
Telstra’s interest however to maintain its premium. It does this by marketing the best network and
maintaining a coverage gap. In the Mobile Roaming Inquiry, the ACCC found that “Telstra is clearly
preferred for consumers who choose service providers for better coverage. Out of all consumers that
cited better coverage as a reason, 73 per cent were with Telstra, 13 per cent were with Optus and 6 per
cent were with VHA. This is even more pronounced in regional areas, where 83 per cent of regional
consumers who cited better coverage as a reason for choosing their provider were with Telstra.” 14
This explains why Telstra is protective of its reputation as the best network, when Optus ran ads
claiming that it had the best network and Telstra sued saying it was “misleading”.15
Consequently, for operators to gain market share from Telstra, they need to have a good network –
hence as Vodafone has improved, Telstra’s share (and premium) has declined and is expected to
continue.16
It is imperative for the merged entity to have the capacity to invest in order to compete
with Telstra and Optus.
Likewise, in the fixed line market there is a significant gap between the merged entity’s market share
and Telstra’s. The gap is in fact larger than in the mobile market. RSPs have commented that the
charging structure of the NBN requires a large customer base to be profitable.
Thus, the creation of a merged entity does not disrupt this dynamic – it maintains the incentive to
compete for Telstra premiums and market share, resulting in overall lower prices for consumers.
Second, the merged entity has an incentive to gain market share and expand the market in order to
underwrite investment in 5G. The considerable investment required for 5G requires a large, and
lucrative, customer base. As market penetration is high and mobile ARPUs declining, merged entity
has incentive to grow the market. This means using its capability as a full-service provider to cross
sell and find new customers, potentially using its corporate channels for IoT and other expected use
cases with 5G. The advent of 5G in a saturated market means all three mobile network operators will
be vying for existing customers as well as finding new ones.
A merged entity is also less likely to face foreclosure problems in terms of accessing or constructing
new facilities in the best possible locations to maximise 5G coverage.17
14 ACCC, Domestic mobile roaming declaration inquiry, Final report, October 2017, pages 39-40. 15 Mason, Max, “Telstra takes Optus to court over best mobile network claims”, Australian Financial Review, 11 May 2018. 16 Mason, Max, “Telstra may cut mobile prices in wake of aggressive push from Optus and Vodafone”, Australian Financial Review, 7
October 2018, https://www.afr.com/business/telecommunications/telstra-may-cut-mobile-prices-in-wake-of-aggressive-push-from-optus-
and-vodafone-20181004-h1698k. 17 Rey, P. and Tirole, J., 2007. A primer on foreclosure. Handbook of industrial organization, 3, pp.2145-2220.
3. Without merger, less competition likely The ACCC asked for market participants’ views on how closely TPG and VHA currently compete, or
would be likely to compete in the future absent the merger.
VHA and TPG are not currently competitors and it is unlikely they would become strong competitors
in the future. Thus, the merger is unlikely to have the effect of substantially lessening competition in
telecommunications markets. This is discussed further below.
3.1. TPG and VHA are new entrants in bundled services
TPG and VHA do not currently compete closely. This is reflected in the merger being marketed as a
“merger of equals” with “highly complementary assets”.18
In fixed line services, TPG is the second largest provider behind Telstra, with around 22% market
share. In contrast, VHA has historically been a mobile-only provider. However, in December 2017
VHA launched NBN products for consumer and small business.19
In the merger documents, VHA’s
fixed line market share is marked as “n/a”.
In mobile, VHA is the third largest mobile provider after Telstra and Optus, with around 19% market
share. TPG launched services as an MVNO in 2008 and in 2017 acquired spectrum to commence
building a mobile network.20
It has since built wi-fi networks in 5 major cities and its market share is
around 1%.
Thus, both entities have commenced operations to offer bundled services, but they are nascent. Absent
the merger, these operations are likely to remain “add-ons” to offer the existing customer base but not
form the core part of their strategy.
3.2. Absent merger less incentive to compete for bundles
Without the merger, it is likely that TPG and VHA will increase infrastructure sharing in order to
minimise investment costs. This is indicated in the investor materials and the joint venture
arrangements that have been submitted to the ACCC.21
Moreover, given the significant investment
challenges for 5G, VHA and TPG have an incentive to minimise investment costs wherever possible
if they want to offer 5G services. It is also likely a response to the scarcity of 5G spectrum. Thus,
competing for 5G spectrum against Telstra and Optus is better than Telstra and Optus and each other.
