PHONES 4U LIMITED (In Administration) Claimant - and
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Claim No. CP-2018-000038 IN THE HIGH COURT OF JUSTICE BUSINESS AND PROPERTY COURTS COMPETITION LIST (Ch D) BETWEEN: PHONES 4U LIMITED (In Administration) Claimant - and - (1) EE LIMITED (2) DEUTSCHE TELEKOM AG (3) ORANGE SA (4) VODAFONE LIMITED (5) VODAFONE GROUP PUBLIC LIMITED COMPANY (6) TELEFONICA UK LIMITED (7) TELEFÓNICA, S.A. (8) TELEFONICA EUROPE PLC Defendants ______________________________________________ DEFENCE OF THE SECOND DEFENDANT ______________________________________________ OVERVIEW AND SUMMARY 1. This is the Defence of the Second Defendant, Deutsche Telekom AG (“DT”). 2. The claims against DT are totally without merit. By way of summary: a) DT was, together with France Télécom S.A. (“FT”, now the third Defendant, Orange SA), a 50% shareholder in EE Limited (“EE”), a joint venture. The revenues from EE’s business were not consolidated within those of DT. 1 b) Under the joint venture contractual framework, DT had two non-executive members on the EE Board, which generally met every other month. DT also participated in regular EE business review meetings. The day-to-day operational control or running of EE was, however, conducted by EE’s senior management. c) Under the EE joint venture agreement with FT (“JVA”), DT’s consent was required for certain key joint venture matters, such as EE’s annual budget and business plan. d) The approach outlined in sub-paragraphs b) and c) above also applied in general to EE’s dealings with P4U, as well as indirect partners more generally. DT therefore denies the allegation in the Particulars of Claim that it sought to “impose” its objectives as respects P4U and/or indirect partners generally on EE. DT’s interest and interventions would come from an overall strategic perspective of protecting and maximising the value of its financial investment in EE. e) P4U’s allegations against DT assume that an MNO in general has a strong and dominating incentive to detach itself from retail intermediaries such as P4U. This over-simplistic assumption is at odds with the business experience of DT: i. Acquiring or extending customer contracts via intermediaries has for more than 20 years been a substantial and integral part of many MNOs’ sales strategies. A mix between direct and indirect sales channels may be optimal in certain circumstances. For example, a direct sales channel may not be profitable in rural areas where the set-up costs for a single brand retail shop could not be recovered by sales in the local catchment area. Similarly, from a consumer perspective, a consumer in a rural area may be less attracted by an MNO’s individual brand shop, and more attracted by a multi-brand (intermediary) retailer shop. ii. For example, even in Germany today approximately every second customer of DT’s subsidiary (Telekom Deutschland GmbH) is acquired via intermediaries or service providers/MVNOs (mobile virtual network operators). 2 iii. Retail intermediaries may in some circumstances exercise some downward pressure on pricing, but this is contingent on a range of factors. In particular, due to a predominantly commission-based sales model, intermediaries have a clear incentive to sell contracts that earn them the best margin, whether or not this also happens to be the cheapest offering to a customer. f) Against this background, EE had to find the right combination of distribution channels, direct and indirect, that would allow it to at least maintain its market share in a highly competitive market like the UK whilst, self-evidently, managing and controlling its cost profile. It follows that P4U’s suggestion that DT was determined, as a general matter, to eliminate intermediaries, or generally believed that driving EE’s intermediaries out of business would be advantageous, is incorrect, including as respects P4U. g) Beyond the baseless allegation of a per se hostile approach of the Defendants/DT in relation to retail intermediaries, the core of P4U’s case is that EE (and thus DT) had no legitimate reason to scale back their reliance on P4U, and pursued an underhand agenda of colluding with other MNOs to drive P4U out of business. P4U’s case is, however, confused and illogical. In 2012 and 2013, the reality is that the relationship between EE and P4U was actually extended. On 10 October 2012, a new three-year agreement was signed between the parties, and in December 2012 the agreement was amended to allow P4U to sell higher volumes of EE Connections. DT expected that this deal would likely run its full course to 2015. The suggestion that EE and/or DT was, in relation to P4U, motivated by any “commitments” made by other MNOs prior to the P4U contract being entered into and/or amended is therefore wrong. h) After entering the EE Agreement in 2012, EE, like any other responsible commercial operator, kept its distribution arrangements, direct and