Australian Communications Consumer Action Network (ACCAN) Australia’s peak telecommunications consumer organisation

PO Box 639, Broadway NSW 2007 Tel: (02) 9288 4000 | Fax: (02) 9288 4019 | Contact us through the National Relay Service www.accan.org.au | info@accan.org.au | twitter: @ACCAN_AU

Proposed merger of TPG with Vodafone

Submission by the Australian Communications Consumer Action Network to the Australian Competition and Consumer Commission

12 October 2018

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About ACCAN

The Australian Communications Consumer Action Network (ACCAN) is the peak body that

represents all consumers on communications issues including telecommunications, broadband and

emerging new services. ACCAN provides a strong unified voice to industry and government as

consumers work towards availability, accessibility and affordability of communications services for

all Australians.

Consumers need ACCAN to promote better consumer protection outcomes ensuring speedy responses

to complaints and issues. ACCAN aims to empower consumers so that they are well informed and can

make good choices about products and services. As a peak body, ACCAN will represent the views of

its broad and diverse membership base to policy makers, government and industry to get better

outcomes for all communications consumers.

Contact

Tara D’Souza

Senior Policy Advisor

PO Box 639,

Broadway NSW, 2007

Email: info@accan.org.au

Phone: (02) 9288 4000

Fax: (02) 9288 4019

Contact us through the National Relay Service

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Contents

1. Overview ......................................................................................................................................... 4

2. New entity likely improves competition ......................................................................................... 6

2.1. Merger creates synergies across complementary networks .................................................. 6

2.2. Merger provides increased investment capability ................................................................. 7

2.3. Merged entity will have an incentive to compete aggressively.............................................. 8

3. Without merger, less competition likely ....................................................................................... 11

3.1. TPG and VHA are new entrants in bundled services ............................................................ 11

3.2. Absent merger less incentive to compete for bundles ......................................................... 11

4. New mobile network operators unlikely ...................................................................................... 13

4.1. VHA’s experience is a disincentive for market entry ............................................................ 13

4.2. VHA’s creation is a disincentive for market entry ................................................................ 15

4.3. Other countries’ experience is a disincentive for market entry ........................................... 16

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1. Overview ACCAN welcomes the opportunity to provide comments on the Australian Competition and

Consumer Commission’s (ACCC) investigation of TPG Telecom Limited’s (TPG) proposed merger

with Vodafone Hutchison Australia Pty Limited (VHA). ACCAN is supportive of the proposed

merger as it is likely to lead to more sustainable competition with a positive effect for consumers in

the Australian telecommunications market. A summary of our reasons is provided below.

New entity likely improves competition

ACCAN considers that it is likely that the merger results in increased price pressure reducing overall

prices and improving non-price aspects of competition, such as quality of service, product and service

inclusions, and customer service. The new entity likely improves competition because it creates a full-

service challenger to Telstra and Optus. The benefits of a full-service challenger are that it:

Creates synergies across complementary networks; and

Provides improved investment capability.

Consequently, the merged entity will have an improved ability to compete with Telstra and Optus.

Moreover, it will have an incentive to compete aggressively to gain market share in order to

underwrite investment in 5G.

Without merger, less competition likely

VHA and TPG are not currently competitors and it is unlikely they would become strong competitors

in the future. This is because without the merger there is an increased incentive (and indeed a plan) to

increase network sharing in order to reduce costs and offer 5G services with limited spectrum

availability. With network sharing, VHA and TPG have less incentive to aggressively compete in

complementary markets as they will be commercial partners. Thus, the merger is unlikely to have the

effect of substantially lessening competition in telecommunications markets.

New mobile network operators unlikely

It is unlikely that smaller competitors will expand significantly and less likely that there will be any

major new competitors commencing supply of mobile services in Australia for the following reasons:

VHA’s experience is a disincentive for market entry – operating in Australia with a small,

dispersed population is expensive and returns are likely low;

VHA’s creation is a disincentive for market entry - in 2009, Vodafone and Hutchison merged

as the third and fourth largest mobile network operators; and

Other countries’ experience is a disincentive for market entry - a number of recent mergers

saw European markets move from four to three. Canada has struggled to get a national fourth

player.

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Overall the merger is likely to benefit consumers

ACCAN is of the view that the merger is likely to lead to an improvement in competition.

