The telecommunications sector is back in the news, with a much-talked-about return to hightened M&A activity. In the UK Cable & Wireless has acquired Energis; BSkyB is to acquire Easynet; ntl and Telewest are to merge; and Telefonica has made an all-cash offer for 02. Meanwhile, in France Cegetel and neuf telecom are to merge; in the Netherlands KPN has acquired Telfort; in Benelux Tele2 has made a public tender offer for Versatel; and in Spain ONO announced the acquisition of Auna and France Télécom is to acquire Amena; A number of these deals, though, are currently awaiting antitrust clearance.
There seems to be three identifiable trends. First, smaller competitors are merging and bringing about industry consolidation to be better able to compete with the incumbents across Europe. As prices in the fixed-line market fall and arbitrage opportunities diminish, competitors must – as identified by The Office of Communications (Ofcom) in its ‘Strategic Review of Telecommunications – “develop the scale to compete with BT”.
Second, bigger national companies are making investments across boundaries.
And third, it appears that convergence, which at the end of the 1990s seemed to have been written off as unattainable, is finally with us. Through regulatory intervention to an extent, it has become possible for operators other than the cable companies to offer triple play – where television, telephony (mobile and/or fixed) and the internet, including broadband access, are bundled together. With the opening of the local copper access network to competition through local loop unbundling, the barriers to a single, cost-effective and technologically flexible distribution platform for the provision of triple play services have been reduced, but the unbundling of the local loop is a very costly exercise.
Triple and quadruple play
Traditionally, services could only be delivered over different platforms: the copper network for voice, the coaxial cable for video and the radio spectrum for TV and radio. Now the internet protocol makes it possible for voice, video and data to be transmitted over cable, digital subscriber line (DSL), wireless fidelity (WiFi), the wireless metropolitan-area network standard (WiMax) and mobile. The advances mean that mobile operators are now able to provide broadcast television and video on demand, clips and alerts, as well as fixed/mobile converged services.
The multi-product network (mobile, DSL, cable, WiFi, WiMax) is slowly gaining momentum and the increased announcements of deals and mergers show that now is the time to be entering the market. BT has also entered the television market and will offer video on demand.
In fact, if the talks between ntl and Virgin Mobile were to lead to a merger, ntl will soon be able to offer quadruple play. This has consequences to the way in which the authorities will analyse and view the marketplace.
Convergence v choice
Ed Richards, chief operating officer at Ofcom, stressed during a lecture in November 2005 that the emergence of triple and quadruple play was “likely to raise a number of complex but important issues in applying the regulatory and competition rules in the communications sector”. He said: “There’s the prospect of large players from one market exploiting technological convergence to enter adjacent markets and offer multi-play services to consumers, leading to a greater number of players in the provision of each service”.
This is likely to lead to an increase in competition, which is of course to be encouraged. However, as Richards also noted, “large players providing bundled services might make life very difficult for providers of a single service”.
“The test of whether this is a concern will rest with the consumer,” he continued. “If consumers generally want to buy services as a bundle, it will be difficult to argue that suppliers shouldn’t sell bundles. But if consumers continue to want to buy significantly on a separate basis, the question arises of whether bundling strategies by large players have an exclusionary motive.”
The first challenge in the converged environment is therefore to ensure that consumer choice is preserved and that providers of a single service are not squeezed out of the marketplace.
Another challenge is to ensure that smaller, traditionally single product or double play (internet broadband and telephony) operators, are given a chance to enter triple play in competition with the larger players. The emergence of voice-over-internet protocol and of local loop unbundling makes it possible for similar voice, data and video to be distributed using common internet protocols over different platforms. If providers are denied the ability to transmit the content that consumers want to access over these platforms, then triple and quadruple play risks becoming a foreclosed arena.
Local loop unbundling is a capital intensive industry: no one can seriously dispute that the long-term industry structure will likely evolve around a small number of operators which have the scale to compete on a national basis with the likes of cable companies on the one hand, and with BT on the other. However, it would be ironic if, having made the considerable capital investments for local loop unbundling, operators with the necessary scale were still to find themselves unable to meet the challenges of triple or quadruple play and to be foreclosed from the sector when it is just developing.
Emanuela Lecchi is head of EU and competition law at Charles Russell