OFT clears Vodafone/Telefonica site sharing agreement

06 February 2013

Nina Cummins

On 11 October the OFT cleared an agreement between Vodafone and Telefonica to set up a joint venture company (Towerco) into which each party would contribute their base station sites, which Towerco would manage as a single grid.  
Relevant merger situation

The arrangements concerned the transfer of the following by the parties into Towerco: sites, site infrastructure used in association with the RAN, IT systems, software, IPR, records, equipment, stock, receivable, managed contracts and goodwill, as well as employees. The OFT considered that these arrangements would result in two enterprises ceasing to be distinct and therefore constitute a relevant merger situation for the purposes of the Enterprise Act. Towerco would be responsible for the management of a single, optimised grid of base station sites, including liaising with landlords and decommissioning or acquiring sites.

By contrast, the OFT considered that other arrangements, whereby the parties would remove their existing RAN equipment and purchase new multi-operator RAN equipment, did not give rise to a relevant merger situation.  There would not be any sharing of existing assets or change of control in the parties' existing RAN equipment nor did the parties currently provide the relevant RAN assets and management services to third parties (such that the assets were not revenue generating and there was no transfer of customer records / goodwill). As such the RAN equipment did not form part of a 'business', and there was no "enterprise" ceasing to be distinct. Nor did the OFT consider the arrangements regarding RAN equipment to be part of the same agreement as the setting up of Towerco and so they did not form part of the same merger situation as the joint venture agreement.

The OFT then concluded that the share of supply test was met in relation to the supply of third party access to base station sites, considering that the parties' combined share of supply was likely to be in the region of 25%-35%.

Market Definition

The OFT considered that the relevant product market was likely to be the basis of the provision of base station site access to MNOs. However, the OFT found that it was not necessary to conclude definitively on the definition of the relevant product market. As regards geographic market, the OFT thought that the market was likely to be national in nature. Again however, the OFT found that it was not necessary to conclude definitively on the definition of the relevant geographic market.

Competition Assessment

a. Unilateral effects

The parties submitted that they primarily provided internal access to their base stations, and that not all their base station sites were capable of being shared. The OFT found that the combined share of supply was 25%-35% which was insufficient to cause concern to the OFT.

Additionally, the parties argued that Towerco simply incorporated an existing cooperation arrangement between the parties concerning the management of their sites (known as Cornerstone) into a new legal entity, and as such did not result in a substantial change to the existing competitive landscape. They argued that demand for third party access to the parties' base sites is extremely low; and that the only current customers for access to their base sites were 2 MNOs (EE and H3G) who currently have a site sharing agreement with one another. The OFT also noted that it had not received any third party concerns regarding possible unilateral effects.

b. Coordinated effects

The OFT then considered the potential for coordinated effects in the wholesale and retail mobile call access and origination markets (including coordination in the spectrum auction). It found that the parties would continue to compete for customers at the core network level (i.e. mobile switching centres, home location registers and service platforms); they would remain free to differentiate themselves in respect of products / services offered to wholesale and retail customers, and with respect to R&D. The increased risk of information-sharing was considered low, with the OFT accepting the parties' arguments that information would only be disclosed to Towerco to the extent that disclosure was necessary for Towerco to carry out its functions / role.

Although the OFT noted that it did receive third party concerns from one party about the parties' ability to co-ordinate their activity in the wholesale and retail call access and origination market (e.g. due to increased cost symmetry) the OFT considered that there was not any evidence to support the view that the JV would result / enable the parties to substantially align their costs, and indeed the parties' estimates of the magnitude of passive RAN costs as a percentage of the parties' total operational costs was in line with comments from other third parties. The OFT also considered the possibility that the JV might actually increase the parties' incentive to compete downstream, although the OFT did not take any final view on this.

The OFT ultimately concluded that the JV would not give rise to any substantial lessening of competition.

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