Competition improves consumer outcomes by providing incentives for service providers to offer

consumers greater choice of services, at lower prices and provide better customer service.

ACCAN is concerned that the high barriers to entry in the mobile market means there is unlikely to be

any new entrants. This is less of a concern in the fixed line market where the national wholesale

provider, NBN, controls input prices and thus barriers to entry are lower.

Without a strong, and sustainable third mobile network operator, Telstra and Optus will have the

opportunity and incentive to compete less vigorously for customers. Australian consumers

experienced this when Vodafone was weakened following its substantial network issues and

subsequent customer losses.

Should the ACCC wish to discuss this submission, please contact us on the details included on the

proceeding page.

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2. New entity likely improves competition The ACCC asked for market participants’ views on the likely impact of the merger on prices and non-

price aspects of competition.

ACCAN considers that it is likely that the merger will result in increased price pressure reducing

overall prices and improving non-price aspects of competition, such as quality of service, product and

service inclusions, and customer service. This will likely lead to a lasting, positive effect on

competition for consumers.

The new entity likely improves competition because it creates a full-service challenger to Telstra and

Optus. The benefits of a full-service challenger are that it:

Creates synergies across complementary networks; and

Provides improved investment capability.

Consequently, the merged entity will have an improved ability to compete with Telstra and Optus.

Moreover, it will have an incentive to compete aggressively to gain market share in order to

underwrite investment in 5G. This is discussed further below.

2.1. Merger creates synergies across complementary networks

The merger of VHA and TPG creates synergies across complementary fixed line and mobile

networks. The synergies of a merged company (versus procuring wholesale products or network

sharing) are:

Increased flexibility – can build innovative products and services without wholesale pricing

or capacity constraints. Also provides long term certainty of asset ownership versus the risks

of changes associated with commercial arrangements;

Lower operating costs- can remove duplicative overhead costs, improved purchasing power

of a larger company, and potential lower network operating costs with asset ownership versus

purchasing capacity;1 and

Broader distribution – can leverage VHA’s retail storefront network.

The synergies are likely to provide consumers with increased product choice, lower prices, and

convenience.

A merged entity provides increased flexibility to offer innovative products and services.2 This is

because with asset ownership there is a greater degree of control over price setting compared to

purchasing access: prices are only constrained by internal requirements to meet investment returns.3

Whereas when access to infrastructure is purchased, pricing is largely determined by the wholesale

1 That is, it avoids the double marginalisation problem. See: Doyle, C. and Smith, J.C., 1998. Market structure in mobile telecoms: qualified

indirect access and the receiver pays principle. Information Economics and Policy, 10(4), pp.471-488. 2 Mergers align incentives, and avoid contractural incompleteness problems, as set out in: Williamson, O.E., 1971. The vertical integration

of production: market failure considerations. The American Economic Review, 61(2), pp.112-123. 3 Klein, B., Crawford, R.G. and Alchian, A.A., 1978. Vertical integration, appropriable rents, and the competitive contracting process. The journal of Law and Economics, 21(2), pp.297-326.

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pricing structure and level, which includes the margin determined by the access provider. For

example, one of the reasons cited for TPG’s switch from Optus to Vodafone was the wholesale

pricing for MVNO access.4 A further example is the difficulty RSPs have experienced offering

innovative and affordable broadband on the NBN given its wholesale pricing.5 Thus increased pricing

flexibility has the potential to offer consumers greater product choice and lower prices.

A merged entity will have lower operating costs compared with two companies. There are a number

of corporate functions that can be rationalised, and a larger firm has greater purchasing power. Greater

purchasing power can benefit consumers if lower input prices are passed on but also if a broader range

of handsets are made available. Further, with asset ownership, versus purchasing access (or

infrastructure sharing), operating costs are lower.6 Lower operating costs provides increased pricing

flexibility with the opportunity recover capital costs over a longer period as revenues increase. That is,

the merged entity could invest in expanding or upgrading coverage with lower margins than its

competitors with the expectation of picking up more volume over the period to recover capital costs.

A merged entity introduces another player offering fixed line services in retail stores. VHA has a

national footprint of retail stores with a focus on metro areas, whereas TPG has none. There is likely a

segment of the population that is not comfortable making purchases on the internet or over the phone.

For consumers that prefer to shop in stores the only fixed line providers have been Telstra and Optus,

which are generally priced higher than TPG. A full-service challenger that can compete with a retail

store network against Telstra and Optus offers real convenience and potentially cost savings to many

consumers.

