Last week the Commerce Commission published “a statement of preliminary issues” on the 2degrees-Orcon merger.
It says the Commission will allow the merger to go ahead if it doesn’t reduce market competition.
On a simple level that question looks straightforward.
There are about 90 retail telecommunications companies in New Zealand. Removing one through a merger may not make much difference.
Yet not all retail telecommunications companies are equal. 2degrees and Orcon, formerly Vocus, are the third and fourth largest.
Teasing out all the arguments is not easy.
Before the merger there were three mobile carriers. That doesn’t change.
The merger removes New Zealand’s largest Mobile Virtual Network Operator from the market.
There are overseas competition watchdogs who see MNVO health as a sign a market is competitive. New Zealand has never had a healthy vibrant MNVO sector.
The market is not open as it looks
Spark, Vodafone, 2degrees and Orcon are the four largest telcos. They account for about 95 percent of the market.
You could argue they are the only companies worth considering in any analysis of market competition.
In effect, Spark, Vodafone, 2degrees and Orcon are the market.
Moving the NZ telco market
The rest are important and essential, but none of them can move the market. The big four can.
The next largest is Sky Network Television with around a one percent market share. Trustpower comes in at sixth place with roughly the same share.
At a stretch you might consider these in an analysis. After the top six you are dealing with minnows.
From that point of view taking out one of the big four changes the competition landscape a great deal.
It may not reduce consumers absolute choice on paper.
They remain free to pick from 90 service providers. Yet the majority of consumers will pick one of what could soon be the big three. At best they will consider the top five remaining players where there were six.
In that sense, the merger means a significant reduction in competition.
Competition experts at the Commerce Commission will chew over this in coming weeks. They’ll get input from rival telcos, consumer groups and other industry players.
2degrees and Orcon suggest a stronger number three will ‘enhance’ competition.
That does not make sense if you agree consumers are reduced from four to three choices. Or, let’s be generous and say from six to five choices.
Does a merger enhance competition?
It does not make sense from another point of view.
Spark is more than three times the size of 2degrees. Vodafone is about two and a half times the size of 2degrees.
Adding Orcon to 2degrees does not make it much bigger. 2degrees is 12.5 percent of the market. Orcon is four percent. Together they are make up 16.5 percent. Spark and Vodafone have a 77 percent market share.
They will continue to dwarf the merged business.
The merged company won’t unnerve the big telcos in the short term. It will be an irritant more than a threat.
A merged, resource-rich business higher up the market could be bad for Sky or Trustpower.
Meanwhile the new business is as likely to increase pressure on the smaller telcos. Wiping them out would not be good. If they struggle as a result of the merger, then competition would suffer.
This is what Commerce Commission experts need to balance: the marginal impact of a slightly larger third player on the top two versus the impact of a larger third player on the remainder of the market.
In the past companies looking to merge would talk about ‘synergy’. It almost never happens. New Zealand’s telecommunications sector has a poor record when it comes from deriving rationalisation value from a merger.
There are potential cost savings1 and the opportunity for 2degrees to sell mobile to the 4 percent of customers arriving from Orcon.
None of this is to say the Commerce Commission will or won’t refuse the merger. But we can’t assume the decision is straightforward. There’s more to look at than meets the eye at first sight.