18 TPG Telecom & Vodafone Hutchison Australia, “Merger of equals”, 30 August 2018. 19 Vodafone, “Vodafone nbn launches in Sydney, Canberra, Melbourne, Geelong & Newcastle”, 4 December 2017, https://www.vodafone.com.au/media/vodafone-nbn-launches. 20 Hatch, Patrick and Lucy Battersby, “TPG to build own mobile network after $1.2b spectrum splurge”, 4 April 2017 (updated 13 April
2017), https://www.smh.com.au/business/companies/tpg-to-build-own-mobile-network-after-12b-spectrum-splurge-20170404-gvd6xr.html. 21 TPG Telecom & Vodafone Hutchison Australia, “Merger of equals”, 30 August 2018.
With increased infrastructure sharing, TPG is unlikely to continue to invest in expanding mobile/wi-fi
coverage as an MNO and VHA is unlikely to invest in backhaul capability to provide NBN services.
VHA and TPG have complementary networks and infrastructure sharing enables them to focus on
expanding those networks and finding synergies to lease to each other. For example, TPG sharing
small cell sites with VHA for 5G rollout. Indeed, there were market analysts that anticipated TPG
would not expand beyond urban markets.22
With network sharing, each of TPG and VHA have the incentive to maintain offering the bundled
services as “add-ons” to their core services. It is likely that each would need to maintain enough
customers to achieve scale and returns in that segment, but it could also accept lower returns if there is
a segment that purchases bundles that it wouldn’t otherwise serve. At the same time, they do not have
the incentive to price aggressively in that segment since it risks disrupting the market of the other
party to the commercial negotiations. That is, with network sharing, each party knows the other
parties’ costs and has the ability to offer compelling add-on services without disrupting the market.23
22 Murphy, Jason, “Is our great mobile rip-off about to end?”, news.com.au, 4 April 2018, https://www.news.com.au/finance/business/technology/is-our-great-mobile-ripoff-about-to-end/news-
story/3a993d174effe6093fe4721853e92d58. 23 Klein, B., 1988. Vertical integration as organizational ownership: The Fisher Body-General Motors relationship revisited. Journal of Law, Economics, & Organization, 4(1), pp.199-213.
Indeed, the value of network coverage can be ascertained by the fact that Optus does not offer
wholesale access to the entirety of its network. Similarly, Telstra does not provide access to its full
mobile network for Belong customers (a Telstra subsidiary).26
As a result, VHA argued vigorously for the declaration of mobile domestic roaming. It argued that
Telstra behaves like a monopoly in regional areas and is it difficult for VHA to compete.27
Accordingly, it was unlikely that TPG would ever expand its network beyond major urban centres
given the investment required and so absent a merger increased network sharing is most likely.28
The
market entry of TPG was that of an established fixed-line operator seeking to provide a
complementary product and would have struggled to maintain profitability in its mobile business on a
standalone basis. Notably, when Hutchison merged with Vodafone, it was experiencing losses (as
discussed below).
Given these challenges, it is likely that VHA’s financial returns are low and as the third player, it
likely has the lowest margins. The merger of TPG and VHA represents the best outcome for VHA to
have the capacity to compete as a national MNO. Such challenges are a clear signal to the market that
returns are not high enough to support a new entrant.
