A MOCNumental decision: Australian Competition Tribunal rejects Telstra/TPG MOCN

Part One

On 21 June 2023, the Australian Competition Tribunal (Tribunal) issued its determination in relation to a proposed agreement between Telstra Corporation Limited (Telstra) and TPG Telecom Limited (TPG). The Tribunal elected to affirm the determination made by the Australian Competition and Consumer Commission (ACCC) on 21 December 2022 – to dismiss the application for authorisation of the arrangement. TPG and Telstra have since revealed that they will not appeal the Tribunal’s determination.

The Tribunal has now published its reasons for the determination. Those reasons show a careful consideration of the issues and represent a significant vindication for the ACCC in an area where it has faced challenges over the past few years. The ongoing implications of this result are explored in part two of this article.

Background

On 23 May 2022, Telstra and TPG lodged an application to the ACCC for authorisation under s88(1) of the Competition and Consumer Act 2010 (Cth) (CCA). This request for authorisation related to a proposed agreement between the parties wherein Telstra would operate under TPG’s allocated spectrum and associated licences – establishing a Multi-Operator Core Network (MOCN) arrangement that covered around 17% of the Australian population in rural and regional areas. A full explanation of the proposed deal, MOCN arrangements more generally, and the implications thereof can be found in this article.  The transaction was comprised of three agreements being: a Spectrum Authorisation Agreement, a MOCN Services Agreement and a Mobile Site Transition Agreement.

Importantly, the catalyst for seeking authorisation was a requirement in Australia’s Radiocommunications Act 1992 (Cth) that authorisation by a licensee for another person to operate radiocommunications devices under their licence is taken to be an acquisition of an asset such that certain provisions of the CCA may apply. CCA s50 prohibits acquisitions (of shares or assets) that would result in a substantial lessening of competition (SLC).

In considering this authorisation, the ACCC received over 90 submissions in its initial consultation, and a further 44 in response to its statement of preliminary views. While there were several submissions in support of the application - including from regional bodies, consumer groups, and Telstra/TPG dealers - there was also significant opposition from a number of operators and industry groups. Principal among those were Optus, Commpete, and Pivotel.  Following a thorough review, the ACCC concluded on 21 December 2022 that:

The ACCC is not satisfied, in all the circumstances, that the Proposed Transaction would not be likely to substantially lessen competition, or would be likely to result in a benefit to the public that would outweigh the public detriment from the Proposed Transaction.

The following day, TPG and Telstra jointly filed applications for review to the Tribunal under s101 of the CCA.

The Determination

In conducting its review, the Tribunal looked to the preconditions for authorisation outlined in s90(7) of the CCA,  and considered whether the proposed conduct would have the effect or likely effect of SLC and, if it did, whether there was a public benefit that outweighed any public detriments (including the SLC).

The Tribunal was ultimately not satisfied that the preconditions for authorisation were met.

I. Substantially Lessening Competition

Mindful of potential legal challenges, the Tribunal covered all bases in its approach to deciding whether or not there would be an SLC.  It considered not only whether the spectrum sharing agreement would have the effect of SLC (as contemplated under s90) but also whether the transaction when viewed in its entirety would have such an effect (or likely effect).  The Tribunal’s robust approach in this regard may have been a key contributor to the parties’ decision not to appeal to the Full Federal Court.

In considering whether conduct may have the effect or likely effect of SLC, a future with and without test is adopted.  In doing so, the Tribunal decided that, in a future without the proposed conduct or transaction, there is a ‘realistic potential’ for TPG to improve its network coverage by entering a network sharing arrangement with Optus or one with Telstra that addresses the concerns raised. 

As discussed above, the Tribunal first looked to whether the proposed conduct would have the effect of SLC. In doing so, it looked specifically at Telstra’s proposed use of TPG’s spectrum as contemplated by the Spectrum Authorisation Agreement.  The Tribunal acknowledged that:

Assessment must be undertaken in light of all relevant circumstances, which includes the MOCN Service Agreement and the Mobile Site Transition Agreement. But the assessment does not involve weighing the likely competitive effects of those other agreements.

Following consideration of the evidence before it, the Tribunal concluded that the spectrum authorisation agreement would be likely to provide Telstra with substantial commercial and competitive benefits and would further increase Telstra’s position of market strength in both retail and wholesale layers of mobile telecommunications markets.

In the Tribunal’s view, Telstra benefits from scale, strong brand, and first mover benefits in the telecommunications (retail and wholesale) market. Telstra’s two main competitors in Optus and TPG face significant commercial impediments in their 5G rollout, particularly in regional areas. The propagation characteristics of low-band spectrum make it particularly valuable in regional areas for mobile phone services. The Tribunal received evidence that, in the medium term, there is unlikely to be more low-band spectrum available for mobile phone services. Under the arrangement, Telstra would hold 75% of available low band spectrum in the short term. From 2024 it would be 60%.