2.2. Merger provides increased investment capability

The Australian mobile market is on the cusp of the next evolution of mobile technology: 5G. In order

for mobile network operators to offer 5G services, they will need to invest substantially in spectrum

and equipment.

VHA is in the challenging position of holding the least amount of spectrum, including spectrum that

could be refarmed for 5G.7 It has also stated that it is impacted by the Government’s decision to ban

Chinese mobile equipment manufacturer Huawei from supplying 5G networks.8 Thus, it is likely that

it will be more difficult and expensive for VHA to upgrade to 5G compared to Optus and Telstra. At

the same time, VHA has the smallest network and, likely, the lowest returns9 from which to mount the

5G investment challenge. The merger increases the size and diversity of the customer base as well as

providing cost synergies that together increase the investment capability. This is similar to the

challenge Vodafone faced prior to the rollout of 4G.

4 Ibrahim, Tony, “Why TPG left Optus for Vodafone: Can Voadfone’s network handle 320,000 more users?”, PC World, 1 October 2015, https://www.pcworld.idg.com.au/article/585780/why-tpg-left-optus-vodafone/. 5 de Ridder, John, “Economuse - 2018 Review of Retail Broadband Pricing: Wholesale pricing still a problem for retail pricing”,

CommsWire, 4 October 2018. 6 ACCC, Domestic mobile roaming declaration inquiry, Draft December, May 2017, page 16. 7 ACCC, Allocation limits advice for the 3.6 GHz spectrum allocation, Public version, July 2018. 8 Crozier, Ry, “Vodafone warns investment ‘uncertainty’ after Huawei 5G ban”, itnews, 23 August 2018, https://www.itnews.com.au/news/vodafone-warns-investment-uncertainty-after-huawei-5g-ban-500718. 9 Telstra prices for a number of different plans are the highest with VHA the lowest in most cases (see ACCC, Domestic mobile roaming

declaration inquiry, Draft December, May 2017, pages 30-32). VHA likely has the lowest returns given large customer losses and huge investments to fix network problems after 2010.

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In 2009, the ACCC assessed the proposed merger of Vodafone and Hutchison (what is now VHA). At

the time, mobile services were dominated by voice but data was increasing in popularity and

providers were recognizing the need to invest in capacity. The expected adoption of long-term

evolution (LTE or 4G) was imminent with the digital dividend spectrum auction forthcoming.

However, the ACCC stated that it “examined a large amount of evidence which indicated that

Hutchison and Vodafone, on an individual basis, would not be likely to continue to make the

investments in their networks that would be necessary for the delivery of high-speed MBB [mobile

broadband] services. Without the merger, it was likely that Hutchison and Vodafone would become

increasing weak competitors over time relative to Telstra and Optus.”10

Unfortunately, the experience

of VHA shortly after the merger was that it didn’t invest quickly enough to meet consumer demand,

with devastating results for consumers.11

2.3. Merged entity will have an incentive to compete aggressively

The merged entity will have an incentive to compete aggressively to gain market share for two

reasons:

No market share changes from acquisition – the merged entity will largely have the same

market position with respect to each segment, so the incentives remain to challenge Telstra’s

premium; and

Impending investment in 5G – the merged entity will remain in a challenging position to

launch 5G, thus has an incentive to gain market share and grow the market in order to

underwrite the substantial investment.

First, the merged entity will hold the same market share position as the individual brands held prior to

the merger: third in mobile and second in fixed line.

Table 1: Market shares across telecommunications services12

Telstra Optus Merged

entity

Vodafone TPG Others

Mobile

market

share

~41% ~29% ~20% ~19% ~1% ~10%

Fixed line

market

share

~51% ~17% ~22% n/a ~22% ~10%

10 ACCC, Public Competition Assessment: Vodafone Group pls and Hutchison 3G Australia Pty Limited – proposed merger of Australian mobile operations, 24 June 2009, page 15. 11 Michael, Sarah, “How did Vodafone become Vodafail?”, news.com.au, 15 October 2012,

https://www.news.com.au/finance/business/how-did-vodafone-become-vodafail/news-story/eab702db1210f0658bf6b86e6d697138 12 Reproduced from TPG Telecom & Vodafone Hutchison Australia, “Merger of equals”, 30 August 2018.

