How Cooperation Between Telecom Firms Can Improve Efficiency

EU Commission building Europe Flags in Brussels
Font Size:

Scholar argues that cooperation and competition can co-exist in the European telecom industry.

Font Size:

The most prominent goal of every competition law system is to ensure that businesses compete in the market as independent economic operators. For more than a century, for example, Section 1 of the Sherman Act has prohibited cartels in the United States. In the same vein, Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) prohibits all agreements between businesses that may affect trade between member states in a way that would distort competition within the internal market.

Yet in the telecom industry, protecting competition should not require the prohibition of every agreement between operators. There is room for operators to engage in agreements with other firms as long as the agreements do not distort competition. Moreover, even if they do distort competition somewhat, inter-firm agreements are allowed under EU law – specifically article 101(3) of TFEU – whenever their pro-competitive effects compensate for the restriction of competition. In fact, agreements between telecom operators can lead to substantial economic benefits, in particular if they combine complementary activities, skills, or assets. Such agreements can provide a means for sharing risk, saving costs, increasing investments, pooling know-how, enhancing product quality and variety, and hastening innovation.

Specifically, agreements between telecom operators can provide a means of promoting efficiency in the sector at a challenging time. Today, the European telecom industry faces pressure from American and Asian operators, who take advantage of their relatively concentrated domestic markets. European telecom firms also face service competition from so-called “over-the-top” providers, namely those providing telecom connectivity via the Internet. Furthermore, the much-heralded next generation telecom networks have still to be rolled-out in most areas. Telecom operators need to keep up with technological advances and provide new services in a highly innovative, technologically advanced industry. In this context, cooperation between telecom operators could improve efficiency in the sector.

The point is that, in many cases, there is no clear distinction between agreements with or without anti-competitive effects. For instance, the exchange of information between operators may lessen the decision-making independence of the parties, by reducing or removing the degree of uncertainty concerning the intended conduct of the undertaking. However, sometimes the exchange of information may have beneficial effects for consumers, as long as it allows competitors to make rational decisions and to be more efficient.

In recent years, the European Commission has taken a more realistic approach to Article 101(1) TFEU, in particular to ensure that it is applied in accordance with sound economic principles. In the same vein, from the end of the 1970s to the present, courts in the United States have narrowed the circumstances in which the rule of per se illegality applies, so that the presumption is that agreements should be analyzed under the rule of reason. Thus, the challenge is to separate from one another.

When the parties to a competition agreement retain autonomy in running their businesses, there is unlikely to be any anti-competitive effect. Agreements between competitors that would not be able to carry out a certain activity independently – at least not in an efficient manner – are unlikely to give rise to restrictive effects on competition. Case law also tends to tolerate such agreements, which are necessary for providing new services or expanding existing services into new areas. Intra-industry cooperation for research and development purposes may also be an efficient way for telecom operators to develop new services.

Co-investment agreements generally are made between actual or potential competitors, with a view to reducing the costs of rolling out new infrastructures. When partners and access-seekers can obtain full control over the infrastructure, co-investments are likely to lead to more timely and intense competition. The challenge is how to encourage investments in next generation networks in a context where demand for super-high speed services is uncertain, and regulation has not been phased out. At present, EU policy tends to accept co-investment agreements as means to facilitate the rollout of new infrastructures. In fact, lowering the cost of broadband deployment has become one of the main objectives of the European Commission, as a means to achieve the EU’s Digital Agenda goals by 2020.

Yet co-investments can vary when it comes to the degree of cooperation between different operators. For example, operators will sometimes share the cost of digging or deploying passive infrastructure, but will lay their own fiber lines, which allows them to engage in full, facility-based competition. In these cases, there is no risk of coordination, as networks based on multiple fiber lines ensure that access seekers can obtain full control over them. Under such conditions, co-investment agreements are more likely to lead to timelier and more intense competition on the downstream market.

Other co-investment agreements might allow operators to divide up the territory among them, so that each operator will be investing in a different area. The operators then grant each other preferential access to their areas. In these cases, there is a risk that co-investment agreements could distort competition by including non-competing clauses or information exchange.

Nevertheless, in highly concentrated but competitive markets such as telecoms, except in under-served areas, anti-competitive agreements are very unlikely to happen if all the major operators are not part of them. On one hand, consumers would change to other operators offering better conditions, so the agreement would not pass on harmful effects to consumers. On the other hand, most competition concerns would be solved if cooperating firms committed to giving access to competitors on a non-discriminatory basis.

In the mobile sector, co-investment and network sharing agreements have become the norm. The degree of cooperation varies from sharing costs of renting space for antennas and towers, to sharing base stations and underlying networks, to a full network sharing deal. Mobile operators usually share passive infrastructure (towers, BTS shelters, power), but they can also share active infrastructure (spectrum, switches, antennae, microwave equipment). They may also facilitate mobile operators’ entry in to fixed networks. Most concerns about competition in the mobile sector could be solved by granting third-party access on a non-discriminatory basis – either by agreements between the undertakings or through regulation.

Vertical agreements are generally less harmful than horizontal restraints, and may actually be more efficient. The companies involved in a vertical agreement usually have an incentive to prevent the exercise of market power by either the upstream or downstream company, as it could hurt activities of the other. Therefore, for most vertical restraints, competition concerns are likely to appear only where there is some degree of market power at the supplier or buyer level – that is, where there is insufficient competition.

In this sense, distribution or production agreements typically link handset manufacturers with telecom operators. There are also well-known cases of over-the-top providers making deals with smartphone manufacturers to install operating systems. Telecom operators also make arrangements with other players, such as banks and content providers. In this sense, we find deals between mobile operators and banks to finance the acquisition of smartphones by customers. Such agreements are not likely to distort competition, since they do not refer to competitors in the same market.

Due to a growing convergence between traditional telecom, media and the Internet, telecom operators have moved to a combined business model which provides telephone, high-speed Internet access, and content (triple play or quadruple play if mobile services are included). Moreover, network operators are sending a message to content providers that they need to work together to create higher-value services, justify network investments, and encourage end-users to pay for better quality services. This sort of cooperation sometimes involves exclusivity clauses.

R&D cooperation between non-competitors generally does not give rise to restrictive effects on competition. Telecom operators usually contract out the deployment, upgrading, or even the operation of their networks to suppliers of telecom-network equipment.

In short, there is a potential for telecom operators to cooperate with other players while still competing for business. That said, commercial cooperation is not a substitute for the efficiency resulting from in-country mergers.

European operators’ associations are calling for a relaxation of merger scrutiny to facilitate consolidation in the sector, which they believe would improve the European operators’ financial ability to compete. In fact, there is a wave of consolidation in the European telecom sector. Most mergers are made between fixed and mobile operators, and are less likely to raise issues around competition. However, mergers between undertakings that operate in the same geographical and product market are posing very real anti-trust concerns.

José Carlos Laguna de Paz

José Carlos Laguna de Paz is Professor of Administrative Law at the Valladolid University Faculty of Law (Spain), where he specializes in regulation and competition law. This post draws from the author’s recent article, “In Search of Efficiency in Telecoms: Agreements Between Undertakings under European Competition Law,” published in Competition and Regulation in Network Industries.