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Summary

On September 1, 2016, the European Commission (EC) gave the green light for the merger of two Italian mobile network operators (MNOs), 3 and Wind. The merged entity will become the largest mobile operator in Italy, bringing together the fourth and second mobile operators in terms of market share, thereby testing Telecom Italia's dominance.

Although the remedies make sure a fourth MNO, Iliad, enters the market, the impact on competition is still unclear. Iliad is the same company that, in 2012, launched Free in France – an operator with an aggressive price strategy that disrupted the market significantly. However, the new Italian MNO is less likely to have room for a similar strategy while it invests to complete its network. It will also have to wait for the decision of the regulator AGCOM, which could grant the new entrant a higher mobile termination rate (MTR) for a few years.

The remedies maintain a four-player market, but prices will not necessarily fall for end users

After a number of cases in which the EC rejected plans of mergers between mobile operators (such as the one between Three and O2 in the UK), the EC's approval of the merger between 3 and Wind in Italy shows that no two cases are seen as the same; however, it also shows that operators must offer extensive commitments to get their deals through.

Given the EC's recent track record of blocking mergers, 3 and Wind must have learned their lesson from recent similar cases (e.g. in Denmark and the UK) and offered commitments that will allow the Italian market to still have four MNOs. The merged entity has agreed to divest spectrum across four bands (900MHz, 1800MHz, 2.1GHz, and 2.6GHz) and to transfer several thousand mobile base station sites to the new entrant, which will be the French company Iliad. A transitional roaming agreement will also allow Iliad to access the joint venture's network on all technologies (including 2G, 3G, 4G, and any other new technologies) to offer customers nationwide mobile services until the new operator has built its own network. The EC must have considered these commitments to be more likely to alleviate competition concerns than those offered in previous merger cases in other countries, which generally related to granting access to MVNOs.

Although the move would mean that the Italian mobile market will be a four-player market, there are potential advantages for the merged entity, which is likely to be able to benefit from a better network (combining the assets of the two existing operators) and the highest market share. At the moment, 3 and Wind have a market share of 11.4% and 24.8%, respectively, which would result in a market share of around 36% for the merged entity, compared to Telecom Italia's 35.4% share.

Also, the three main players, including Vodafone, would benefit during the time in which the new entrant will have to adjust its strategies and decide how to gain customers. While there is a possibility that the new entrant could start a price war, it will also depend on how feasible this option will be in the Italian market. Iliad adopted an aggressive pricing strategy when it launched Free Mobile in France, which had a disruptive impact for the existing operators in the country. In Italy's mobile market, there has been a fierce price competition for some time, which means that the average ARPU is lower (currently around $14.3) compared to France when Free started its activities ($40.8, which rapidly fell to $22.7 in 1Q16). Such circumstances could leave less room for a similar strategy.

There is also a possibility that Iliad could be allowed to charge a higher MTR for some time by the Italian regulator. Because Iliad will be a new entrant, AGCOM will be allowed to apply one of the rules from the EC's recommendation on fixed and mobile termination rates of 2009. This allows new entrants to benefit from a higher MTR for up to four years, which is the time in which the EC expects a new entrant to reach a minimum efficient scale. However, this is a decision that AGCOM will have to take based on a review of the mobile call termination market and cannot be taken for granted until the regulator has completed its analysis.

Appendix

Further reading

Italy: Country Regulation Overview, TE0007-000992 (February 2016)

"Tougher remedies will have to be accepted if mergers are to go through," TE0007-001014 (April 2016)

Author

Luca Schiavoni, Senior Analyst, Regulation

luca.schiavoni@ovum.com

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