Ofcom’s full set of tools: taking on the oligopoly

Do European regulators need a new framework to enable intervention in consolidated markets?

The headline takeaway of Ofcom Chief Executive Sharon White’s speech at the LSE last night is that the Three-O2 merger is not pleasing to Ofcom, unless there are some significant measures undertaken to promote competition in the market.

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White: Ofcom CEO in search of a full set of tools

Ofcom is still of the opinion that four national operators is better than three, and that increased competition enhances investment, rather than limiting it. Where markets have reduced, via consolidation, the results have been poor for consumers, with little evidence of increased investment as a result. As White said, “Our analysis of a dozen countries, inside the EU and beyond, shows no relationship between consolidation and investment.”

She also pointed out that even though UK operators have been splurging on LTE networks, “ they are maintaining a healthy average cashflow margin of more than 12 per cent.”

Although Ofcom will not “rule” on the potential Three-O2 acquisition (it’s not its decision to make), it will certainly have an input to the CMA. Not surprisingly, given its newsworthiness, this angle dominated reporting.

As a result, one interesting aspect of White’s speech went slightly (if not totally) missing, and this was her call for “a full set of tools to do the job” –  to enable Ofcom to regulate a changing telecoms market more effectively.

The Mobile Network understands this to mean that Ofcom views the established de facto threshold for justifying ex ante intervention in a market as too limited and clumsy for markets with very limited numbers of players.

Although the framework is very clear about potential characteristics of the market, the casework since then has established an artificial and disproportionate threshold.

There is a feeling that the case law that has emerged on top of the European regulatory framework is too limiting. The de facto measure of whether a market is likely to result in a degree of co-ordination is to demonstrate “tactit collusion”.

This is “by definition” hard to prove, White said. In White’s words: “The problem is that the framework sets too high a bar for regulating cases where no one company has market power but the market is still highly concentrated”.

What Ofcom is concerned about is that a market may exhibit signifiers of a lack of competition, such as low customer switching or high barriers to entry for new players, but the regulator cannot intervene because the accepted threshold – demonstrating joint significant market power via tacit collusion – cannot be met.

There is a feeling that although the framework is very clear about potential characteristics of the market, the casework since then has established an artificial and disproportionate threshold.

It is clear that Ofcom would really rather the mobile market didn’t consolidate, but it if does, and the number of players reduces, Ofcom wants to have more flexibility to regulate the market.

As just one national regulator, Ofcom is not alone in this and it has fed its thoughts into BEREC’s Draft Report on oligopoly analysis and regulation. This report has been submitted for consultation and the European Commission has committed to consider the issue as part of the review of the telecoms framework.

What the BEREC paper identified was that although regulators have a framework for identifying and acting upon significant market power of a single telco, they do not have the same ability to act in cases where joint significant market power (SMP) may be “harming” a market. Consolidation is more likely to create this scenario, as players become of equal size and power. (Put simply, where you have a smaller player, the potential for collusion or tacit collusion is limited as it is not in the interests of the smaller party.)

In that context, White’s “full set of tools” would include the ability to act in cases of joint SMP.

 

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