EU: Telecoms

During the past year, the telecommunications sector experienced a number of evolutions, raising from the ever-changing nature of technology but also from market consolidation. On the strict telecommunications side, the European market seems to be consolidating, with several mergers taking place or planned within the EU. On the content side, the major cases currently followed by the Commission seem to concern US companies, namely this year Amazon and Google.

Statement of Objections issued to Google

On 20 April 2016, the European Commission initiated formal antitrust proceedings against Alphabet, Google’s parent company, with regard to its business practices related to Android. On the same day, a Statement of Objections was also sent to both Alphabet and Google.

According to the Commission, Google would have breached EU antitrust rules by abusing of its dominant market position in imposing restrictions on Android device manufacturers and mobile network operators. Google is thus accused of unfairly favouring its own services, such as its search engine and Google Maps, on its Android smartphone operating system.

The Commission opened proceedings in April 2015 concerning Google’s conduct as regards the Android operating system and applications. A year ago, the Commission thus sent Google a Statement of Objections in which it considered that the company had abused its dominant position on the markets for general internet search services in the European Economic Area (EEA) by systematically favouring its own comparison shopping product in its general search results pages.

The Commission now considers that Google is dominant on the market for general internet search services, licensable smart mobile operating systems and app stores for the Android mobile operating system. This dominance can be inferred from Google’s market shares of more than 90 per cent in each of these markets in the EEA.

In the April Statement of Objections, the Commission alleges that Google has breached EU antitrust rules by:

• requiring manufacturers to pre-install Google Search and Google’s Chrome browser and requiring them to set Google Search as default search service on their devices, as a condition to license certain Google proprietary apps;
• preventing manufacturers from selling smart mobile devices running on competing operating systems based on the Android open source code; and
• giving financial incentives to manufacturers and mobile network operators on the condition that they exclusively pre-install Google Search on their devices.

According to the Commission, such business practices lead to a further consolidation of Google Search’s dominant position. The Commission is also concerned that these practices can affect rival browsers’ ability to compete with Google Chrome and can hinder the development of operating systems based on the Android open source code and the opportunities they would offer for new apps and services. Furthermore, as Commissioner Margrethe Vestager puts it, the Commission believes that ‘Google’s behaviour denies consumers a wider choice of mobile apps and services and stands in the way of innovation by other players, in breach of EU antitrust rules.’

Opening of an investigation concerning Amazon

On 11 June 2015, the European Commission opened a formal antitrust investigation into Amazon’s e-book distribution arrangements in order to assess whether it used its predominant position in the European e-books market to make it more difficult for rivals to offer lower prices.

Electronic books have experienced a rise in popularity in recent years and Amazon is currently the largest distributor in Europe. The Commission has concerns that some clauses included in Amazon’s contracts with publishers concerning such e-books may constitute a breach of EU antitrust rules that prohibit the abuse of a dominant market position as well as restrictive business practices. In particular, the investigation focuses on provisions that seem to shield Amazon from competition from other e-book distributors, such as clauses granting it:

• the right to be informed of more favourable or alternative terms offered to its competitors; and/or
•  the right to terms and conditions at least as good as those offered to its competitors.

The Commission will now investigate further whether such clauses may hinder the level playing field and potentially decrease competition between e-book distributors to the detriment of consumers.

This Statement of Objections is the formal step in the Commission’s investigations into Amazon’s practices; obviously, this analysis is without prejudice of the outcome of the investigation.

Mergers in the telecommunications sector

Case M.7612 Hutchison 3G UK/TelefÓnica UK

On the UK mobile communications market, Hutchison intended to acquire sole control over TelefÓnica UK, but the European Commission prohibited this merger as it feared this acquisition would lead to higher prices and less choice for UK customers and would reduce innovation in the mobile sector.

This transaction was notified to the Commission on 11 September 2015. It aimed to combine O2 (a subsidiary of TelefÓnica UK) with Three UK (a subsidiary of Hutchison), which are respectively the second and the fourth largest mobile network operators (MNO) in the UK. This merger would have created the biggest MNO in the UK.

On 2 October 2015, the UK competition authority submitted a request to the Commission to be referred part or all of the assessment of the case since, according to the British authority, the competitive effects of this merger were purely national. The Commission, however, decided otherwise and stated that it was better placed to assess the merger.

At the end of 2015, the Commission launched both a market investigation and an in-depth investigation of the transaction itself. The main concerns raised by these investigations were the following:

• First, the transaction would remove an important competitive force from the market and this may increase prices and reduce innovation;
• Second, it would reduce the number of MNOs willing to host mobile virtual network operators (MVNOs), which would in turn weaken MVNOs’ negotiating power; and
• Third, the reduction in the number of competitors following the takeover would leave only three MNOs on the market, making it easier for them to coordinate their competitive behaviour and increase prices permanently on the retail and wholesale markets.