Interestingly, the Tribunal also concluded that the proposed conduct would not materially affect TPG’s competitive position in the mobile telecommunications market. The Tribunal concluded that TPG has other options to monetise spectrum allocation given its valuable scarcity as a resource. In lieu of the arrangement, TPG would be at liberty to deal with their spectrum as it saw fit, and even if the return were to be lower than in the arrangement with Telstra, the conduct would not materially affect TPG’s competitiveness in the eyes of the Tribunal. This helped the Tribunal reach the view that the counterfactual (including a potential deal with Optus) would still leave TPG a viable operator and competitor.

Ultimately, the Tribunal concluded that the benefits of the active sharing arrangement would serve to materially enhance the competitive position of Telstra – particularly as compared with Optus (the other major player in the space). The additional spectrum would improve Telstra’s service quality and cost advantages, resulting in customers transitioning from Optus – which would increase Telstra’s scale advantages. The Tribunal was of the view that this would undermine Optus’ incentive to invest in 5G in the area.

Consistent with established case law, the Tribunal clarified that its concern was the protection of competition in mobile markets, not of Optus as a competitor. However, in the highly concentrated market where Optus exists as the second largest competitor, it formed the view that a material reduction in the competitive constraint able to be imposed by Optus is likely to have the effect of SLC.

As foreshadowed above, the Tribunal also considered whether the proposed transaction as a whole would have the effect of SLC. That is to say that the Tribunal also took into account the competitive impacts of the MOCN Service Agreement and the Mobile Site Transition Agreement.  It concluded that TPG’s competitive position would be improved by the transaction particularly as a consequence of the entry into the MOCN Service Agreement as this would increase TPG’s network coverage and provide access to Telstra’s 5G network.  However, the Tribunal also formed the view that TPG would have a competitive dependency on Telstra and that a consequence of the MOCN Service Agreement would be that TPG cease to be a fully independent competitor.

Balancing TPG’s improved competitive position against the anti-competitive elements of the agreement – particularly that Telstra would maintain and improve its advantages over Optus - the Tribunal was not satisfied that the proposed transaction would not have the effect, or would not be likely to have the effect, of SLC in the mobile telecommunications market at both the retail and wholesale levels. Given that conclusion, it was unnecessary for the Tribunal to consider the competitive effects in any other markets.

II. Net Public Benefit

In relation to the second limb, the Tribunal took a similar approach. It firstly looked to the submissions of the applicants with regard to the net public benefit of the proposed conduct (i.e. Telstra’s use of TPG’s spectrum pursuant to the Spectrum Authorisation Agreement).

The applicants submitted that Telstra’s increased access to spectrum would provide a net public benefit by reducing congestion and improving the network in regional areas, as well as reducing the costs of new infrastructure in regional and rural areas. The Tribunal agreed that additional spectrum for Telstra would result in efficiency gains, with better capacity and speed for Telstra at a lower cost. It also accepted that this was a public benefit even if not passed on in the form of reduced prices for consumers. However, the Tribunal caveated this with the assertion that Telstra don’t need the additional spectrum to achieve this, finding that it could simply invest in additional mobile sites to reduce congestion instead.

The Tribunal therefore determined that any public benefit was outweighed by the public detriment of the likely SLC. Furthermore, it concluded that the public benefits in the form of productive efficiency gains would be experienced in the short term whereas, over the medium and longer term, there would likely be a reduction in economic efficiency due to the likely SLC (with consumers bearing those costs).

With regard to the broader transaction, the applicants submitted that it would foster a net public benefit through increased pricing pressure from TPG, and through TPG and Telstra improving service quality in regional areas. They also submitted that it would create cost savings through a lack of duplication of infrastructure, which would again bring forward 5G investment by Telstra. The lack of duplication was also cited as an environmental benefit.

The Tribunal accepted there would be public benefits from the efficiency and environmental gains. However, when weighed against the detriments from SLC - while more finely balanced than with regard to the proposed conduct only - the Tribunal concluded that the SLC would be likely to generate efficiency losses that outweighed any efficiency (and environmental) gains.

Headline Implications

This determination by the Tribunal is likely to have resounding impacts on the way MOCN agreements are viewed through a competition lens, not just in Australia but globally. Our key takeaways are:

• The Tribunal’s decision represented a major vindication of the ACCC which has had a number of decisions overturned on review in recent years. This is one of two major authorisations (the other being ANZ/Suncorp)[1] blocked by the new Chair of the ACCC. She will be relieved with the Tribunal’s determination in this instance;
• The reluctance to grant authorisation shows the strength of concerns held by the ACCC and Tribunal regarding Telstra’s continuing dominance in regional Australia; and
• Given the scale of the proposed transaction and the extent of proposed MOCN sharing, the Tribunal decision could well serve as a benchmark for regulators around the world.

Part Two of this article will explore these implications in more depth.

For more information please contact: Thomas Jones, Matthew Bovaird or Benjamin Holmes