Perhaps unsurprisingly, the bosses of Melita Ltd and Vodafone Malta have portrayed the proposed Melita acquisition of Vodafone Malta as a positive development for competition in the telecommunications industry in Malta.

Unfortunately for Maltese consumers, this claim appears largely unfounded. For the reasons set out below, the Office for Competition within the MCCAA is expected to find that the proposed transaction would likely give rise to higher prices and less choice for consumers, the opposite outcome of what the merging firms have asserted.

First, the proposed merger eliminates one of the three mobile network operators on the island. Post-merger, after absorbing the mobile business of Vodafone, the combined Melita-Vodafone mobile operator would dominate the market.

The increased market concentration would likely give rise to significant price increases relative to a market situation without the merger.  Concretely, the price of mobile communications has been falling, that is, tariffs of mobile plans have stayed approximately the same while consumers are getting more with standard plans including unlimited calls and SMS while offering more data.

The merger would likely halt this trend.

Recall that Melita entered the market aggressively by offering discounted tariff plans. By releasing the competitive pressure on Vodafone, the elimination of such a maverick player would likely give the new entity an incentive to raise prices.  Furthermore, it appears difficult to see, post transaction, how the merged entity would be able to roll out new technologies that would improve the performance of its mobile network.

After all, for years Vodafone has been investing to improve the quality of its network without the help of Melita, and in fact it has already started preparing to launch 4G+ across all of Malta.

Second, the merged entity, by combining the Vodafone 4G network with the Melita cable network, would propose an integrated service offering that would be hard to replicate for any new entrant on the mobile market. This would therefore secure the anti-competitive price increase that would result from the transaction.

Specifically, the merged entity would bundle its fixed service offering (broadband, fixed voice and pay TV) with its mobile services. In practice, fixed-service subscribers would either get one (or several) mobile subscriptions or be enticed to purchase prepaid mobile subscriptions from the merged entity.

Consumers are getting more with standard plans including unlimited calls and SMS while offering more data. The merger would likely halt this trend

These customers would then be out of reach for a new mobile operator, which would find it more difficult to profitably enter the market.Because any new operator would have to recoup high fixed network costs, entry would only occur if the new company expects to reach a critical mass of subscribers.

The merged entity’s bundling strategy, however, is a significant obstacle that would prevent the new player from achieving this objective.  Indeed bundling fixed and mobile services would shrink the potential customer base of any new mobile operator, therefore securing the supra-competitive rent that the new entity would earn as a result of the elimination of competition between Vodafone’s and Melita’s existing mobile operations.

Third, the merging firms have claimed that their combined fixed and mobile operations would allow the new entity to offer a full range of services, becoming therefore a competitor of equal strength to GO. The argument appears to suggest that GO currently enjoys an unassailable position as the only operator who can combine a 4G mobile network with its DSL fixed infrastructure.

In other words, the merging firms imply that GO is earning supra-competitive rent that the new entity would compete away.  This claim is baseless. GO does not offer a pure quad-play bundle that combines fixed and mobile services. That is, Home Pack subscribers do not have to take up GO mobile services to use its fixed services.

This means that GO must price its mobile plans competitively to avoid losing subscribers to Vodafone and Melita. This also means that GO cannot rely on the supply of fixed services to maintain its competitive position on the mobile market. Furthermore, GO is competing head-to-head with Melita’s cable network for the provision of fixed services.

The merger does not change this. If anything, the integration of the merging parties’ fixed and mobile operations may eventually weaken GO’s position and thus dampen competition in the market. The merged entity would be able to propose a mobile-fixed bundle that cannot be readily replicated by competitors.

In this context, it is highly likely that the OFC finds that the proposed merger between Melita and Vodafone would significantly lessen competition. In practice, this means that the transaction cannot be authorised unless the merging parties offer a set of robust commitments that would be sufficient to guarantee that competition remains effective post-merger.

To achieve this objective, at a minimum, the merged entity should be required to divest Melita’s entire mobile operations, thereby allowing a new operator to replace the current third operator and apply the same level of competitive pressure on the market.

However, to ensure that the remedies are effective, the OFC would have to condition the regulatory clearance of the transaction on finding a suitable purchaser for Melita’s assets (also known as up-front buyer condition).

Furthermore, and importantly, because of its plan to integrate its fixed and mobile services, the merged entity should be under the obligations to open its cable network to any third party under fair, reasonable and non-discriminatory terms.

In particular, this would ensure that a new mobile operator could launch a competing bundle and/or that an operator finds it attractive to enter the retail fixed market. After all, the transaction also eliminates the most credible, potential entrant on the retail fixed markets, namely Vodafone.

Benoît Durand is a Partner at RBB Economics, one of the largest global specialised economic consultancies focusing on competition law.

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