Less than four reliable national wholesalers

Ofcom is concerned about the number of national wholesalers in the communications market. Currently we have four national wholesalers but until recently we had five wholesalers. It is a fact that consumers in the UK get communications services at a lower price than their counterparts in other European countries thanks to the existence of stiff competition in the mobile market. The regulator realizes the fact that after the auction if there are fewer than four credible national wholesalers in the UK, then the competition in the mobile market would be badly affected. Hence the auction acquires special importance in shaping future competition in the mobile market.

The regulator has received many responses stating that there is no room for any concern even if the number of credible national wholesalers after the spectrum auction is fewer than four. Ofcom has considered these responses too.

Ofcom assessed the future competition in the mobile market after the spectrum auction and noted that there would be an increase in concentration in the market. Hence it is considering the use of tools of assessment similar to the tools of assessment used for the assessment of merger. This assessment takes into account the phenomena of increase in market concentration also. The regulator is aware of the differences between the consideration of merger and the present issues. Here Ofcom is concerned with the effects of the release of spectrum in to the market that could change the very structure of the market. It could also pave the way for the new LTE technology and ultimate benefit to the consumers. Five to ten years from the conclusion of the auction is the time frame of the competition assessment. In the case of merger assessment, there were only two identified merging entities whereas in this case, the element of uncertainties as well as its impact would be great. To speak of uncertainties, for example, which national wholesaler would exist, which one would benefit from the auction, to what extent it would be benefited and the time scale involved etc. remain obscure. These factors limit the extent and scope of the analysis.

Since there are broad similarities like the economic issues and market concentration Ofcom decides to make use of the tools of merger assessment. In this assessment Ofcom is considering the factors like the increase in market concentration, the scope for coordinated behaviour between firms, the scope of firms unilaterally to raise prices and reduce quality, whether buyers have countervailing bargaining power, the extent of barriers to entering the market and whether efficiency could be increased by consolidation.

In relation to the provisions of mobile services, here Ofcom is considering the above mentioned factors. According to standard classifications (HHI is over 2000) the current market is highly concentrated. The scope for coordinated behaviour will depend on factors like the ability of the firm to reach a coordinated agreement, the ability to monitor and punish cheating on this agreement etc. The coordinated behaviour becomes difficult because of the intricacy of mobile tariffs. Risk of coordinated behaviour is that it may lead to reduction in the number of competitors or a greater symmetry among the competitors.

The scope for firms unilaterally raising prices or reducing quality: A market where the entry is very difficult for the new entrants, if an existing competitor is removed, naturally consumers will have only fewer options. When the counterbalancing effects are less the response to a price increase would also be less. In a concentrated market firms will charge higher prices. With a larger increase in concentration, unilateral effects will be greater. They will also depend on how many customers consider the existing/acquired firm as a substitute, and whether consolidation will result in the removal of a firm which was a strong competitor. Here in the UK all the four national wholesalers have constituted a strong competitive force. If the smallest among them say H3G vanishes, then it would increase the HHI (measures of market concentration) by 450 points. In a highly concentrated market 150 points is considered as the threshold of potential competition concern in merger control.

Entry barriers: In the UK there are mainly two reasons to say that the entry barriers are high 1) the barrier include the cost of the infrastructure and 2) the availability of spectrum is limited.

Countervailing buyer power: means the customer’s ability to bargain down prices either by threatening to switch to another provider or to buy less. Depending on the wholesale market conditions, MVNOs may be able to bargain down the prices by threatening to switch wholesaler.

Efficiency benefits: According to the CC/OFT mergers pave the way for the emergence of a range of potential efficiencies and will lead to greater economies of scale (economies of scale = saving in cost of production due to mass production). If this savings is passed on to consumers in terms of low prices, it would be a benefit to the consumers. In the present case if the wholesalers agree to share networks without a reduction in the number of national wholesalers the scope of achieving greater efficiency is more.

Ofcom’s exploratory view is that a further concentration in the already highly concentrated market would be the result of consolidation from four credible national wholesalers to three. Ceteris paribus, it would incentivise the firms to raise the prices unilaterally or to remain less competitive. There is also a chance of coordination becoming easier as a result of the elimination of a competitor. This will happen in a market where the entry barriers are high and the consumers having little countervailing power. The scope for achieving cost efficiencies without a reduction in the number of wholesalers will be high. Taking in to consideration of all these facts, Ofcom came to the conclusion that a consolidation from four to three national wholesalers would lead to a reduction in competition.

Ofcom considered the impact of a reduction in competitive intensity on consumers. When there is a reduction in competition then there is a chance of the wholesalers increasing the price of services with a view to increase profits. It will be followed by less investment in new services and innovations. The remaining national wholesalers will go on making profits at the expense of the consumers since they were to pay higher prices. Not only that availability of choice will be reduced and access to new or improved services would also be delayed.

The communications market in the UK is so large that the revenue from this sector in 2010 was 15.1 billion Pounds. Majority of the adult population in the UK use the communications services. The mobile connections per head of population in the UK are 1.3 while the 3G connection is one for two people i.e. 50 per cent. The estimated consumer surplus generated in 2010 is 20.7 billion Pounds. Consumer surplus is the value of a service to a consumer minus the price paid by the consumer for that particular service. Hence a substantial economic impact would be felt if there is a slight reduction in the intensity of competition. For example, it is estimated that the loss of consumer surplus in a year would be 0.2 billion if the reduction in competitive intensity is 1 per cent.

The assessment made by Ofcom regarding the future competitiveness in mobile market helped the regulator to reach the provisional conclusion that any reduction in the number of national wholesalers from four to three would lead to a reduction in competition which would pave the way for consumer detriment. Hence Ofcom has decided to implement certain appropriate measures in the auction so as to promote wholesale competition.

Provisional conclusions on fewer than four national wholesalers More over Ofcom noted that if future developments necessitate the existence of four credible national wholesalers in consumers’ interest, it can be assessed through the merger regime. On the other hand, consolidation from four wholesalers to three wholesalers takes place as a result of the auction and it is found that the consolidation is detrimental to the interest of consumers, and then it would be difficult to reverse the situation.

Ofcom is aware of the inherent risk in the auction that it may result in the existence of fewer than four credible national wholesalers and that such a situation would not promote competition in the communications market after the auction. Ofcom is still considering such a situation and its chances of occurrence. Under these circumstances the regulator consider whether it should implement appropriate and proportionate measures with a view to avoid the chances of consolidation and to promote competition.