In order to address the Commission’s concerns, Hutchison proposed several remedies. The Commission considered that none of them could properly address the structural problems the takeover would create. To the opinion of the Commission, the set of measures proposed were thus not capable of replacing the weakened competition either. Furthermore, the Commission believed these largely behavioural measures would have been difficult to implement and monitor.

Finally, Commissioner Vestager, in charge of competition policy, recalled the goal of EU merger control and declared that ‘allowing Hutchison to take over O2 at the terms they proposed would have been bad for UK consumers and bad for the mobile sector’. The Commission concluded that the remedies proposed by Hutchison would not have been able to prevent the likely negative impact on prices, quality of service and network innovation in the UK mobile sector. It thus blocked the notified merger in its decision issued on 11 May 2016.

Case M.7637 Liberty Global/BASE Belgium

After an in-depth investigation, the European Commission has cleared the acquisition of BASE, a Belgian mobile network operator, by Liberty Global. This approval is conditional upon the implementation of commitments to ensure effective competition in the Belgian retail mobile market.

BASE, a subsidiary of the Dutch telecoms group KPN, is one of Belgium’s three mobile network operators (together with Proximus and Mobistar) and offers mobile services to consumers and businesses in Belgium. Liberty Global controls the Belgian cable operator Telenet, which offers fixed telecommunication services (TV, fixed broadband and fixed-line telephony) in Flanders and parts of Brussels. It also offers mobile services as a full MVNO, using the network of Mobistar.

The takeover has been notified on 17 August 2015 to the Commission, which opened an in-depth investigation of the case in October 2015. Initially, the Commission had two main competition concerns:

• First, it considered that the transaction was likely to reduce competition on the Belgian retail mobile market, as there would be fewer competitors. This could lead to higher prices and less choice and innovation for Belgian mobile consumers.
• Second, the transaction could significantly worsen wholesale access conditions for MVNOs in Belgium. The Commission initially feared that after the merger, BASE would have less incentive to offer virtual operators access to its mobile network. If MVNOs could not enter the wholesale market, this would eventually lead to less competition on the retail market.

Some competitors also raised concerns about the merged entity’s market power and its ability to exclude other competitors from the markets by bundling together fixed and mobile services in packages. The Commission, however, did not consider them serious enough to impose further commitments on the undertakings at stake.

In order to address the Commission’s concerns, Liberty Global committed to:

• selling BASE’s share in Mobile Vikings, an MVNO that uses BASE’s network, to Belgian broadcaster Medialaan; and
• transferring part of BASE’s customer base to Medialaan. Currently, BASE and Medialaan have an agreement under which BASE sells mobile services under the brand JIM Mobile, which is owned by Medialaan. Liberty Global will thus transfer customers of the JIM Mobile brand to Medialaan.

In addition, Liberty Global has concluded an agreement with Medialaan, giving it access to BASE’s mobile network under conditions that will allow Medialaan to compete successfully as a full MVNO. Therefore, a new MVNO will enter the retail market in order to compensate for the loss of competition resulting from the exit of Telenet as an independent MVNO.

According to the Commission, these remedies adequately address its competition concerns and Commissioner Vestager declared: ‘We have made sure that Liberty Global’s merger with BASE will not reverse the trend of declining mobile prices in Belgium in recent years’. Thus, on 4 February, the Commission issued the decision allowing the transaction.

Case M.7678 Equinix/Telecity

On 13 November 2015, the European Commission cleared the proposed acquisition of Telecity, a provider of data centre services headquartered in the United Kingdom by rival Equinix Inc of the United States. The approval is conditional upon full implementation by Equinix of several commitments to ensure effective competition in data centre colocation markets in Amsterdam, London and Frankfurt.

The undertakings at stake are the two largest providers of data colocation and related services in Amsterdam, London and Frankfurt. Their activity consists in renting out floor space and power in purpose-built data centre facilities to customers who install their servers and data storage equipment there. According to the Commission, Equinix and Telecity are important players in this market in all three metropolitan areas where they often compete against one another for customer contracts. Their activities completely overlap in these geographical areas.

The takeover was notified to the Commission on 24 September 2015. The Commission’s main concern was that this transaction would eliminate an important competitor. This could lead to higher prices of colocation services in the metropolitan areas of Amsterdam, London and Frankfurt.

As Equinix and Telecity are closed competitors in Amsterdam, London and Frankfurt, the remaining competitors would be unlikely to replace the competitive pressure currently exercised by Telecity and they would struggle to challenge the merged entity. Furthermore, new players could face significant difficulties in entering the market owing to high investment, as well as the deployment time needed to build new data centres able to compete with the remaining players. Therefore, only a very limited number of large and established providers of highly connected, retail data centres would be left in the metropolitan areas of Amsterdam, London and Frankfurt.

In order to address the Commission’s concerns and make the transaction compatible with the internal market, Equinix submitted two sets of commitments in October and November 2015, offering to divest a number of data centres in Amsterdam, London and Frankfurt. These data centres will be acquired either by a new player or by an existing competitor to ensure that competition in colocation services is not reduced in these metropolitan areas. In particular, Equinix will divest two data centres in Amsterdam, five in London and one in Frankfurt.

