Vodafone has applied to the Commerce Commission for clearance to buy TelstraClear from Telstra in Australia for $840 million. The document – studded with the gaps that contain “commercially sensitive” information – provides some interesting assertions. The date for a decision is given as July 27. Here are ten questions the Commission might consider. 1. What is the market? Under the merger and acquisition guidelines the Commission must first define the market that may – or may not – become substantially less competitive should a merger take place. Vodafone says it has “adopted the Commission’s historic approach of regarding mobile and fixed line services as falling within different markets.” In the same paragraph (page 32, paragraph 98) it says it will consider the impact on businesses looking for a single source of fixed and mobile services (presumably the reason why Vodafone needs TelstraClear’s fixed line assets to compete against Telecom) – so what’s it to be? Are fixed and mobile markets separate, or not? 2. How competitive is the market already? According to the Commission’s annual telecommunications market report, market share in home internet connections is split as follows: Telecom at 49 percent, TelstraClear 16 percent, Vodafone 13 percent – that sees the three top players with 78 percent of the fixed line market. In the mobile market the customers are divided as follows: Vodafone has 47.8 percent, Telecom 37.6 percent, 2degrees 13.6 percent. However in the mobile market customer numbers may not equal revenue share. Analyst Paul Budde claims the revenue market share in mobile is Vodafone at 62 percent, Telecom 31 percent and 2degrees 7-8 percent. (When Computerworld has published Budde’s figures in the past Vodafone has disputed them – but refused to provide an alternative revenue market share figure). 3. What happens to Vodafone’s existing national and CBD fibre backhaul suppliers? Vodafone’s document points out that it has no current national or CBD fibre backhaul infrastructure, so by gaining TelstraClear's backhaul it won’t limit competition. But what about Vodafone’s existing suppliers – FX Network nationally and Vector in Auckland – won’t the loss of Vodafone’s business substantially decrease their business and provide a more difficult market for these companies to compete in because they will be up against two (almost) vertically integrated telcos – Vodafone and Telecom? 4. What about Vodafone’s track record as a wholesaler? Vodafone’s document says the company will continue to provide wholesale services to 2degrees, Kordia/Orcon and others (page 3). But what do those wholesale service agreements look like? Especially the agreement in which 2degrees has to pay Vodafone every time one of its customers strays from its infrastructure footprint. The provision to allow roaming is regulated but not the price, terms and conditions. The price could be crippling 2degrees for all we know. Should the Commssion demand to see it before greenlighting the sale? 5. What about international connectivity? Vodafone’s document points out that TelstraClear provides trans-Tasman retail services over the Southern Cross Cable and Tasman II, which Vodafone does not currently (it buys its services from Vocus, which resells Southern Cross). So does this mean that if Vodafone buys TelstraClear it would get its international connectivity business, and if so would Vodafone still be interested in using the services of Pacific Fibre – the proposed alternative international cable that appears to struggling to get finance? 6. What is in the restraint of trade clause? Presumably the Commission will see the terms of sale, which includes the secret restraint of trade clause mentioned by TelstraClear chair Gordon Ballantyne at the press conference when he announced the sale last week. What does this mean? Telstra is one of the most cashed up telcos in the Asia Pacific, for how long is the New Zealand telco sector to be denied any kind of investment from this company? For example, could it exclude Telstra from investing in Pacific Fibre (see question number 5) or extend its own international cable to New Zealand? 7. Will the sale stall the uptake of Ultra Fast Broadband? This may not come under the Commission’s purview but it’s worth raising, as academic Bronwyn Howell has noted– a combined TelstraClear/Vodafone is likely to invest more, not less, in the copper network to the detriment of the new taxpayer-backed fibre network. According to Vodafone’s document, upping its investment in unbundling the local loop is advantageous to consumers (page 14, paragraph 35). “It also benefits consumers in the long run as unbundled exchanges continue to provide a competitive constraint on fibre pricing following the rollout of UFB”. But the wholesale pricing of UFB has been set by Crown Fibre Holdings and the Commission has oversight on those contracts. So Vodafone’s argument appears to be that a player with almost 30 percent share in the fixed line market which invests in copper is providing some kind competitive constraint on fibre pricing. It would be interesting to see a counterfactual on that assertion. 8. Why no mention of the Chorus/Vodafone agreement in Rural Broadband Initiative in any detail? Why is this government-backed partnership not analysed anywhere in Vodafone’s public document. Together, these companies have secured a $300 million government contract to rollout services to the sector that is the highest earning export earner for New Zealand. Yet the only mention we could find of the contract in the public document was in the glossary on page 64. 9. Should Vodafone’s new spectrum allocation in 1800MHz be taken into consideration when 700MHz spectrum is being divvied out? The process of how the valuable 700MHz spectrum will be allocated is due before cabinet shortly, according to a spokesperson for ICT Minister Amy Adams. But if Vodafone increase their amount of 1800MHz spectrum, should this impact how much they can bid for in the 700Mhz spectrum auction (there’s 45MHz available and Vodafone has publicly said it wants 20MHz). Again, not strictly within the Commission’s purview, but maybe it should be taken into account by another government agency? 10. Does past behaviour suggest a Telecom/Vodafone duopoly in the fixed line market? Here we return to the number one issue – how do you define the market? Until mobile termination rates were regulated Telecom must have been forced to pay Vodafone a substantial amount because of the difference in market share. And yet Telecom always lined up behind Vodafone in arguing again MTR regulation – why? Could it be because Telecom was/is protecting its fixed line voice revenues (the $45 a month most of us pay for a home phone line)? In other words, it's not in Telecom’s interest to have low mobile calling rates because its customers could abandon their home lines and their revenues would drop.
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