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This means that the merger creates an entity with a largely status quo market position, albeit with the

financial and strategic strength to compete as a full-service provider. The market remains dominated

by Telstra with a considerable lead in both fixed and mobile services. Thus, there is a large market

share gap to chase. At the same time, Telstra maintains a price premium. In this situation, the smallest

provider has the most to gain and the least to lose in pursuing an aggressive pricing strategy. It

appears that since Vodafone improved its network it has been a stronger competitor, with Optus

chasing Telstra and Telstra responding with falling premiums.

That is to say the benefits for a merged entity in increasing its market share or quantity sold is greater

than the loss through reductions in price. In contrast, for the larger firms the loss in market for price is

great than any recaptured market.

Following its devastating losses after a series of network failures in 2010, VHA lost nearly 10% of its

market share. As a result, Vodafone had to invest heavily in its network and significantly weakened as

a competitor, likely leading to less aggressive pricing from Optus. During this period Telstra gained

market share, likely because its network brand had increased salience during Vodafone’s crises. This

is illustrated in the market share changes chart below.

Figure 1: Changes in retail mobile market shares

Source: ACCC Telecommunications reports 2006-07 to 2016-17.

More recently, mobile market competition has accelerated as Vodafone has improved its position and

Telstra’s mobile premium has declined:

“on average [the ACCC] observed that the effective price of data in Telstra post-paid plans

has progressively decreased over time to approach other MNOs’ offers with the exception of

low category plans. For example, the cost of data in Telstra’s medium post-paid plans in the

second quarter of 2014 was more than 270 per cent higher than in Optus’ or VHA’s plans.

This price difference has reduced to 17 per cent in 2017. In the high category, the premium

paid by Telstra’s customers fell from 2013 per cent in 2014 to 38 per cent in June 2017.”13

13 ACCC, Domestic mobile roaming declaration inquiry, Final report, October 2017, page 32.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Re

tail

Mar

ket

Shar

e (

%)

Telstra Optus VHA Vodafone Hutchison Other

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The reduction in Telstra’s premium is consistent with it responding to consistent market share losses.

As it loses more volume it evaluates a reduction in margin versus further volume losses. It is in

Telstra’s interest however to maintain its premium. It does this by marketing the best network and

maintaining a coverage gap. In the Mobile Roaming Inquiry, the ACCC found that “Telstra is clearly

preferred for consumers who choose service providers for better coverage. Out of all consumers that

cited better coverage as a reason, 73 per cent were with Telstra, 13 per cent were with Optus and 6 per

cent were with VHA. This is even more pronounced in regional areas, where 83 per cent of regional

consumers who cited better coverage as a reason for choosing their provider were with Telstra.” 14

This explains why Telstra is protective of its reputation as the best network, when Optus ran ads

claiming that it had the best network and Telstra sued saying it was “misleading”.15

Consequently, for operators to gain market share from Telstra, they need to have a good network –

hence as Vodafone has improved, Telstra’s share (and premium) has declined and is expected to

continue.16

It is imperative for the merged entity to have the capacity to invest in order to compete

with Telstra and Optus.

Likewise, in the fixed line market there is a significant gap between the merged entity’s market share

and Telstra’s. The gap is in fact larger than in the mobile market. RSPs have commented that the

charging structure of the NBN requires a large customer base to be profitable.

Thus, the creation of a merged entity does not disrupt this dynamic – it maintains the incentive to

compete for Telstra premiums and market share, resulting in overall lower prices for consumers.

Second, the merged entity has an incentive to gain market share and expand the market in order to

underwrite investment in 5G. The considerable investment required for 5G requires a large, and

lucrative, customer base. As market penetration is high and mobile ARPUs declining, merged entity

has incentive to grow the market. This means using its capability as a full-service provider to cross

sell and find new customers, potentially using its corporate channels for IoT and other expected use

cases with 5G. The advent of 5G in a saturated market means all three mobile network operators will

be vying for existing customers as well as finding new ones.

