Competition wished into existence?

David Havyatt

Anyone who attends the ACCC and Australian Energy Regulator (AER) annual regulatory conference is struck by the existential dilemma that afflicts competition regulators.

Their economic world view is that competition is the best way to efficiently deliver products and services to consumers, but their task is to be regulators.

But the principle of competition hits a barrier in cases where the technology means that all the required output can be supplied at lowest cost by one provider — the condition of natural monopoly.

Vodafone-TPG: Are the regulators trying to wish competition into existence?

As regulators the ACCC typically do three things; decide whether something is a monopoly and should be subject to price control, setting the prices for monopoly services and deciding whether mergers or acquisitions will substantially lessen competition.

The ACCC itself only has the power to allow mergers, any decision to block a merger can be appealed. Merger decisions become particularly interesting when they relate to sectors that the ACCC regulates.

So we come to the decision of the ACCC to oppose the merger of Vodafone Hutchison Australia (VHA) and TPG Telecom (TPG).

The ACCC has concluded, ‘in particular, that the proposed merger between TPG and Vodafone is likely to substantially lessen competition in the supply of mobile services because the proposed merger would preclude TPG entering as the fourth mobile network operator in Australia.’

This is a particularly challenging decision, given that the ACCC previously did not oppose the merger of Hutchison and Vodafone, both of which were operating 3G networks.

In the space of under a decade the ACCC has changed from not opposing the merger of the third and fourth network to opposing a merger between the third network and a business that is just possibly a fourth network.

The ACCC issues Public Competition Assessments in cases (among others) where it opposes a merger or it is not opposed but the merger raises important issues the ACCC thinks should be made public. We have the Assessment from the earlier merger but not yet the VHA/TPG one, though the ACCC is being encouraged to do so.

For the earlier merger the ACCC identified two types of services offered at the retail level by Mobile Network Operators; mobile telephony and mobile broadband (MBB). The most important part was that the ACCC determined that MBB was not a substitute for fixed broadband on the basis of price and service offerings.

What tipped the ACCC’s consideration in the earlier case seems to be a conclusion that while Hutchison was a vigorous competitor, absent the merger Hutchison would unlikely continue to be a vigorous competitor.

The ACCC found that ‘in the foreseeable future Hutchison was unlikely to continue to be a vigorous and effective competitor in the MBB segment of the market. It was found that Hutchison has network capacity constraints, and would need to undertake substantial investments in network capacity in order to continue to compete aggressively for MBB customers. Having examined the evidence provided by Hutchison and HWL, the ACCC considered that the significant investments needed to fully overcome Hutchison’s network capacity constraints were not likely to be made.’

In the current case the ACCC has convinced itself otherwise based on its claims that TPG has an investment program already developed. In this assessment the ACCC is being misled by the simple construct of ‘strategic commitment.’

Prior to making any decision to invest in mobile, TPG’s best strategy would have been a merger with VHA. The question for management is how to get VHA interested in the merger. If TPG just talked about possibly getting into the mobile market, then VHA had no reason to take them seriously.

However, by buying spectrum and commencing a 4G build they make a strategic commitment which VHA has to take seriously. It now transpires that the ACCC is being convinced that TPG would continue that build without the merger.

We have seen this game of strategic commitment play out before in Australia with disastrous consequences. When Optus first talked about building a hybrid fibre coax (HFC) network for pay TV and voice Telstra didn’t take them seriously and didn’t respond by lowering telephony interconnect rates.

Once Optus signed with Continental Cablevision to form Optus Vision, Telstra realised the threat was real . Telstra tried to go back to Optus with lower interconnection rates, but by then Continental Cablevision had Optus as a committed party and wouldn’t let Optus out of the telephony side of the deal.

Bizarrely once the network was capable of telephony, OptusVision charged Optus the same PSTN rates as Telstra, because that was the ‘market price.’

The ACCC didn’t have anything to authorise here, but the decision on VHA/TPG is a bit like the ACCC standing in the shoes of Continental Cablevision and insisting that TPG fulfil the promise of the strategic commitment. The only difference is the TPG doesn’t have to build its network.

The advice the ACCC has received – that because TPG has already a sunk investment they will by necessity complete the network – is an economic nonsense. TPG needs to make a marginal decision about whether it will get a return from another dollar spent, also recognising that their costs have increased since the business case was first considered.

The ACCC’s decision not to declare mobile roaming, which was made six months after TPG decided to enter the MNO space, would not help the business case.

TPG’s plan to cover 80 per cent of the population might be useful for a wireless broadband strategy, but would struggle in a mobile broadband strategy. That density of coverage would not be anywhere near as much contiguous coverage.

Since the original decision to licence three mobile (GSM) operators was replaced by an open entry approach, a policy bias to promoting competition hasn’t succeeded in making a fourth operator materialise.

AAPT and One.Tel were the first to fall away, and Hutchison limped to the merger with Vodafone. If TPG does make the investment and builds a network the ACCC is probably simply only deferring a decision – as almost certainly either VHA or TPG will eventually exit the market.

The best economic outcome will be one that ultimately happens by merger. The alternative is the unhappy circumstances that followed the ACCC blocking Foxtel’s acquisition of Australis, bizarrely on the grounds of competition in local telephony. Various parties simply gathered to feast on the carcass.

The other part of the ACCC reasoning that will be of interest is seeing how the with or without test reflects on the competition in all services. In a world where bundling of fixed and mobile services is encouraged it would seem that VHA/TPG becomes a far more significant competitor for the bundled services offerings of Telstra and Optus.

A market structure of three integrated firms all selling the same fixed line infrastructure is a competitive environment with very different dynamics to the dominant firm with a competitive fringe we are used to.

The fixed broadband market is facing its own competitive constraints. While a lot of focus exists on NBN Co’s pricing, especially its CVC charges, less analysis exists of the backhaul market from the Points of Interconnect mandated by the ACCC to preserve competition in the transmission market.

Competition regulators sometimes have to accept the limitations that technology places on the prospects of competition. This country wasted resources on the HFC wars. We have been wasting money by constraining NBN Co on the prospect of competitive supply.

The last thing we need is to see resources wasted on building another mobile network when it is not needed to provide coverage nor competition.

David Havyatt worked as a Special Adviser to Senator Conroy from Dec 2011 to June 2013. He is no longer employed in a political office and no longer works in telecommunications.

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