Wigley+Company solicitors

Why the The Commission has given reasons in its 73 page Commerce decision, released several weeks after the clearance Commission was confirmed. We summarise some key points in the cleared decision. Vodafone’s purchase of TelstraClear

January 2013 Framework Markets

We start with the framework used in the The markets considered by the Commission decision1. Then we turn to specific services and were: markets. Retail • Residential fixed line voice; The Commission clears an acquisition if it will not have, or is not likely to have, the effect of • Residential fixed line broadband; sufficiently lessening competition (SLC) in a • Business fixed line data including voice; market. That’s usually assessed on a forward- looking approach over the next two years. • Mobile for business and residential. However, that two year limit had little focus Upstream inputs here, and the decision deals a lot with the here and now, as opposed to close assessment of • National backhaul transmission; what might happen in the future due to the • Spectrum. acquisition. Crystal ball gazing as to the future is challenging, and the here and now can be In the retail markets, the Commission compared informative as to the future. the current level of competition against (a) the extent to which that level of competition would In its decision, the Commission first defines the be lessened by the acquisition and (b) whether relevant markets (e.g. retail mobile services) the remaining or new entrant providers could and then considers if there is SLC in each of sufficiently constrain VF-TCL. those markets. It uses the standard factual/ counterfactual approach, or, in other words, it Turning to each market: assesses what will happen with the acquisition, Residential fixed line voice and broadband compared with what will happen without the acquisition. The “without” or counterfactual These two markets were handled together in is the status quo in this case: VF and TCL will view of overlapping issues. continue to trade separately. It is the difference The Commission said that VF and TCL are between the “with” and the “without” that drives competitors in these markets, and that would the SLC analysis, and not the difference between be lost on the acquisition. An example is the the position following the acquisition and some recent $75 price-point introduced by TCL. So the sort of Nirvanian competitive model. Seen that Commission then handled the next question: way, retaining anti-competitive aspects in the would competitors constrain VF-TCL? , said markets does not necessarily mean there is SLC. the Commission: ©Wigley & Company 2013

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Why the Commerce • Post-separation Telecom – the largest player For example, little is done to explain why (a) Commission cleared – would constrain VF-TCL, including because “nascent competition” from VF’s future options and/or plans (in the counterfactual) doesn’t Vodafone’s purchase a stronger vertically integrated provider is created, able to take on Telecom (with its change things and (b) how “Telecom alone will of TelstraClear retail focus) “head to head”; likely constrain the merged entity” when it, like VF-TCL, has incentives to keep pricing higher, • Orcon and CallPlus will continue as where competition is driven by two players. aggressive, price leading competitors, especially where they have unbundled. Mobile phone services

The Commission looked at triple-play issues, No SLC here, given TCL’s small market share and focussing on the position today, where only TCL the fact that it is an MVNO, making it a price and VF bundle in for new customers. TCL taker, with margins set by a mobile network only offer Sky over HFC, so there is little overlap operator (MNO), namely, VF. between the offerings by each of VF and TCL. Upstream inputs On this basis, competition lost was said to be minimal. Consideration of the remaining two markets The Commission concluded that UFB would not (backhaul and spectrum) focusses on: make a difference to the players in the markets • Increased pricing charged to downstream or their positions in those markets. Similarly in competitors such as for backhaul owned by the business markets that follow. VF-TCL (called partial input foreclosure); and

Fixed line services for businesses • Cessation of supply to downstream competitors (called foreclosure). The Commission considered that there are more issues in the SME space so it focussed on that in Backhaul the analysis, ahead of business at the big end of town. The Commission addressed only supply of The Commission concluded that the acquisition backhaul to rival mobile operators. It concluded could be “characterised as a reduction from three there would not be SLC for national backhaul, [Telecom, TCL and VF] to two main suppliers given: [where the] other smaller providers do not • Existing competition from FX and Telecom; appear to be targeting this market or play the price leading role that they do in the residential • Telecom is the only other vertically integrated market.” operator, and VF-TCL would require an “accommodating response of Telecom so that The Commission concluded: the choice of backhaul service providers would “On balance, the Commission considers be reduced to one”. that competition in this market appears • Chorus has, or has access to, sufficient to be driven by Telecom and TelstraClear, backhaul to enter the market, and is although Vodafone has made some incentivised to do so if backhaul prices are high advances in this market recently. enough. The Commission considers that post acquisition, Telecom will likely constrain Spectrum the merged entity.” First as to mobile use of spectrum, the deal will The analysis in this area is focussed on today’s have VF-TCL with expanded 1800MHz holdings, position rather than what might happen in the and Corp holding 1800MHz spectrum future under the factual and the counterfactual. that it can sell. The Commission decided that