indirect, under constant review, on a legitimate and responsible commercial basis, for both general and specific reasons: i. Whilst (as addressed above) an indirect distribution channel, such as P4U, can in principle offer advantages (e.g., if there are geographic gaps in retail 3 coverage for an MNO), it also involves costs, since an intermediary will require an additional margin over and above the MNO. Moreover, the value of the Connections acquired via indirect sales channels constantly needs to be reassessed on the basis of performance indicators (such as average revenue per customer, bad debt and fraud rates). An intermediary also does not in general contribute to building the value of an MNO’s brand (particularly as compared with a direct sales channel). ii. There were also specific factors affecting the assessment of P4U’s status as an intermediary in 2013 and 2014: 1. O2 had, in early 2013, reduced P4U’s business to upgrades for existing O2 customers. 2. In early 2014, O2 then eliminated its reliance on P4U for upgrades as well (which P4U itself announced). 3. In February 2014, talks for a merger between Carphone Warehouse (“CPW”) and Dixons were publicly announced. This had a potentially transformational impact on the indirect distribution landscape, since the scale and scope of retail coverage of the merged entity had the real potential to offer a standalone indirect distribution alternative to P4U. 4. In April 2014, Vodafone announced plans to invest £100 million in opening 150 new stores under its own brand. 5. EE itself kept the optimal balance between direct distribution in own- retail outlets versus indirect distribution via P4U and others under specific review in late 2013 and 2014. This was not only due to the market developments adverted to above, but also because EE was itself keen to maximise its margin (and, therefore, from DT’s perspective, its investment in EE) by using direct distribution where commercially justified. i) Accordingly, when EE and DT (and the other parent company, FT, as shareholders) considered options in respect of the renewal of the 2012 EE 4 Agreement in the latter part of 2013 and particularly in the first half of 2014, it was against a potentially quite different set of circumstances compared to when the EE Agreement was concluded in October 2012. Indeed, there were realistic scenarios in which extending the EE Agreement beyond the September 2015 expiry date may not have made commercial sense for EE and its shareholders. j) EE announced a review of its internal retail strategy on 31 January 2014, building on work undertaken in late 2013. At that stage, however, EE (and DT as a shareholder) had not made any final decision about the options of that retail strategy. By around May 2014, EE had developed a detailed picture on its options in the changing and fluid market environment outlined in sub-paragraph h) above. This involved weighing the pros and cons of various commercial options, seeing which options made the most financial sense to EE, and then presenting them to the shareholders, DT and FT. Out of that analysis, the option identified as the most favourable (and hence recommended by EE) was one to the effect that EE would: (1) seek to have CPW become its largest (and, depending on the terms, possibly sole) indirect distribution partner; (2) make additional investments in developing EE’s own direct sales channel (with circa 150 stores); and (3) honour the existing EE Agreement, certainly at least until its expiry at the end of September 2015 (and thereafter seek to spread the P4U volume between its new direct retail outlets and an expanded CPW indirect distribution base). This option was considered preferable by EE because it had the most favourable impact on EE’s earnings before interest, tax, depreciation and amortisation (“EBITDA”) over a forward-looking four- to five-year cycle. DT agreed with EE’s preference for this option. k) However, throughout this process of evaluation, EE was open to the possibility of extending the P4U arrangements beyond 2015 provided, crucially, that better terms could be offered than those applicable under the current deal, and better than those that could be offered by CPW, which (given its dealings with Dixons) was keen to retain EE as a customer and/or grow volumes with EE. In this regard, it was significant that the terms under the EE Agreement provided P4U with an artificially strong incentive to acquire customers by discounting handsets (for which EE bore 50% of the costs). The profile of customers 5 acquired by P4U for EE also tended to be less profitable, to carry higher risks (notably bad debt and fraud), and to have shorter tenure than those acquired through other channels. The above circumstances directly and strongly contradict P4U’s allegation that EE’s decision not to renew the EE Agreement in September 2014 involved, or was the product of, unlawful collusion with other MNOs or MNO undertakings.