Press Release 15/2024
July 4, 2024

The Portuguese Competition Authority (AdC) has issued a prohibition decision regarding Vodafone Portugal, S.A.'s (Vodafone) proposed acquisition of exclusive control over Cabonitel, S.A., which includes Nowo Communications, S.A. (Nowo). The AdC concluded that the proposed merger would likely create significant impediments to effective competition in the identified relevant markets, thereby harming consumers.

I - Companies Involved, Market and Assessment
Vodafone is a multi-service electronic communications operator active in Portugal, providing fixed and mobile communications, fixed and mobile internet services, subscription television services, and telecommunications bundles. Vodafone has nationwide network coverage and offers services using both its own and third-party infrastructures.
Nowo offers electronic communications services in mainland Portugal, including fixed voice, mobile telecommunications (as a mobile virtual network operator or MVNO, using Altice's network), broadband internet access for residential customers, subscription television services, and telecommunications bundles for residential customers. Unlike Vodafone, Nowo's fixed and broadband network coverage is limited to certain regions of mainland Portugal. Nowo recently acquired radio spectrum via the 5G frequency auction, allowing it to develop its own mobile telecommunications network.
Today's decision follows an in-depth investigation by the AdC of the transaction that determined that the merger would have detrimental effects on Portuguese telecommunications consumers, due to an increase in market power for Vodafone and its main competitors (i.e., unilateral effects), enhanced conditions for coordinated offers among various operators (i.e., coordinated effects), and reinforced barriers to market entry.

Market Characterization in the Pre-Merger Scenario

Before assessing the probable impacts of the merger, the AdC conducted a detailed characterization of the telecommunications industry in Portugal. Structurally, the telecommunications markets in Portugal are characterized by high and heterogeneous levels of concentration across the mainland, with customer loyalty periods and bundled offers further reinforcing barriers to customer mobility between operators, thereby reducing competition and increasing entry and expansion barriers for new operators.
Significant parallelism was identified in the offerings of the three main operators—MEO, NOS, and Vodafone—both in terms of the type of offers and their tariffs. The AdC identified several mechanisms and procedures through which these operators maintain such parallelism or alignment in their offers.
Along with collecting extensive market information, including internal company documents, the AdC developed and implemented an econometric model of the industry, using a static equilibrium model with price competition and differentiated products.
This model provided a robust technical methodology to characterize the current market equilibrium and assess the probable impacts of the merger on telecommunications prices in Portugal.
The AdC concluded that, pre-merger, equilibrium differs from a non-cooperative price competition equilibrium in an oligopolistic market with four firms, clearly indicating a significant degree of coordination, pre-merger.
In this pre-merger scenario, all firms possess substantial market power, with average telecommunications prices estimated to be 21% higher than in a four-firm oligopolistic competition scenario, resulting in a consumer surplus loss of €349 million and social welfare loss of €90 million per year.

Unilateral Effects Resulting from the Merger

Regarding unilateral effects, the AdC found that Nowo exerts considerable competitive pressure on the other market operators. The merger would lead to significant price increases:

1. Nowo's product prices would rise significantly (55% for standalone mobile services, 21% for 3P bundles, and 14% for 4/5P bundles).
2. Vodafone's product prices would increase to a lesser extent (2.8% for standalone mobile services, 3.9% for 3P bundles, and 3.1% for 4/5P bundles within Nowo's network footprint).
3. Prices of other market operators' products would increase marginally.

The merger would, enhance Vodafone's market power. Overall, it was estimated that these effects would lead to losses of consumer surplus and of social welfare in the order of €54 million and €20 million per year, respectively. These results indicated a deterioration of the pre-merger equilibrium, already characterized by significant coordination.

Coordinated Effects Resulting from the Merger

In terms of coordinated effects, the AdC concluded that the merger would likely increase the probability, sustainability, and degree of coordinated behaviors among the three main market operators—MEO, NOS, and Vodafone.
The similarity of the operators' offers and the elimination of the only operator (Nowo) with differentiated and lower-priced offers contributed to this conclusion.
The merger would also reinforce barriers to entry, particularly due to the concentration of spectrum in Vodafone, making it unavailable to new entrants in the mobile segment, further facilitating coordinated behaviors among the main 3 operators.
The AdC's econometric model indicated that the merger would increase coordination incentives, already positive in the pre-merger equilibrium.

Assessment Conclusion

Based on the above, the AdC concluded that the merger would create significant barriers to effective competition in various telecommunications markets, resulting in unilateral and coordinated effects leading to significant price increases, enhanced market power, increased entry barriers, and strengthened cooperative industry equilibrium conditions.