A merged entity is also less likely to face foreclosure problems in terms of accessing or constructing

new facilities in the best possible locations to maximise 5G coverage.17

14 ACCC, Domestic mobile roaming declaration inquiry, Final report, October 2017, pages 39-40. 15 Mason, Max, “Telstra takes Optus to court over best mobile network claims”, Australian Financial Review, 11 May 2018. 16 Mason, Max, “Telstra may cut mobile prices in wake of aggressive push from Optus and Vodafone”, Australian Financial Review, 7

October 2018, https://www.afr.com/business/telecommunications/telstra-may-cut-mobile-prices-in-wake-of-aggressive-push-from-optus-

and-vodafone-20181004-h1698k. 17 Rey, P. and Tirole, J., 2007. A primer on foreclosure. Handbook of industrial organization, 3, pp.2145-2220.

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3. Without merger, less competition likely The ACCC asked for market participants’ views on how closely TPG and VHA currently compete, or

would be likely to compete in the future absent the merger.

VHA and TPG are not currently competitors and it is unlikely they would become strong competitors

in the future. Thus, the merger is unlikely to have the effect of substantially lessening competition in

telecommunications markets. This is discussed further below.

3.1. TPG and VHA are new entrants in bundled services

TPG and VHA do not currently compete closely. This is reflected in the merger being marketed as a

“merger of equals” with “highly complementary assets”.18

In fixed line services, TPG is the second largest provider behind Telstra, with around 22% market

share. In contrast, VHA has historically been a mobile-only provider. However, in December 2017

VHA launched NBN products for consumer and small business.19

In the merger documents, VHA’s

fixed line market share is marked as “n/a”.

In mobile, VHA is the third largest mobile provider after Telstra and Optus, with around 19% market

share. TPG launched services as an MVNO in 2008 and in 2017 acquired spectrum to commence

building a mobile network.20

It has since built wi-fi networks in 5 major cities and its market share is

around 1%.

Thus, both entities have commenced operations to offer bundled services, but they are nascent. Absent

the merger, these operations are likely to remain “add-ons” to offer the existing customer base but not

form the core part of their strategy.

3.2. Absent merger less incentive to compete for bundles

Without the merger, it is likely that TPG and VHA will increase infrastructure sharing in order to

minimise investment costs. This is indicated in the investor materials and the joint venture

arrangements that have been submitted to the ACCC.21

Moreover, given the significant investment

challenges for 5G, VHA and TPG have an incentive to minimise investment costs wherever possible

if they want to offer 5G services. It is also likely a response to the scarcity of 5G spectrum. Thus,

competing for 5G spectrum against Telstra and Optus is better than Telstra and Optus and each other.

18 TPG Telecom & Vodafone Hutchison Australia, “Merger of equals”, 30 August 2018. 19 Vodafone, “Vodafone nbn launches in Sydney, Canberra, Melbourne, Geelong & Newcastle”, 4 December 2017, https://www.vodafone.com.au/media/vodafone-nbn-launches. 20 Hatch, Patrick and Lucy Battersby, “TPG to build own mobile network after $1.2b spectrum splurge”, 4 April 2017 (updated 13 April

2017), https://www.smh.com.au/business/companies/tpg-to-build-own-mobile-network-after-12b-spectrum-splurge-20170404-gvd6xr.html. 21 TPG Telecom & Vodafone Hutchison Australia, “Merger of equals”, 30 August 2018.

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With increased infrastructure sharing, TPG is unlikely to continue to invest in expanding mobile/wi-fi

coverage as an MNO and VHA is unlikely to invest in backhaul capability to provide NBN services.

VHA and TPG have complementary networks and infrastructure sharing enables them to focus on

expanding those networks and finding synergies to lease to each other. For example, TPG sharing

small cell sites with VHA for 5G rollout. Indeed, there were market analysts that anticipated TPG

would not expand beyond urban markets.22

With network sharing, each of TPG and VHA have the incentive to maintain offering the bundled

services as “add-ons” to their core services. It is likely that each would need to maintain enough

customers to achieve scale and returns in that segment, but it could also accept lower returns if there is

a segment that purchases bundles that it wouldn’t otherwise serve. At the same time, they do not have

the incentive to price aggressively in that segment since it risks disrupting the market of the other

party to the commercial negotiations. That is, with network sharing, each party knows the other

parties’ costs and has the ability to offer compelling add-on services without disrupting the market.23

22 Murphy, Jason, “Is our great mobile rip-off about to end?”, news.com.au, 4 April 2018, https://www.news.com.au/finance/business/technology/is-our-great-mobile-ripoff-about-to-end/news-

story/3a993d174effe6093fe4721853e92d58. 23 Klein, B., 1988. Vertical integration as organizational ownership: The Fisher Body-General Motors relationship revisited. Journal of Law, Economics, & Organization, 4(1), pp.199-213.

