The Orange-Jazztel Merger: A Competition Policy Case Study
When two major telecommunications companies merge, regulators face a difficult balancing act: allowing efficiency gains while preventing anti-competitive harm. The 2014 merger between Orange and Jazztel in the Spanish telecommunications market provides a fascinating case study in competition policy, market definition, and regulatory remedies.
Download the full case report (PDF)
Background: A Consolidating Market
In 2014, Orange SA announced its intention to acquire Jazztel, Spain’s third and fourth largest telecommunications companies by revenue. Both companies operated in overlapping markets:
Retail markets:
- Fixed voice services
- Fixed Internet access services
- Mobile telecommunication services
Wholesale markets:
- Call termination on fixed and mobile networks
- Broadband access services
- International carrier services
The Spanish National Competition Authority (CNMC) referred the case to the European Commission on November 5, 2014, arguing that the merger could significantly affect several national markets. The Commission initiated proceedings on December 4, 2014, launching what would become an extensive Phase II investigation.
Market Structure: An Oligopoly by Design
The telecommunications industry has natural characteristics that lead to market concentration. Setting up fixed-line network infrastructure is extremely costly and largely irreversible — these are classic sunk costs that create high barriers to entry.
Pre-Merger Market Shares (2015)
| Market | Jazztel | Orange | Vodafone | Telefónica | Yoigo |
|---|---|---|---|---|---|
| Fixed voice (subscribers) | 11% | 13% | 21% | 49% | 0% |
| Fixed Internet (subscribers) | 12% | 15% | 21% | 45% | 0% |
| Mobile services (subscribers) | 2% | 23% | 22.5% | 34% | 7% |
In terms of revenue, the concentration was even starker. Together, Vodafone and Telefónica controlled 91.4% of market revenues, with the remaining 8.6% split among smaller competitors including regional cable operators.
Oligopoly vs. Natural Monopoly
The case study explores an important question: Is the Spanish telecommunications market an oligopolistic market or a dominant firm(s)-fringe market?
Evidence for oligopoly: High barriers to entry mean that 3-4 major companies dominate the market. These firms have significant market power and can influence prices.
Counter-argument: Since 2003, EU regulations have required infrastructure operators to allow Mobile Virtual Network Operators (MVNOs) to rent wholesale access to their networks. This regulation artificially lowered barriers to entry. Companies like Jazztel — an MVNO in the mobile market — could compete against large network carriers despite lacking physical infrastructure.
The report suggests that before 2014, Jazztel and Orange acted as fringe competitors, known for aggressive pricing strategies. Jazztel in particular was characterized as offering the best “value for money” in the market.
Competition Concerns: Why the Commission Worried
The European Commission raised several concerns about the merger:
1. Increased Market Concentration
Post-merger market shares would be:
- Telefónica: 42.7% of fixed Internet revenue
- Orange/Jazztel: 30%
- Vodafone/ONO: 21.7%
This “three-player” market raised concerns about reduced competition, particularly in fixed Internet access where both companies had been growing aggressively (increasing market share by ~50% between 2010-2014).
2. Elimination of a Maverick Competitor
Both Jazztel and Orange were known for aggressive pricing. The Commission worried that combining these two price-aggressive competitors would reduce incentives to compete on price post-merger. As the EC noted:
“The merger would consequently reduce the merging companies’ incentives to compete aggressively in the market.”
Telefónica and Vodafone, being less price-aggressive, were unlikely to replace this competitive constraint.
3. Coordinated Effects
In oligopolistic markets, there’s a risk of coordinated effects — where firms tacitly coordinate behavior (like maintaining high prices) without explicit collusion. With only three major players, monitoring and punishing deviations from tacit coordination becomes easier.
4. Vertical Integration and Foreclosure
The telecommunications market is highly vertically integrated. Companies like Telefónica, Orange, Vodafone, and Jazztel owned multiple layers of the supply chain: infrastructure, broadcasting licenses, consumer brands, and software solutions.
