ACCC dials up the pressure on Australian RAN sharing proposal

On 21 February 2022, Telstra, Australia's largest mobile network operator (“MNO”), and TPG, the country’s third largest MNO, announced a long-term active network sharing deal (referred to as a Multi-Operator Core Network commercial agreement). The deal is subject to approval by Australia’s competition regulator, the Australian Competition and Consumer Commission (“ACCC”) and faces staunch opposition from Singtel Optus, the country’s second largest MNO.

The deal involves Telstra and TPG sharing RF spectrum and active infrastructure across 17% of Australia’s population coverage. It has the potential to shape Australia’s telecommunications sector for years to come, particularly in regional and remote areas where limited coverage and a lack of competition have had a significant impact on consumers.

The deal is currently being considered by the ACCC, following an application for merger authorisation by the parties given that it involves a grant of spectrum rights access. The ACCC consultation has attracted attention from a wide range of stakeholders, with over 180 submissions received so far. In particular, Optus has been a vocal opponent of the proposed transaction with 100’s of pages of submissions and expert reports being submitted to the ACCC during the consultation process.

On 30 September 2022, the ACCC released a Statement of Preliminary Views which sets out the Commission’s initial views and invited further submissions from interested parties. A final decision is due in December. This decision will be watched by competition regulators around the world given its implications for similar developments elsewhere.

An introduction to network sharing

Radio Access Network (“RAN”) sharing involves mobile network operators sharing RAN equipment or infrastructure (e.g., antennae, base stations and sometimes spectrum) but keeping their core networks separate. There is an important difference between passive network sharing, where operators share physical cell sites and passive network elements (e.g., masts and power supplies), and active RAN sharing, where operators share transport infrastructure, and baseband processing resources in addition to passive equipment. At a deeper level, active RAN sharing may also involve sharing of critical spectrum resources. This is commonly known as multi-operator core network (“MOCN”) sharing.

The sharing of telecommunications infrastructure and equipment can result in cost efficiencies, allowing operators to simultaneously provide better coverage while reducing the capital expenditure associated with network rollouts. It can also bring other benefits such as lower power usage. RAN sharing agreements are becoming more commonplace because of the particularly high costs associated with 5G network rollout, and it is likely that network sharing will continue to facilitate the deployment of 5G around the world. However RAN sharing and, in particular, active RAN sharing can also involve a high level of coordination between competitors in quite concentrated markets. As a result, it frequently requires oversight by competition regulators.

The proposed network sharing arrangement between Telstra and TPG

The provision of mobile and broadband services in regional and remote areas of Australia is uniquely challenging. Substantial investment is required ‘to provide connectivity across Australia’s large landmass, despite the relatively small population in remote areas’.[1] The vast majority of Australia’s population is located in relatively small urban areas.

Capital investment requirements are greater in the push to upgrade to 5G connectivity particularly for rural and regional communities. This helps to explain the long-term agreement, which is for 10 years with 2 options to extend by a further 5 years. Consequently, this proposed arrangement has the potential to shape the telecommunications industry in Australia for the next two decades and beyond.

Under the proposed arrangement between Telstra and TPG, TPG will be given access to Telstra’s active mobile network infrastructure services in the ‘Regional Coverage Zone’ - certain regional and urban fringe areas covering approximately 17% of Australia’s population. TPG will get access to approximately 3,700 of Telstra’s mobile towers across this area (a significant increase from the 750 sites it currently operates). This will allow TPG to increase its coverage from 96% to 98.8% of the population.

In exchange, Telstra will be provided access to TPG’s 4G and 5G band spectrum in the coverage area. This spectrum will be pooled with Telstra’s spectrum and utilised to provide the MOCN services. Telstra will also get access to TPG’s spectrum in areas beyond these regional areas (i.e., in very remote areas of Australia in which Telstra is the only carrier) and to gain access to 169 existing TPG Telecom sites. TPG originally proposed to decommission the remainder of its sites in the Regional Coverage Zone although the parties have recently proposed undertakings to the ACCC whereby TPG would retain many of these sites).

While Telstra will share its RAN for 4G and 5G, the mobile core networks of Telstra and TPG will still be operated independently by each party in the Regional Coverage Zone. The parties will also still operate their networks independently in metropolitan areas. Additionally, TPG will not be able to extend its coverage in remote areas (where a further 0.7% of the population is serviced by Telstra).

The merger clearance process in Australia

Telstra and TPG have applied for merger authorisation since granting access to spectrum licensed to another person is considered to be an acquisition of an asset for the purposes of the merger clearance provisions of Australia’s Competition and Consumer Act 2010 (Cth) (“CCA”).

Generally, parties are not obliged to notify the ACCC prior to completing a transaction since Australia’s merger regime is voluntary. However, failing to do so carries a risk that the transaction may subsequently be found to substantially lessen competition in breach of s 50 of the CCA. Authorisation also provides an exception to the cartel conduct provisions of the CCA.