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4. New mobile network operators unlikely The ACCC asked for market participants’ views on the likelihood of smaller competitors (i.e.

competitors other than Telstra, Optus, TPG and Vodafone) expanding significantly or major new

competitors commencing supply of mobile services.

In ACCAN’s view it is unlikely that smaller competitors will expand significantly and less likely that

there will be any major new competitors commencing supply of mobile services in Australia. This is

for the following reasons:

VHA’s experience is a disincentive for market entry – operating in Australia with a small,

dispersed population is expensive and returns are likely low.

VHA’s creation is a disincentive for market entry - in 2009, Vodafone and Hutchison merged

as the third and fourth largest mobile network operators.

Other countries’ experience is a disincentive for market entry - a number of recent mergers

saw European markets move from four to three. Canada has struggled to get a national fourth

player.

We discuss this further below.

4.1. VHA’s experience is a disincentive for market entry

VHA is the third MNO with a market share of about 19%. Since its creation in 2009, it has lost nearly

10% of its market share. With the advent of 5G, VHA faces significant financial and strategic

challenges relative to its competitors.

The ACCC has found that coverage and network quality are significant aspects of competition in

mobile services.24

Both Optus and VHA have invested significantly to close the gap in Telstra’s

coverage. However, both still remain behind Telstra, with VHA appearing to experience the most

difficultly.

In 2010, VHA experienced substantial market share loss following its widely publicised network

failures. It has invested heavily in network upgrades and since 2014 its market share appears to have

stabilised. However, its coverage is still behind both Optus and Telstra.

24 ACCC, Domestic mobile roaming declaration inquiry, Final report, October 2017.

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Table 2: MNO percentage population coverage25

1998 2005 2010 2016

Telstra 94 98 (CDMA

96 (GSM)

99 99.3

Optus 91 94 97 98.5

Vodafone 91 92 94 95.6 (without

agreement with

Optus)

97 (with

agreement with

Optus)

Indeed, the value of network coverage can be ascertained by the fact that Optus does not offer

wholesale access to the entirety of its network. Similarly, Telstra does not provide access to its full

mobile network for Belong customers (a Telstra subsidiary).26

As a result, VHA argued vigorously for the declaration of mobile domestic roaming. It argued that

Telstra behaves like a monopoly in regional areas and is it difficult for VHA to compete.27

Accordingly, it was unlikely that TPG would ever expand its network beyond major urban centres

given the investment required and so absent a merger increased network sharing is most likely.28

The

market entry of TPG was that of an established fixed-line operator seeking to provide a

complementary product and would have struggled to maintain profitability in its mobile business on a

standalone basis. Notably, when Hutchison merged with Vodafone, it was experiencing losses (as

discussed below).

Given these challenges, it is likely that VHA’s financial returns are low and as the third player, it

likely has the lowest margins. The merger of TPG and VHA represents the best outcome for VHA to

have the capacity to compete as a national MNO. Such challenges are a clear signal to the market that

returns are not high enough to support a new entrant.

25 Reproduced from ACCC, Domestic mobile roaming declaration inquiry, Draft Decision, page 30 (Table 3). 26 Belong website, https://www.belong.com.au/mobile/coverage-map, “Belong operates on part of the Telstra mobile network, with 4G coverage available to 96.5% of the Australian population and 3G coverage available to more than 98.8% of the population.” [emphasis

added] Note that both population figures are lower than those contained in Table 3 of the ACCC’s report. 27 Vodafone, Domestic Mobile Roaming Declaration Inquiry: Part A of the submission by Vodafone Hutchison Australia, Main Submission, 5 December 2016, available at https://www.accc.gov.au/system/files/VHA%20submission%20Part%20A_0.PDF. 28 TPG announced it would spend $1.9 billion on spectrum and deploying equipment at 2,500 sites over three years. (see:

https://www.computerworld.com.au/article/617634/tpg-announces-1-9bn-national-4g-network-plan/) It said initially it would offer mobile coverage in the CBDs and select suburbs of Adelaide, Brisbane, Canberra, Melbourne and Sydney. (see:

https://www.computerworld.com.au/article/640978/tpg-offer-free-access-new-mobile-network/). Note that in 2017 VHA announced

spending of $2 billion for almost 1,800 sites (see: https://www.vodafone.com.au/media/vodafone-reveals-almost-2-billion-mobile-technology-spend-for-2017 ) while Telstra was investing $5 billion over three years (see: https://www.zdnet.com/article/telstra-announces-

au5b-networks-investment-launches-new-mobile-plans/ ). Thus TPG would need to increase capital in order to expand beyond major

metropolitan areas. Notably, Hutchison had 2,700 base stations at the time of its merger with Vodafone and had network sharing with Telstra. (see: http://registers.accc.gov.au/content/index.phtml/itemId/874445/fromItemId/751043 )