On 13 November 2015, the Commission issued a decision approving this merger provided that these commitments were fully implemented by Equinix.

Case M.7758 Hutchison 3G Italy/WIND/JV

The European Commission has decided to open an in-depth investigation to assess whether the proposed joint venture between the telecommunication activities of Hutchison and VimpelCom in Italy is compatible with the internal market.

The transaction would combine VimpelCom’s subsidiary WIND with Hutchison’s subsidiary H3G, respectively third and fourth-largest operators in the Italian mobile telecommunications market. There are currently only two other mobile network operators in Italy that are present on the retail mobile market, Vodafone and TIM. In addition to these four MNOs, several MVNOs are also active on the market.

This transaction was notified to the Commission on 5 February 2016.

So far, the Commission believes this operation raises serious doubts as to its compatibility with the internal market. More specifically, the Commission has concerns that this merger would lead to higher prices, less choice and reduced innovation for mobile customers in Italy. Actually, the transaction at stake would reduce the number of MNOs in Italy from four to three. Furthermore, the Commission considers that such a takeover would create the largest player in terms of the number of subscribers, followed by TIM and Vodafone, which are very similar in size.

The Commission issued a decision on 30 March 2016 indicating the opening of the second phase investigation. It identified the following concerns:

• First, H3G and WIND currently compete against each other in the retail mobile telecommunication market in Italy. The Commission feared that the transaction would remove two important competitive forces and that the joint venture would have limited incentives to exercise significant competitive pressure on the remaining competitors. This would lead to higher prices and less investment in mobile telecommunications networks.
• Second, the transaction could reduce the number of MNOs that host mobile virtual network operators. MVNOs are dependent upon MNOs in order to offer their services to final consumers, whereas prospective and existing MVNOs may have less choice of host networks and hence a weaker negotiating power to obtain favourable wholesale access terms.
•  Third, the reduction in the number of competitors following the merger risked weakening competitive pressure and increasing the likelihood that MNOs would coordinate their competitive behaviour and raise prices on a sustainable basis on the retail and wholesale markets.

Again, the opening of an in-depth investigation does not prejudge the Commission’s final decision.

Case M.7861 Dell/EMC

On 29 February 2016 the European Commission cleared the acquisition of data storage and software provider EMC by computer technology company Dell, under the EU Merger Regulation.

Both companies are based in the USA. The first one (Dell) is owned by Denali and it develops, sells and supports computers and related products and services, including servers, networking products, storage systems, software, IT and business services. As for EMC, it offers data storage, information security, virtualisation, analytics, cloud computing and other products and services that enable businesses to store, manage, protect and analyse data. EMC is a majority owner of VMware, Inc, a provider of virtualisation software, and VCE Company LLC, a joint venture with Cisco that sells converged infrastructure appliances.

As Commissioner Vestager stated, given the ‘strategic importance of the data storage sector’, it is necessary to assess this deal carefully and to make ‘sure that there would be no adverse effects on customers’. The Commissioner also mentioned that the investigation of Dell’s multi-billion dollar takeover of EMC has been carried out in close cooperation with its US counterpart (ie, the Federal Trade Commission).

The Commission first assessed the potential effects of this transaction on the market for external enterprise storage systems. It considered that the merged entity would have a rather moderate market share on this market and in any event, that the increment brought about by the transaction would be small.

The Commission found that the merged entity would continue to face strong competition from established players, such as Hitachi, HP, IBM and NetApp, as well as from new entrants.

The Commission also investigated the risk that the merged entity could attempt to restrict or degrade access to VMware’s software for competing hardware vendors,considering VMware’s strong market position in server virtualisation software. However, the Commission found that the merged entity would have neither the ability nor the incentive to shut out competitors given that:

• VMware’s products are facing increasing competition from other providers of server virtualisation software such as Citrix, Microsoft and Red Hat and, and to a lesser extent from new technologies;
• customers usually multi-source from more than one server virtualisation software provider;
• VMware’s business strategy has been hardware and software-neutral and it has been working with many vendors; and
• on the server market, Dell has strong competitors that will continue to operate either in partnership with VMware or with third-party virtualisation software providers.

Furthermore, the Commission considered that the combination of Dell’s and EMC’s external enterprise storage systems products, as well as VMware’s storage virtualisation software, would have no negative impact on competition given the existence of several alternatives to VMware’s software.

Finally, the Commission investigated whether the merged entity could prevent competitors from having access to virtualisation software used for converged and hyper-converged infrastructure systems. The Commission concluded that the acquisition raised no concerns in this respect, as the merged entity’s competitors would be able to provide these systems in partnership with virtualisation software providers other than VMware.

This is why on 29 February 2016, the Commission decided not to oppose the notified concentration and to declare it compatible with the internal market.

The authors are grateful to Julia Jean-Marie for her valuable contribution to the preparation of this article.