Merger parties can notify the ACCC of a transaction through the informal clearance process or by applying for merger authorisation (with each process involving the ACCC assessing the transaction).

The informal process allows a party to seek the ACCC’s view on whether the merger is likely to substantially lessen competition (“SLC”) and provides parties ‘a significant level of comfort’.[2] Alternatively, parties can seek legal protection through the merger authorisation process. The ACCC can grant authorisation it if is satisfied that either:

• The proposed acquisition is not likely to SLC; or
• The likely public benefit outweighs the likely public detriment from the transaction (the ‘net public benefit’ test).

It is rare for parties to seek merger authorisation, with only five applications having been made since 2017. To put that into perspective, the ACCC assessed a total of 424 mergers in 2020/2021 alone.[3] This means the vast majority of those mergers considered by the ACCC are assessed through the informal clearance process.

One key reason why applicants may choose to seek merger authorisation is the right to have the ACCC’s decision reviewed (on the merits) by the Australian Competition Tribunal.

Competition Analysis

Telstra and TPG argue that the transaction would not have the effect of SLC in any market.

In the applicants’ view, the arrangement will promote retail and wholesale competition in regional areas due to TPG’s improved coverage in these areas. It is also argued that the arrangement will promote competition by improving TPG’s offering to metropolitan customers that travel in regional areas. Improved competition at the retail level will also improve network competition.

The ACCC’s Statement of Preliminary Views considers the potential competitive effects of the transaction on both price-based competition and infrastructure-based competition, including by driving innovation and product differentiation (to the extent possible in an MOCN).

Retail price-based competition

In relation to price-based competition, the ACCC considers that, in the short term, TPG may become a stronger competitor to Optus (the second largest MNO in Australia) and Telstra since it will likely be able to offer a better product to consumers in regional areas. This may increase price-based competition between the MNOs.

However, it is concerned that other factors, such as the fees payable for access to the MOCN services, or the wholesale payments payable by TPG to Telstra, may lessen price-based competition by changing TPG’s cost structure.

The Commission’s preliminary view is that TPG will be incentivised to increase prices in a future with the transaction, considering instant developments in the value of its product, as well as higher costs.

Infrastructure-based competition

The ACCC is also considering the impact of the transaction on infrastructure-based competition, which it has strongly advocated in the past. The Commission expects that TPG will grow to be reliant on access to Telstra’s network regionally, ‘and will discontinue investment in the Regional Coverage Zone for the foreseeable future’.[4] In the long-term, removing TPG as a possible infrastructure investor in regional areas could impact competition.

That is not really surprising as a key rationale for RAN sharing deals is to reduce the cost of investing in infrastructure, particularly in the transition to 5G. The key questions for regulators are whether the MOCN will still create incentives for price and product competition at the services layer and how it will impact on operators that do not participate in the MOCN.

The ACCC is carefully considering the extent to which the transaction might impact Optus’ (as the third major MNO) investment in regional areas, with the preliminary view being that Optus will still have incentive to invest in a future with the transaction. Although the Commission will continue to consider the impact of the transaction on Optus’ investment incentives (and whether this could lessen competition). Optus claims that, if the transaction proceeds, it will be at a significant competitive disadvantage given it will need to fund its own 5G network and will not have the efficiency benefits that the applicants will enjoy as a result of the transaction. This may, it claims, decrease its incentive to invest in regional Australia.

Acquisition of spectrum

An interesting issue (and one which has significance for other countries) is the potential impact on competition in markets for the acquisition of spectrum rights (i.e. the rights to transmit over specific spectrum bands). In particular, the Commission is concerned that the transaction may impact TPG’s incentive to obtain spectrum (since TPG will no longer need spectrum in regional areas). The transaction could also impact Optus’ incentive to develop its 5G network in regional areas, potentially making it less likely to obtain spectrum licences.

However, the ACCC considers it is likely that TPG and Optus will continue to have some incentive to acquire spectrum. For example, in TPG’s case, it may be incentivised to acquire spectrum licences in the ‘primary’ market to trade or resell them in the ‘secondary’ market (even in regional areas).

Other areas of consideration include competition in the wholesale supply of mobile services to MVNOs, and passive mobile network infrastructure services.

Public benefits and detriments

The ‘net public benefit’ test is the second possible avenue for the Commission to authorise the transaction. The applicants claim that the public benefits of the authorisation would outweigh any detriments.

Public benefits

The ACCC is considering Telstra and TPG’s claims that the transaction is likely to result in substantial benefits to the public (mainly in rural and regional communities), including better connectivity and service quality, improved innovation and competition in regional areas, and increased efficiency in utilising infrastructure and less network costs.

At this stage, the Commission believes the transaction is likely to lead to immediate improvements in the parties’ services (which could provide consumers with better choice in regional areas). However, the Commission is conscious that any short-term benefits will need to be considered against potential longer-term effects of the deal (from a decrease in infrastructure-based competition). Also, the extent of public benefits resulting from network improvements, increased choice, and innovation is going to depend on factors such as existing congestion issues faced by Telstra.