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4.2. VHA’s creation is a disincentive for market entry

Prior to mid-2009, Australia had a fourth mobile network operator: Hutchison. Hutchison operated a

3G network in metro areas of Australia and through a joint venture with Telstra provided coverage to

96% of the population.29

Hutchison had over 2 million customers at the time of its merger, and yet, in

its financial year ending 31 December 2008 it posted a net loss of $163.1 million.30

In June 2009 the ACCC published its assessment of the Vodafone and Hutchison merger.31

The

ACCC found that there was “no prospect of entry by an MNO on the scale and scope necessary to

constrain existing MNOs”. It also found that individually Vodafone and Hutchison required

substantial capital investments to support network upgrades/expansions that they were unlikely to be

able to make absent the merger. The ACCC concluded that the proposed merger would not have the

effect, or be likely to have the effect of substantially lessening competition in any market.32

Similarly, TPG was likely to limit its mobile network to urban areas. It launched mobile services as a

VHA wholesale customer with plans to build a small cell network with 1,800 stations. It recently

noted it was breaking even in the segment. However, in order for it to offer 5G services it would need

to invest substantially in spectrum and network capability. The ACCC’s assessment of allocation

limits for the upcoming 3.6 auction stated that TPG “has very limited holdings compared to the

incumbents and its ability to acquire more spectrum in the near future materially impacts its ability to

compete with the incumbents.”33

Thus, absent the merger VHA and TPG are likely to pursue

increased network sharing to minimise capital investment.

Given this history in the Australian mobile market, and the subsequent developments of TPG and

VHA, it is unlikely a prospective investor would enter as a national MNO.

29 Note Table 1 in the ACCC’s assessment showed Telstra’s population coverage at 99%. 30 ACCC, Public Competition Assessment, “Vodafone Group plc and Hutchison 3G Australia Pty Limited – proposed merger of Australian

mobile operations”, 24 June 2009. 31 ACCC, Public Competition Assessment, “Vodafone Group plc and Hutchison 3G Australia Pty Limited – proposed merger of Australian

mobile operations”, 24 June 2009. 32 And as shown in section 2.3 above, VHA is likely to have contributed to the reduction in Telstra’s price premium. 33 ACCC, “Allocation limits advice for the 3.6 GHz spectrum allocation”, Public version, July 2018, page 4.

www.accan.org.au | info@accan.org.au | twitter: @ACCAN_AU 16

4.3. Other countries’ experience is a disincentive for market entry

In the last five years, there have been a number of mergers in Europe that have reduced the number of

mobile network operators reduce from four to three. These mergers indicate that the financial returns

necessary to sustain investment in a high capital industry are insufficient with more than three players.

In addition, policies to promote and support new market entry have had relatively little success in

sustaining fourth operators. For example, in Canada there have been a number of policies to support a

fourth, national network operator but it still doesn’t have one. And in Europe, policies to promote

competition may have had a detrimental impact on investment and, ultimately, consumers that

experience declining infrastructure.34

The European experience can be summed up with a statement made by the former Austrian regulator

at a hearing in Canada to determine whether or not to regulate domestic roaming:35

“This magic number of how many operators a certain market can carry, I mean we had that on

and on in Europe. We had a couple of four-to-three boiling down the number of mobile

network operators. The last one was in Germany now, that even the strongest and biggest

economy in Europe – Germany, with close to 90 million in habitants – could not carry four

full-fledged mobile network operators and that has been allowed to boil down to three.

So I mean the basic economics are always the same. Everywhere on the globe they are the

same. So I cannot imagine how that would work with the even more challenging Canadian

geography, a fourth full-fledged operator.”

