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Summary

The EC has accepted commitments by Orange in Spain and has cleared its merger with Jazztel. Although these commitments could leave the market structure almost unchanged in the country in the long run, they are likely to facilitate Orange’s ability to invest in the coming years.

The EC initially refusal to authorize the deal based on concerns around reduced competition and increased retail prices. Orange submitted commitments that, at a first glance, could leave the market as it is now: the new entity will have to divest an FTTH network and grant wholesale access to its fixed DSL and mobile infrastructure. However, Orange will be the second player in fixed broadband in the Spanish market and should benefit from economies of scale.

Divest to invest?

Its merger with Jazztel will make Orange the second player in fixed broadband after Telefonica, which still had a market share of approximately 45% as of 4Q14. The provider should benefit from economies of scale, which could spur investment.

After the EC initially refused to authorize the deal, Orange committed to divesting an FTTH network (which largely overlaps with Jazztel’s FTTH network). This would leave Orange with a fixed footprint almost identical to Jazztel’s current infrastructure, which comprises an FTTH network in the largest cities in Spain and a DSL network made up of Jazztel’s own DSLAMs in Telefonica’s exchanges in the whole country (except the Canary Islands).

Orange has also committed to granting the buyer of the FTTH network access to its own mobile network, including 4G, and bitstream access to Jazztel’s DSL network. Once the merger is complete, the outcome could therefore be similar to the market structure before the merger, given that Jazztel is currently an MVNO on Orange’s network.

Although the buyer of the FTTH network does not necessarily have to take advantage of its rights of access, it will very likely do so, because bundles of fixed and mobile connections are very popular in Spain (approximately 37% of bundles included fixed and mobile broadband as of 4Q14). It would be difficult for the new entrant to build a significant customer base without being able to offer similar bundles. This also shows why it is sensible for Orange to strengthen its position in the fixed market through the merger, which is a similar move to Vodafone’s acquisition of the cable operator Ono in 2014. The difference is in Orange’s existing customer base in fixed broadband (approximately 15.0% as of 4Q14), which is much larger than Vodafone’s market share before its own merger (approximately 5.2% in 2Q14). Ono had an 11.5% market share at the point of merger, whereas Jazztel had an 11.7% share as of 4Q14.

The merger should not prompt concern as to operators’ willingness to continue to invest in fixed next-generation access – competition at the infrastructure level has so far proved relatively healthy and effective in Spain. FTTH is currently available to 45% of the population and the country is likely to hit the targets of the EC’s digital agenda in advance: 65% of the population has now access to 30Mbps speeds and 61% can have 100Mbps connections or higher.

Appendix

Further reading

Superfast-Access Policy Tracker: 2014, TE0007-000825 (September 2014)

Spain (Country Regulation Overview), TE0007-000822 (August 2014)

Author

Luca Schiavoni, Senior Analyst, Regulation

luca.schiavoni@ovum.com

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