Although the Commission recognises that the deal will likely lead to certain efficiencies, it also believes that this must be considered against other factors such as the effect of consolidation on operators’ independence and ability to provide differentiated services, to determine any public benefits.

Another public benefit discussed is environmental benefits including those arising from energy savings and the reduced need to build competing infrastructure. There is an increasing global awareness by regulators of the potential tension between sustainability objectives and the economic benefits of competition, including in the US under the Biden Administration.

The ACCC points out that the significance of these benefits is not yet clear (although it recognises that benefits may result from the transaction).

Public detriments

In the ACCC’s view, the most substantial detriments are likely to the transaction’s impacts on competition. That being said, the Commission is also considering negative impacts on the structure of the industry going forward (from the effects of spectrum concentration), or broader impacts on the economy and employment.

In relation to spectrum, the Commission’s believes that public detriment may arise from ‘an increasing concentration in the ownership of regional spectrum’.[5] In particular, a concern is that there will be an incentive for incumbent licensees to ‘lock up’ spectrum.[6]

Do global examples of network sharing provide a useful comparison?

In their application, Telstra and TPG observe that MOCN agreements are becoming more common around the world. They also argue that international sharing arrangements have brought benefits to consumers, such as improved service quality and lower prices.

RAN sharing agreements between operators have certainly become more commonplace. For example, in 2012, Danish operators Telia and Telenor were granted permission for a network sharing arrangement through a joint venture, where the operators jointly own, control and develop infrastructure and frequency resources (with the parties continuing to operate their own core networks). The parties would not share their core networks. In 2022, the parties continue to be separate mobile operators on the wholesale and retail markets.

The decision to grant permission by the Danish Competition Council (“DCC”) was conditional upon certain commitments, such as that the parties are required to accept requests from wholesale customers to purchase mobile telephony and mobile broadband on customary and market conditions, or that the parties must sell or let surplus antenna sites to interested players in the market. Other recent examples include network sharing arrangements in the Czech Republic involving T-Mobile CZ, CETIN, and O2 CZ and in the United Kingdom between O2 and Vodafone.

However, despite widespread consideration of active network sharing arrangements by Competition authorities in other jurisdictions, the initial view of the Commission is that referring to these arrangements is of little benefit in understanding how the TPG/Telstra proposal may affect competition in Australia. This is partly because Australia’s geography is unique. However, it is also partly because the transaction is different to a typical MOCN agreement in that it: (1) does not constitute a joint venture, (2) includes the payment of fees, and (3) does not include a shared investment model.

In the Commission’s view, these factors ‘may significantly alter the Applicants’ incentives with respect to investment (both in infrastructure and spectrum), and the imposition of usage charges by Telstra will change TPG’s cost structure and competitive incentives’.[7]

Proposed undertakings

On 1 November 2022, the parties wrote to the Commission and proposed two undertakings to address some of the Commission’s preliminary concerns with the transaction. Under Australia’s competition laws (as in many other jurisdictions), undertakings may be accepted to mitigate the risks to competition associated with a proposed transaction (for instance, the behavioural undertakings to address the DCC’s concerns in Denmark).

The parties propose that merger authorisation is granted subject to the Commission reviewing the transaction again within eight years (the ‘Joint Undertaking’). TPG has also undertaken to retain access to some of its sites in the Regional Coverage Zone, which means that it would keep around 60% of its total sites in this area until the ACCC re-assesses the transaction (the ‘Sites Undertaking’). This includes those sites transferred to Telstra that will revert to TPG if the deal concludes.

These undertakings may signal a concern that the transaction is unlikely to be authorised without some conditions. It will be interesting to see whether the Commission will be satisfied with the proposed commitments or whether further concessions will be required. For example, one of the commitments in the network sharing deal in Denmark is that Telia and Telenor are required to accept requests from wholesale customers to purchase mobile telephony and mobile broadband on customary and market conditions.

The timeframe for the ACCC to make its determination has now been extended to 22 December 2022, which means that interested parties will now be given a further opportunity to make submissions.

Conclusion

With the ACCC’s decision due soon and a significant number of submissions from industry and consumers, both for and against the transaction, we invite you, the reader, to share your thoughts with us – what happens next? Get in touch and let us know what you think.

For more information, please contact Thomas Jones, Matthew Bovaird, Patrick Cordwell or Dylan McGirr.

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[1] https://www.infrastructure.gov.au/sites/default/files/documents/regional-telecommunications-review-2021-issues-paper.pdf

[2] ACCC’s Informal Merger Review Process Guidelines at [1.11].

[3] https://www.accc.gov.au/system/files/Annual%20Report%202020%2021%20-%20Web.pdf

[4] ACCC’s Statement of Preliminary Views at [5.48].

[5] See ACCC’s Statement of Preliminary Views at [6.63].

[6] See ACCC’s Statement of Preliminary Views at [6.66].

[7] See ACCC’s Statement of Preliminary Views at [4.23].