20 Jul, 2020

Commission Blocks – General Court Unblocks

For some reason May is THE month for competition.  Mays of yesteryear have witnessed many intriguing courtroom battles: May 2016, May 2019 and finally in May 2020.

True to form, merger control is making the headlines again.  The General Court (GC) annulled the European Commission’s (Commission) decision in Hutchison 3G UK (Hutchison) and Telefónica UK (Telefónica) merger on May 28, 2020.  If you have not seen it yet, the underlying reason behind the annulment is quite thought-provoking: in a nutshell, the GC held that the Commission made errors in law and manifested errors of assessment, and to boot, infringed essential procedural requirements.

CMA and the Commission Epoch

Let’s back up a bit.  The proposed merger met the thresholds for review under Council Regulation 139/2004/EU (EUMR) and was therefore notified to the Commission.  You have probably heard about the UK’s Competition and Markets Authority (CMA) before.  Well, the CMA has made a request to the Commission to refer Hutchison’s proposed acquisition of Telefónica to the CMA for investigation.  Howbeit, the Commission decided not to refer the case to the CMA.

The CMA however did not falter, and not long after wrote a letter to the Commission setting out its concerns about the proposed merger between Hutchison and Telefónica.  Despite not leading the investigation, the CMA has had extensive, constructive engagement with the Commission on this case.

Fast forward … The Commission reached a decision on May 11, 2016, blocking the merger of two British mobile telecom companies, Hutchison and Telefónica.  The GBP 10.5 billion deal combined two of the four biggest mobile network operators (MNOs) in the United Kingdom (UK), bringing together 31 million customers, or in other words, 41% of the UK wireless market.

After an in-depth investigation, the Commission had serious concerns that UK mobile customers would have had less choice and would have to pay higher prices as a result of the takeover, and that the deal would harm innovation in the mobile sector by removing an important competitor and rescaling the market to only two MNO’s challenging the merged entity.  The Commission alleged that the takeover is likely to have a negative impact on the quality of service for UK consumers by hampering the development of mobile network infrastructure in the UK and reduce the number of MNOs willing to host other mobile operators on their networks.

Maybe it is not everyone’s cup of tea to commit oneself for better or for worse, yet Hutchison was diligent and offered a number of concessions, such as promising to work with remaining competitors to ensure there were two competing mobile networks in the UK, in order to secure anti-trust approval.  In the eyes of the Commission, these commitments were just not good enough.  With the relentless goal of never allowing competition to weaken at the expense of consumers, especially on the telecoms market, the Commission, displeased with the commitments, gave a rundown apropos these commitments that failed to adequately address the serious concerns raised by the takeover.  In its conclusion, the Commission deemed the pre-transaction Hutchison as an undertaking that constitutes an important competitive force on the wholesale market for access and calls origination services on public mobile networks in the UK, adding that Telefónica also holds a strong position.  According to the Commission, this may lead to an approximately 40% combined market share in case Hutchison and Telefónica go through with the transaction.  Besides, Hutchison and Telefónica would be run as a combined business.

The truth is that, while competing on the market, competitors constrain each other’s behavior in a variety of different ways.  For instance, competitors on a particular product market may constrain each other by bringing their costs and prices down.  Also, they may achieve this by working on the development of new products and the improvement of existing ones.  The manifestation of competition will depend on the nature of the industry.

Hutchison, not prepared to take the Commission’s decision on the chin, decided to come out fighting and brought an action before the GC seeking an annulment.  The two-day hearing took place in May 2019.  The GC did not share the Commission’s opinion on the acquisition and had other ideas.  To everyone’s surprise, the GC annulled the decision in its entirety on May 28, 2020, finding that there have been ‘errors of law and errors of assessment’ in the Commission’s valuation of the merger.  Arguing that the Commission has failed to prove that prices would rise or that competition would be distorted as a result, the GC contested that the Commission also failed to establish that Hutchison was an important competitive force – the Commission was wrong to consider that an important competitive force need not stand out from its competitors.  Just think about this for a second: any concentration involving actual or potential competitors leads, by definition, to a reduction of competitive pressure and thus to an increase in market power.  This means that any similar transaction gives rise, by definition, to non-coordinated effects.  If this line of argument were to be accepted, the Commission would enjoy, in effect, the discretion to decide which horizontal mergers to clear and which to block.  Hypothetically, in case this approach is accepted as such, the GC says, it would effectively allow the Commission to prohibit any horizontal merger in a market with a limited number of major competitors.  And nobody wants that …

Taking a Harder Line?

Were older cases decided upon differently?

The fact that the Commission took a harder line in the Hutchison/Telefónica transaction than in previous cases came therefore as no surprise.  However, the blocking of the transaction outright was still a significant blow to industry hopes for further consolidation.  In particular, the Commission’s decision was seen as evidence that in future, ‘four-to-three’ MNO mergers would only be cleared on the basis of a package of divestments sufficient to lead to entry by a new fourth MNO.

Telecoms Market is an Oligopoly – As Often as Not

Oligopoly is one of the forms of imperfect competition.  It is such a specific market structure where only a few large competitors, interacting with each other, competing, and concentrating a balance of the market in their hands.

The competitive environment in the telecommunication sector is highly concentrated and competition needs to be regulated to achieve sustainable development.

The Commission has created a dilemma of sorts.  The so-called dilemma of ‘collective dominance’.  To get around this dilemma, Commission officials cultivated alternative theories of harm.  One was the idea of ‘collective dominance’, which posited that competition could be distorted if a merger reduced the number of rivals in an oligopolistic market.  This is the situation in national mobile telecom markets, where a four-to-three merger may reduce competition without creating a dominant position.

The EUMR captures the loss of competition in oligopolistic markets where a merger case can ease the pressure on remaining rivals, and allows the Commission to prohibit, in certain circumstances, an oligopolistic markets concentration which, although not giving rise to the creation or strengthening of an individual or collective dominant position, is liable to affect the competitive conditions on the market to an extent equivalent to that attributable to such positions.

Many Questions Left Unanswered

Apparently, the judgment confirmed some existing perspectives trending in the Commission’s administrative practice.  It is clear that inertia and rigid thinking around the appropriate approach to address an issue can only lead to mistakes.  The Commission has the power to block horizontal mergers in a quite broad range of scenarios, especially in ones taking advantage of the legislative ‘loophole’.

Let’s not forget that apart from its obvious relevance in a telecommunications market context, the GC’s endorsement of the assumption that a “four-to-three” merger will not necessarily be blocked is potentially relevant for mergers in other oligopolistic markets. 

Would a merger between the two of only four major industry players always have the effect of eliminating a significant competitive constraint and does the intervention in EU merger control require direct evidence that a competitive parameter will be harmed, considering not only the innovation but also the expenses and quality?

Does merger control really concern only the merged entity while neglecting other undertakings in the same market?  Is it not rather about the effect that a merger may have on the market structure?

Not every question has as clear as a bell answer to it; however, concentrations between competitors do not necessarily have anticompetitive effects.  Undeniably, they can even generate efficiencies.  At the same time, any competition authority has reasonable grounds to be suspicious of horizontal mergers since they can almost have the same potential harm as cartels.

At least now, we have learnt the ropes and are expecting another big deal in antitrust probably very soon, but surely something will crop up in May 2021 – May is our star month.

Authors: Nadja Kosić and Jovana Trivunović