Europe is at a telco M&A fork in the road

• There is pressure on Brussels to slacken regulation and permit mobile mergers to strengthen Europe’s mobile and digital services market 
• Claims are the sector would become financially stronger and more efficient, but competition would decline and consumer bills would rise
• Analysts say consolidation would release cash to help fund 6G and other next-generation technologies while meeting the EU’s digital and green transition agendas

As Europe considers the strength and future of its digital services sector and the best way to develop a suitable regulatory regime while enabling the development of a regional powerhouse, it might want to look west across the Atlantic. The US Chips Act recently celebrated its first birthday and it is evident that the legislation is a success. The 2022 Chips and Science Act, to give it its full name, was signed into law by President Joe Biden on 9 August 2022. The legislation provides some $280bn in funding over 10 years to boost domestic scientific research and development (R&D) and to fund the expansion of semiconductor manufacturing in the US: It includes $39bn in subsidies for chip manufacturing “on US soil” together with 25% investment tax credits for costs of manufacturing equipment and $13bn for semiconductor research and workforce training.

The primary aim of the Act is to enhance and ensure US competitiveness, innovation and national security in semiconductors and to counter the perceived threat of China in those matters. In essence, those companies (and any affiliates) in receipt of federal funding under the Chips Act are prohibited from engaging in any joint research into leading-edge high-tech semiconductors “or certain other items controlled” and/or signing licensing agreements with any Chinese company. 

To date, the Chips Act has already spurred $166bn in semiconductor and electronics investments in the US and, in light of its success, the European Union (EU) is now looking to learn lessons from some aspects of the proactive American legislation as pressure grows to light a fire under the region’s technology and communications sectors.

Europe has its own equivalent of the successful US legislation of course – the European Chips Act, albeit on a smaller scale, seeks to help boost the region’s global chip manufacturing sector market share from the current 10% to 20% by 2030, and efforts to help achieve that goal are already underway. 

But that alone won’t transform Europe. While it doesn’t relate to subsidies and investments, one particular area that many feel needs to be addressed by proactive regulation is telco sector consolidation.  

Those in favour of consolidation claim that Europe’s competitive telco environment is now a liability rather than an advantage. Indeed, the EU’s competition commissioner, Margrethe Vestager, recently referred to EU mobile telco competition as “excessive” and said it is now both pressuring investment levels in the sector and limiting profitability. Overall, she adds, these factors are compromising the EU’s ability to compete “at an international level”. 

Her view, and those of many European telcos, are echoed by the telecoms market analysts who bang the drum for consolidation, saying their studies show that by reducing the number of operators across the EU’s member states, the sector would become financially stronger and more efficient (yes, it’s that all-enveloping but difficult to quantify word again, so beloved of politicians and asset-strippers the world over) and would thus provide the cash greatly needed to increase levels of investment in technologies, such as 6G, AI/ML (machine learning) etc, and so allow the EU to compete on equal terms in the same arena as the US and China. 

Currently, Spain holds the six-month-long revolving presidency of the EU Council. It began on 1 July and will end on 31 December, to be followed by Belgium (January to June 2024) and then Hungary (July to December of next year). Spain is using its presidency to push hard for ways to accelerate telecom market consolidation: The country’s secretary of state for telecommunications and digital infrastructure, Maria Gonzalez Veracruz, says it is incumbent on the government to improve the global market position of the EU’s telcos and so to help “in every way it can” to provide favourable circumstances to effect sector consolidation. Meanwhile, C-level executives across Europe’s telcos, communications service providers and digital service providers are agitating for rapid and far-reaching changes to regulations that, they claim, are out of date and a major stumbling block to “continental” consolidation. 

Of course, the not-so-hidden hand of self-interest is quite evident where the Spanish government is concerned. Strong rumours have it that Telefónica is pursuing a fibre network partnership deal with Vodafone Spain: Telefónica wants to enlarge and consolidate its empire and enhance its position in the greater European telecoms market while a floundering Vodafone Spain is casting about for a lifebelt as Spain’s multiplicity of cheap and cheerful rivals pile on the competitive pressure.

Is 100-plus mobile network operators across the member states of the EU too many?

There are more than 100 mobile operators across the 27 member states of the EU, and several of them, generally the smaller nations, have four per country. For years, four operators per member state was touted by the European Commission (EC) as the “magic number” and it was dead set against merger and acquisition (M&A) activity that would reduce the number to three because it regarded such takeovers as a certain path to the development of oligopolistic markets.

Any potential four-to-three mobile merger, even if the resulting operator remained below the threshold of market dominance, was closely analysed to determine whether such consolidation would instigate market changes that would negatively affect market competition. Thus, long Phase II reviews of mooted four-to-three mobile mergers were instituted by the EC and were either denied – as happened in Denmark with Telia and Telenor, and in the UK with O2 and Three – or allowed only after the merging companies divested assets sufficient to allow a new fourth operator to enter the market.

However, the mood is changing and, across the EU as a whole, Brussels finds itself walking a tightrope to somehow maintain its balance between consolidation and competition as it seeks to ensure that the European telco sector will, in future, still have a global influence and a part to play in the international market, while simultaneously trying to make sure that a badly built bonfire of regulations doesn’t spread to burn down down the carefully constructed European regulatory environment and cover member states in smoke and ashes.

An extremely important test case that should determine whether the EC will continue its long-standing opposition to four-to-three mobile mergers is underway right now. The €18.6bn merger of Orange Spain and MasMóvil was announced in July 2022 but, as it would create the country’s largest domestic operator by subscriber numbers, there are major concerns in Brussels that the merger would reduce competition and increase prices to consumers and enterprises.

Thus, the commission has sent a statement of objections to the operators and is demanding “significant remedies” if an amended deal is to be approved. In a statement, the EC wrote, “The commission is concerned that the proposed transaction may reduce the number of network operators in Spain, thereby eliminating a significant competitive constraint and innovative rival in the Spanish retail markets for mobile telecommunications services, fixed internet services and multiple-play bundles.”

The European mobile regulatory environment is now at a crossroads and what happens next could well determine the course of European mobile telecoms consolidation for years to come. 

What’s more, the commission will find itself in a difficult position whatever the outcome of the Orange-MasMóvil merger. 

Should it permit the deal in an attempt to foster much-needed investment in 5G networks and other technologies to meet its self-imposed “digital-green transition” agenda? Competitive operator Digi Spain might help sway the argument in this direction by announcing it will invest billions in its own network if it is granted the opportunity to acquire any assets that Orange Spain and MasMóvil are forced to sell if conditional regulatory approval is granted.   

Or will the EC maintain strong regulatory control, forbid the merger on the grounds that it is anti-competitive, and risk the EU becoming a digital also-ran behind the US, China and other global competitors?

That critical decision is imminent, though the EC probe was put on ice in late July to give more time for responses from Orange and MasMóvil. The ultimate outcome, whenever it comes, looks to be crucial to Europe’s tech and telco sector.

- Martyn Warwick, Editor in Chief, TelecomTV