25 Reproduced from ACCC, Domestic mobile roaming declaration inquiry, Draft Decision, page 30 (Table 3). 26 Belong website, https://www.belong.com.au/mobile/coverage-map, “Belong operates on part of the Telstra mobile network, with 4G coverage available to 96.5% of the Australian population and 3G coverage available to more than 98.8% of the population.” [emphasis
added] Note that both population figures are lower than those contained in Table 3 of the ACCC’s report. 27 Vodafone, Domestic Mobile Roaming Declaration Inquiry: Part A of the submission by Vodafone Hutchison Australia, Main Submission, 5 December 2016, available at https://www.accc.gov.au/system/files/VHA%20submission%20Part%20A_0.PDF. 28 TPG announced it would spend $1.9 billion on spectrum and deploying equipment at 2,500 sites over three years. (see:
https://www.computerworld.com.au/article/617634/tpg-announces-1-9bn-national-4g-network-plan/) It said initially it would offer mobile coverage in the CBDs and select suburbs of Adelaide, Brisbane, Canberra, Melbourne and Sydney. (see:
https://www.computerworld.com.au/article/640978/tpg-offer-free-access-new-mobile-network/). Note that in 2017 VHA announced
spending of $2 billion for almost 1,800 sites (see: https://www.vodafone.com.au/media/vodafone-reveals-almost-2-billion-mobile-technology-spend-for-2017 ) while Telstra was investing $5 billion over three years (see: https://www.zdnet.com/article/telstra-announces-
au5b-networks-investment-launches-new-mobile-plans/ ). Thus TPG would need to increase capital in order to expand beyond major
metropolitan areas. Notably, Hutchison had 2,700 base stations at the time of its merger with Vodafone and had network sharing with Telstra. (see: http://registers.accc.gov.au/content/index.phtml/itemId/874445/fromItemId/751043 )
4.2. VHA’s creation is a disincentive for market entry
Prior to mid-2009, Australia had a fourth mobile network operator: Hutchison. Hutchison operated a
3G network in metro areas of Australia and through a joint venture with Telstra provided coverage to
96% of the population.29
Hutchison had over 2 million customers at the time of its merger, and yet, in
its financial year ending 31 December 2008 it posted a net loss of $163.1 million.30
In June 2009 the ACCC published its assessment of the Vodafone and Hutchison merger.31
The
ACCC found that there was “no prospect of entry by an MNO on the scale and scope necessary to
constrain existing MNOs”. It also found that individually Vodafone and Hutchison required
substantial capital investments to support network upgrades/expansions that they were unlikely to be
able to make absent the merger. The ACCC concluded that the proposed merger would not have the
effect, or be likely to have the effect of substantially lessening competition in any market.32
Similarly, TPG was likely to limit its mobile network to urban areas. It launched mobile services as a
VHA wholesale customer with plans to build a small cell network with 1,800 stations. It recently
noted it was breaking even in the segment. However, in order for it to offer 5G services it would need
to invest substantially in spectrum and network capability. The ACCC’s assessment of allocation
limits for the upcoming 3.6 auction stated that TPG “has very limited holdings compared to the
incumbents and its ability to acquire more spectrum in the near future materially impacts its ability to
compete with the incumbents.”33
Thus, absent the merger VHA and TPG are likely to pursue
increased network sharing to minimise capital investment.
Given this history in the Australian mobile market, and the subsequent developments of TPG and
VHA, it is unlikely a prospective investor would enter as a national MNO.
29 Note Table 1 in the ACCC’s assessment showed Telstra’s population coverage at 99%. 30 ACCC, Public Competition Assessment, “Vodafone Group plc and Hutchison 3G Australia Pty Limited – proposed merger of Australian
mobile operations”, 24 June 2009. 31 ACCC, Public Competition Assessment, “Vodafone Group plc and Hutchison 3G Australia Pty Limited – proposed merger of Australian
mobile operations”, 24 June 2009. 32 And as shown in section 2.3 above, VHA is likely to have contributed to the reduction in Telstra’s price premium. 33 ACCC, “Allocation limits advice for the 3.6 GHz spectrum allocation”, Public version, July 2018, page 4.
4.3. Other countries’ experience is a disincentive for market entry
In the last five years, there have been a number of mergers in Europe that have reduced the number of
mobile network operators reduce from four to three. These mergers indicate that the financial returns
necessary to sustain investment in a high capital industry are insufficient with more than three players.
In addition, policies to promote and support new market entry have had relatively little success in
sustaining fourth operators. For example, in Canada there have been a number of policies to support a
fourth, national network operator but it still doesn’t have one. And in Europe, policies to promote
competition may have had a detrimental impact on investment and, ultimately, consumers that
experience declining infrastructure.34
The European experience can be summed up with a statement made by the former Austrian regulator
at a hearing in Canada to determine whether or not to regulate domestic roaming:35
“This magic number of how many operators a certain market can carry, I mean we had that on
and on in Europe. We had a couple of four-to-three boiling down the number of mobile
network operators. The last one was in Germany now, that even the strongest and biggest
economy in Europe – Germany, with close to 90 million in habitants – could not carry four
full-fledged mobile network operators and that has been allowed to boil down to three.
