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Mobile telecoms consolidation

Consolidation in mobile telecommunications leads to higher consumer prices but also higher investment per mobile operator, finds study based on 33 OECD countries over a 12-year period.

Shot of a group of colleagues using their cellphones together in an office

Consolidation among mobile telecoms operators is an issue that has vexed regulators in recent years, with some mergers cleared and others blocked on concerns that competition would be stymied. In many countries, the question has been whether four major operators can be reduced to three.

A new study forthcoming in the journal Economic Policy, based on a trove of data from 33 OECD countries over a 12-year period (2002-2014), finds that prices paid by consumers are higher in more concentrated markets (by an estimated average of 16.3 per cent in a four-to-three operator merger, according to the study’s model), while at the same time investment per operator increases when the number of providers is reduced (by an estimated 19.3 per cent in a four-to-three merger).

The effect of such consolidation on total investment by all operators does not appear significant, but those findings are not conclusive.

The authors – from Cambridge Judge Business School, Imperial College London, and the University of Leuven in Belgium – argue that regulators have so far focused hard on consumer pricing implications of mobile consolidation, while paying little attention to the impact of mergers on efficiencies and investment.

Dr Christos Genakos

Dr Christos Genakos

“The study says that regulators and policymakers should consider investment more seriously, and weigh more fully the trade-off between consumer pricing and operator efficiency and investment in order to reach the best decisions,” says Dr Christos Genakos, University Senior Lecturer in Economics at Cambridge Judge Business School.

“At the European Commission, merging parties face tough hurdles in submitting efficiency defences – not just in the mobile industry – and the result of this is that they tend not to put much effort into this. The result is a self-fulfilling loop in which pricing rather than efficiency is the overwhelming focus, and we think that this loop should be broken so evidence on efficiency is no longer merely an after-thought.”

Recent four-to-three mobile operator consolidation approved in Europe include mergers in Austria between Orange and Hutchinson (2013), in the Netherlands between Orange and T-Mobile (2007), and in Germany between O2 and E-Plus (2014). Four-to-three mergers that were blocked involved deals between Hutchinson and 02 in both Denmark (2015) and the UK (2016).

The study collected what the authors described as being, to their knowledge, the “largest dataset employed to date” for study of pricing and investment in the mobile telecoms sector – using quarterly information on consumer billing from price benchmarking firm Teligen and capital expenditure data from the Global Wireless Matrix of Bank of America Merrill Lynch, as well as other mobile-industry data on such measures as average profits, profit margins and revenue per user.

During the period 2006-2014 (which was used for some of the study’s analysis), absolute consumer prices declined steadily and sharply during the study period (due partly from competition from new chat apps and other rival technology); the study focused on relative prices and considers the impact of a change in market structure (due to entry via licensing, exit via mergers or organic growth) in some countries relative to other countries that experience these changes at different times or not at all.

The study finds that increased market concentration in the mobile industry potentially generates an important trade-off. For example, a merger increases prices, but also investment per operator goes up. Based on the study’s estimates, compared to no change, a hypothetical four-to-three symmetric merger would increase end user bills by 16.3 per cent on average, while at the same time capital expenditure would go up by 19.3 per cent at the operator level.

“Our findings are not only relevant for the current consolidation wave in the telecommunications industry,” the study says. “More generally, they also stress that competition and regulatory authorities should take seriously the potential trade-off between market power effects and efficiency gains stemming from agreements between firms.”

The study – entitled “Evaluating market consolidation in mobile communications” – is co-authored by Dr Christos Genakos of Cambridge Judge Business School, Tommaso Valletti of Imperial College London, and Frank Verboven of the University of Leuven.