Commitments Presented by Vodafone

Vodafone proposed four commitment packages to address the AdC's competition concerns. The final package (the 4^th) involved:

1. Selling the radio spectrum usage rights (DUER) reserved to new entrants recently acquired by Nowo to Digi.
2. Providing Digi with a wholesale offer on Vodafone's fiber optic network.
    

The AdC found that the commitments only effectively addressed the increased entry barriers resulting from the market withdrawal of the DUER originally reserved for new entrants. On other fronts, the AdC concluded that the proposed remedies presented risks of circumvention and distortion on one hand, and on the other, were not effective in their purpose, as they would not address the adverse competitive effects of the merger.
In fact, the provision of the Wholesale Offer aimed to address unilateral and coordinated competitive concerns by, notably, offering a wholesale arrangement to DIGI, allowing it access to Vodafone's fiber optic network (enhanced by Nowo's small fiber optic network) to offer services to its residential customers in areas where Nowo was present. This would allegedly maintain the competition that would be eliminated due to the merger by "replacing" Nowo with Digi.
However, the AdC considered that DIGI's market entry does not depend on Vodafone's acquisition of Nowo nor, by extension, on the implementation of the Wholesale Offer. The principle of Nowo-Digi "substitution" as a response to competitive concerns is, therefore, a misconception, as it implies that DIGI's entry would only occur through the offered commitment.
Thus, Digi's presence in the market was considered as a counterfactual, meaning part of the reference scenario in the absence of the merger.
It is expected that the new entrant will have positive impacts on the market, leading to lower prices and reduced incentives for coordination.
However, the impact of the merger must be, and was, evaluated solely in relation to the marginal impact of the acquisition of Nowo, already assuming DIGI's presence in the market.
The results of the AdC's analysis concluded that this marginal impact remains negative, meaning the benefit from DIGI's entry would be smaller in Nowo's footprint area if the merger occurred. Therefore, the proposed commitment, regardless of its risks and the level of network overlap—the overlap between Vodafone's network offered in the wholesale arrangement and Nowo's current network is limited—does not effectively address the estimated competitive effects of the merger, even considering the improved terms of the 4th Commitment Package compared to previous proposals.

II - Chronology

The procedure began on November 7, 2022, with Vodafone's notification of the merger to the AdC. Comments were submitted by MEO Group, NOS Group, Ius Omnibus Association, and Digi Portugal.
The AdC sought opinions from ANACOM (National Communications Authority) and ERC (Regulatory Entity for Social Communication).
On April 5, 2023, the AdC initiated an in-depth investigation, as the merger could not be excluded from causing significant competition obstacles and harming consumers (see https://www.concorrencia.pt/en/articles/adc-opens-depth-investigation-acquisition-nowo-vodafone)
The AdC identified detailed competition concerns in its decision to proceed with an in-depth investigation and held state-of-play meetings with Vodafone to discuss ongoing investigation findings and updated competition concerns.At least, from April 5, 2023, Vodafone was informed of the competition concerns.
On December 12, 2023, Vodafone submitted a commitment package under the Competition Law, which the AdC rejected on January 17, 2024, as it did not address the identified
competition effects.
Vodafone then presented three more commitment packages on January 31 (withdrawn on February 26), February 26, and April 22.
Based on the in-depth investigation and the unmitigated competition concerns, the AdC issued a draft prohibition decision on March 22, 2024, initiating the preliminary hearing phase, which concluded on April 22. Vodafone's fourth commitment package submitted on April 22 led the AdC to reopen the investigation and conduct supplementary inquiries. On May 29, after analyzing the fourth commitment package and finding it insufficient to mitigate competition concerns, the AdC issued a second draft prohibition decision and opened a second preliminary hearing phase, concluding on June 14.
After analyzing the observations from the second preliminary hearing, the AdC adopted a prohibition decision on this date under Article 53(1)(b) of the Competition Law, for the merger operation Ccent. 55/2022 – Vodafone/Cabonitel.

III - Proceedings

The procedure involved three preliminary hearings—one for initiating the in-depth investigation phase and two for issuing the prohibition decision.
During the investigation, the AdC formally requested information from Vodafone 14 times (excluding reiterations of incomplete responses) and had over 30 interactions with third-party entities (ANACOM, INE, MEO, NOS, Digi, MásMóvil/Lorca, Lycamobile).
Vodafone accessed the non-confidential version of the procedure 27 times (21 during the in-depth investigation phase).
The AdC commissioned a consultant to perform an econometric estimation model. Vodafone's economic consultants accessed a virtual machine replicating the infrastructure used by the consultant for their econometric estimation, allowing them to freely consult, analyze, and produce alternative analyses.
It is important to note the particular complexity of the case, which included not only the collection and analysis of extensive internal Vodafone documentation, but also extensive quantitative analysis, including, on the one hand, an econometric model in which the "Nowo Effect" was identified and, on the other, an econometric model simulating the effects of the operation.