So I mean the basic economics are always the same. Everywhere on the globe they are the
same. So I cannot imagine how that would work with the even more challenging Canadian
geography, a fourth full-fledged operator.”
In Canada, there have been a number of policies to increase competition and ostensibly support a
fourth, national mobile network operator (see the Box below). However, Canada still does not yet
have a fourth national mobile network operator. Moreover, among the “big three”, two have a
network sharing agreement such that there are only two physical mobile networks available nation-
wide.36
As Australia has a similar population density to Canada, it is likely Australia would face similar
challenges supporting a fourth. Accordingly, ACCAN considers that the experiences of these other
countries are a disincentive for market entry to Australia.
34 Dr Serentschy argues that Europe is experiencing relative under-investment with the result of 4G rollout falling behind other regions,
continued decline in telecoms infrastructure quality relative to other countries, job losses, lack of internet technology and expertise and weakening of telecoms companies which leads to closure or take-over. He argues this is negative not just for the sector but for the broader
economy and ultimately its citizens. See: Statement of Dr. Georg Serentschy (former Austrian Telecom Regulator, RTR, and Chairman of
the Body of European Regulators for Electron Communications, BEREC) in response to CRTC’s Telecom Notice of Consultation (CRTC 2014-76): Review of wholesale mobile wireless services, 20 August 2014. 35 CRTC, Review of wholesale mobile wireless services (CRTC 2014-76), Hearing Transcript, Volume 2, 30 September 2014, paras 2356-
Box 1: Summary of policies to promote new mobile network operators in Canada
In 2007, Canada held its advanced wireless spectrum auction.37
The auction, and associated licenses,
had the following policies to promote new mobile network operators:
40MHz set aside for new entrants (65 MHz available for remaining bidders);
Condition to provide in-territory roaming for 5 years while new entrants build out their
networks;
Providing an extension of a further 5 years for national new entrants provided that rollout
obligations are met;
Mandating out-of-territory roaming for at least the 10-year licence term; and
Mandating antenna tower and site sharing and prohibiting exclusive site arrangements for all
radio and spectrum licences.
In 2014, the Government amended the Telecommunications Act38
to introduce a cap on the rates the
incumbent, national mobile network operators could charge the new entrants. The cap was introduced
in response to complaints from new entrants that commercial rates were too high. The cap was to be
determined based on the operators’ retail revenues and volumes sold. The cap was in place until June
2015 as the telecommunications regulator, the CRTC, released its decision mandating that the national
mobile network operators (Bell, Rogers and Telus) provide domestic roaming at a regulated rate to
new entrants.39
The tariffs were approved in March 2018.40
According to the CRTC’s 2017 Communications Monitoring Report, the three national mobile
network operators have the largest market share across all provinces and territories except
Saskatchewan and Manitoba (where the government-owned mobile network operators dominate).41
The new entrants, such as Freedom, have generally concentrated in urban areas.42
37 Government of Canada, “Government Opts for More Competition in the Wireless Sector”, News Release, 28 November 2007,
https://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf10021.html 38 CRTC, Telecom December CRTC 2015-540, “Legislated wholesale domestic roaming caps under the Telecommunications Act”, 9
December 2015, https://crtc.gc.ca/eng/archive/2015/2015-540.pdf. 39 CRTC, Telecom Regulatory Policy CRTC 2015-177, “Regulatory framework for wholesale mobile wireless services”, 5 May 2015, https://crtc.gc.ca/eng/archive/2015/2015-177.htm 40 CRTC, Telecom Order CRTC 2018-99, “Wholesale mobile wireless roaming service tariffs – Final rates”, 22 March 2018,
https://crtc.gc.ca/eng/archive/2018/2018-99.htm 41 CRTC, Communications Monitoring Report 2017, 2017, page 304. Note that Bell Canada has recently acquired Manitoba Telecom
Services (see BCE, “Bell announces agreement to acquire Manitoba Telecom Services (MTS)”, News Release, 2 May 2016. 42 Jackson, Emily, “’Sharing is the worst’: Shw’s Freedom Mobile takes aim at Big Three shared wireless plans”, Financial Post, 1 August 2018, https://business.financialpost.com/telecom/sharing-is-the-worst-shaws-freedom-mobile-takes-aim-at-big-three-shared-wireless-plans