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Why the Commerce this is pro-competitive rather than causing SLC: both have extensive mobile networks Commission cleared spectrum is freed up for sale to a third party. already, and the proposed acquisition would do little to alter the competitive Vodafone’s purchase Similarly in the 2100MHz range, against the landscape in this regard. of TelstraClear background that the Commission says that sub-1GHz spectrum will mostly be used for LTE Bundling fixed-line with mobile services (with 2100MHz for longer distances). 700MHz spectrum to be released by the analogue switch- Bundling can be pro-competitive, but also anti- off is said by the Commission to be relevant, and competitive too where there is, for example, said the other two mobile network operators have the Commission, predatory pricing, or bundling large holdings in the 2100MHz range anyway. prevents rivals from gaining sufficient scale to be viable. As to non-mobile use in the 2100MHz range, the Commission noted there was not The Commission said that there is a concern if SLC, for reasons that include the limited VF-TCL has the ability and incentive to foreclose commercialisation of spectrum holdings on rivals, with the effect of SLC. It concluded that in these higher bandwidth areas, and that VF-TCL wouldn’t have the ability to foreclose: commercialisation may be a number of years “joint purchasing of fixed and mobile services away (plus several other players hold spectrum in does not currently appear to be the norm”. these bandwidths). That conclusion is supported by international experience cited by the Commission. And there Conglomerate effects are what the Commission described as counter- This is the next level considered by the strategies: Telecom’s ability to bundle and Commission, followed by coordinated effects as MVNOs’ ability to bundle. noted below. However, as the Commission in effect noted A conglomerate merger involves acquisition of earlier in the decision, MVNOs have limited room a firm trading in a separate but closely related to move and would not be effective competitors market: while they often lead to efficiencies, where mobile services are involved. That is not there can be competition concerns. In this surprising: viable MVNO offerings such as those context, the Commission addressed Fixed to in the UK would be difficult to obtain in this Mobile (FTM) on-net/off-net pricing, and the limited market (where, also, one MNO does not bundling of fixed line services with mobile have national coverage on its own network). services. That view is supported by Optus’ recent announcement in Australia that it would limit Fixed-to-mobile on-net/off-net pricing supplying to MVNOs.

After an extensive review of the issues, the That leaves two fixed line and mobile-integrated Commission concluded: operators with the ability to offer fixed and mobile bundles that are not viably available from The Commission considers that the above others. Arguably, Telecom does not provide an evidence suggests that, post‐acquisition, adequate restraint in those circumstances. Vodafone would not have an enhanced ability or incentive to foreclose rival Those issues, and the role of 2degrees, are mobile services providers by engaging in not addressed, at least in the non-confidential fixed‐to‐mobile on‐net/off‐net pricing. parts of the decision. The answer may be that Fixed‐to-mobile calling does not appear 2degrees can buy-in fixed line services from to be a major driver of consumers’ choice another carrier (or acquire a fixed line operator) of mobile network. Vodafone and Telecom Wigley+Company solicitors

Why the Commerce and compete in that way. But can it viably likely be required before there could be Commission cleared do that in the 2 year window usually used on a substantial lessening of competition Vodafone’s purchase clearance applications? Those issues weren’t in relation to coordinated effects. This addressed. is because there are other competitors of TelstraClear that currently compete with the merged For overlapping and other reasons, the entity and Telecom, and which may thwart Commission also concluded there is no relevant any potential for coordination if they are incentive or effect. still in the market acting as vigorous Coordinated effects competitors. Therefore based on the conclusions above that there is unlikely The question here is whether there is the to be foreclosure due to the merger we do prospect of enhanced tacit or other coordination not consider that there will be enhanced between TCL-VF and Telecom. The issues we coordination between the merged entity raise above as to possible bundling incentives and Telecom post acquisition. for Telecom and TCL-VF (where they are the Where to from here? only integrated fixed and mobile carriers) are an example. The acquisition is done and dusted, and others don’t have rights of appeal. There Flowing from the earlier conclusions as to are undoubtedly positive outcomes of this inability to foreclose, the Commission decided acquisition such as the creation of a larger carrier that there are no coordinated effects causing SLC:

As in the vertical and conglomerate effects 1. The clearance reasons are at http://www.comcom. theories where the merged entity may govt.nz/assets/Uploads/NZCC-33-2012-Vodafone- have the unilateral incentive to increase TelstraClear-clearance-public-decision-29- prices, we consider that foreclosure would October-2012.pdf

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