Sustainably competitive

When looking at telecom services, regulators should focus on whether the market is sustainably competitive. That seems to be the message arising from merger reviews in Europe.

After years of focus on the number of carriers, regulators are taking note of the impact of hypercompetitive markets on investment. UK service providers are unable to cover their cost of capital. As a result, operators are unable to fund network upgrades. Vodafone and Three UK intend to merge. The Competition and Markets Authority (CMA) in the UK is moving into the next phase of its review of the merger.

In announcing its next phase, CMA said “the deal, which combines 2 of the 4 mobile network operators in the UK, could lead to mobile customers facing higher prices and reduced quality.”

The CMA’s Phase 1 investigation found that Vodafone UK and Three UK provide important alternatives for mobile customers. Both have made significant investments in their networks in recent years – which includes the rollout of 5G. Three UK is also generally the cheapest of the four mobile network operators. The CMA is concerned that combining these two businesses will reduce rivalry between mobile operators to win new customers. Competitive pressure can help to keep prices low, as well as provide an important incentive for network operators to improve their services, including by investing in network quality.

Vodafone and Three UK replied, noting “The current market structure has resulted in the quality of mobile network services in the UK lagging significantly behind other European countries. Vodafone UK and Three UK are sub-scale, unable to cover their cost of capital, and constrained in their ability to invest and compete effectively against the two market leaders.”

In February, OpenSignal reported that the UK ranked 22nd for 5G availability and download speeds when comparing to 25 European countries. The UK has the slowest download speeds in the G7. By way of comparison, I recently wrote that Canada is consistently a leader in availability and speeds.

There is a reason why EBITDA margins are necessarily higher among facilities-based telecom competitors. By definition, EBITDA measures the earnings before consideration of interest, depreciation, and amortization. Each of these are costly factors for companies with large investments in infrastructure. If the EBITDA margins are not sufficiently strong, network operators will be unable to maintain investment.

Last October, I wrote about a CRTC arbitration on MVNO access, where the Commission determination explicitly said “This decision helps to promote access to affordable telecommunications services for Canadians and to foster sustainable competition and continued investment.” At the time, I asked “To what extent does it provide clues for the way the CRTC will approach revisions to the wireline wholesale framework?” I wrote about sustainable competition two years ago, showing how the CRTC and Competition Bureau seemed to be at odds in their approaches.

A singular focus on driving lower prices fails to appropriately consider balancing competing policy objectives. In Canada, telecom policy seeks a balance between quality, coverage and price. I’d submit that the number of competitors should be a less important factor for policy makers. The more important consideration should be fostering a sustainably competitive market to deliver overall consumer benefits.