In Canada, there have been a number of policies to increase competition and ostensibly support a

fourth, national mobile network operator (see the Box below). However, Canada still does not yet

have a fourth national mobile network operator. Moreover, among the “big three”, two have a

network sharing agreement such that there are only two physical mobile networks available nation-

wide.36

As Australia has a similar population density to Canada, it is likely Australia would face similar

challenges supporting a fourth. Accordingly, ACCAN considers that the experiences of these other

countries are a disincentive for market entry to Australia.

34 Dr Serentschy argues that Europe is experiencing relative under-investment with the result of 4G rollout falling behind other regions,

continued decline in telecoms infrastructure quality relative to other countries, job losses, lack of internet technology and expertise and weakening of telecoms companies which leads to closure or take-over. He argues this is negative not just for the sector but for the broader

economy and ultimately its citizens. See: Statement of Dr. Georg Serentschy (former Austrian Telecom Regulator, RTR, and Chairman of

the Body of European Regulators for Electron Communications, BEREC) in response to CRTC’s Telecom Notice of Consultation (CRTC 2014-76): Review of wholesale mobile wireless services, 20 August 2014. 35 CRTC, Review of wholesale mobile wireless services (CRTC 2014-76), Hearing Transcript, Volume 2, 30 September 2014, paras 2356-

2357. (see: https://crtc.gc.ca/eng/transcripts/2014/tt0930.htm) 36

Sturgeon, Jamie, “Telus and Bell’s wireless partnership still a sore spot for competitors”, Financial Post, 12 June 2012.

www.accan.org.au | info@accan.org.au | twitter: @ACCAN_AU 17

Box 1: Summary of policies to promote new mobile network operators in Canada

In 2007, Canada held its advanced wireless spectrum auction.37

The auction, and associated licenses,

had the following policies to promote new mobile network operators:

40MHz set aside for new entrants (65 MHz available for remaining bidders);

Condition to provide in-territory roaming for 5 years while new entrants build out their

networks;

Providing an extension of a further 5 years for national new entrants provided that rollout

obligations are met;

Mandating out-of-territory roaming for at least the 10-year licence term; and

Mandating antenna tower and site sharing and prohibiting exclusive site arrangements for all

radio and spectrum licences.

In 2014, the Government amended the Telecommunications Act38

to introduce a cap on the rates the

incumbent, national mobile network operators could charge the new entrants. The cap was introduced

in response to complaints from new entrants that commercial rates were too high. The cap was to be

determined based on the operators’ retail revenues and volumes sold. The cap was in place until June

2015 as the telecommunications regulator, the CRTC, released its decision mandating that the national

mobile network operators (Bell, Rogers and Telus) provide domestic roaming at a regulated rate to

new entrants.39

The tariffs were approved in March 2018.40

According to the CRTC’s 2017 Communications Monitoring Report, the three national mobile

network operators have the largest market share across all provinces and territories except

Saskatchewan and Manitoba (where the government-owned mobile network operators dominate).41

The new entrants, such as Freedom, have generally concentrated in urban areas.42

37 Government of Canada, “Government Opts for More Competition in the Wireless Sector”, News Release, 28 November 2007,

https://www.ic.gc.ca/eic/site/smt-gst.nsf/eng/sf10021.html 38 CRTC, Telecom December CRTC 2015-540, “Legislated wholesale domestic roaming caps under the Telecommunications Act”, 9

December 2015, https://crtc.gc.ca/eng/archive/2015/2015-540.pdf. 39 CRTC, Telecom Regulatory Policy CRTC 2015-177, “Regulatory framework for wholesale mobile wireless services”, 5 May 2015, https://crtc.gc.ca/eng/archive/2015/2015-177.htm 40 CRTC, Telecom Order CRTC 2018-99, “Wholesale mobile wireless roaming service tariffs – Final rates”, 22 March 2018,

https://crtc.gc.ca/eng/archive/2018/2018-99.htm 41 CRTC, Communications Monitoring Report 2017, 2017, page 304. Note that Bell Canada has recently acquired Manitoba Telecom

Services (see BCE, “Bell announces agreement to acquire Manitoba Telecom Services (MTS)”, News Release, 2 May 2016. 42 Jackson, Emily, “’Sharing is the worst’: Shw’s Freedom Mobile takes aim at Big Three shared wireless plans”, Financial Post, 1 August 2018, https://business.financialpost.com/telecom/sharing-is-the-worst-shaws-freedom-mobile-takes-aim-at-big-three-shared-wireless-plans