The Commission worried about vertical foreclosure: Would the merged Orange/Jazztel obtain infrastructure monopoly in certain parts of Spain? Could they restrict wholesale access to competitors?
5. High Barriers to Entry
The Commission characterized barriers to entry in the fixed Internet access market as high, making it unlikely that new competitors would enter to replace the lost competition.
Diversion Ratios and Mobile Number Portability
An interesting analytical tool in the case was diversion ratios. Using consumer survey data and econometric estimates, regulators can estimate: if Orange raises prices and loses customers, what percentage switch to Jazztel versus other competitors?
If this number is high, it indicates the two companies are close competitors, and merging them would significantly reduce competition.
The Commission used Fixed Number Portability (FNP) data to calculate diversion ratios. The logic: high mobile number portability makes subscribers less loyal and more willing to switch brands. If consumers couldn’t keep their phone number when switching carriers, they’d be less likely to switch — reducing competitive pressure.
Analysis of competitive constraints showed that prices were likely to increase by 3-6% post-merger in the fixed Internet access market.
The EC’s Decision: Approve with Remedies
On May 19, 2015, the European Commission approved the merger subject to structural remedies. The Commission faced three options:
- Prohibit the merger entirely
- Clear the merger without conditions
- Accept with remedies to mitigate competitive harm
They chose option 3. The remedies proposed by Orange/Jazztel on April 20, 2015 included:
Structural Remedy 1: FTTH Divestment
Orange agreed to divest an independent high-speed Fiber-To-The-Home (FTTH) network covering 13 urban districts in the 5 largest Spanish cities, reaching 700,000-800,000 buildings (roughly matching their pre-existing FTTH network size).
This created a new competitor with immediate infrastructure to compete in the fixed broadband market.
Structural Remedy 2: Wholesale Access to ADSL
Orange agreed to give the purchaser of the FTTH network wholesale access to its national ADSL network for up to 8 years.
According to the EC:
“This commitment is for an unlimited number of subscribers and will allow the purchaser to compete immediately on 78% of Spanish territory. The cost for this wholesale access to Jazztel’s ADSL network will allow the new player to compete as aggressively as Orange and Jazztel do today.”
The buyer of this remedy package was Yoigo / MásMóvil group.
Market Definition: The Devil in the Details
A crucial part of any merger review is defining the relevant market. Too narrow, and you overestimate market power. Too broad, and you underestimate it.
The Commission considered several potential segmentations:
Product Market
Internet speed: Could the market be segmented into above/below 30 Mb/s? Some respondents claimed significant price increases could lead to segmentation. The Commission disagreed, viewing different speeds as imperfect substitutes within one market.
Technology: Should copper (ADSL), hybrid fiber coaxial (HFC), and optical fiber (FTTH) be separate markets? The Commission found that consumers base choices on speed and price, not underlying technology, so these constitute one market.
Retail vs. business customers: Large business customers have different bandwidth and security needs. The Commission created a separate “retail business connectivity market” distinct from residential consumers.
Multiple-play services: Bundled services (dual-play, triple-play, quadruple-play combining fixed Internet, mobile, and TV) were considered potentially separate markets, but the Commission ultimately concluded that the retail supply of fixed Internet access is one relevant market.
Geographic Market
The Commission concluded the geographic market was national (Spain-wide). While there’s no significant geographic price differentiation within Spain, competition and infrastructure deployment vary regionally. However, all market participants agreed the relevant geographic market was national.
Post-Merger Outcomes: Did It Work?
Looking at 2017 data (two years post-merger), we can evaluate the outcomes:
Market Shares Post-Merger (Q1 2017)
Revenue distribution:
| Company | Fixed Voice | Fixed Internet | Mobile |
|---|---|---|---|
| Orange | 8.7% | 29.3% | 23.6% |
| Vodafone | 18.2% | 17.0% | 31.6% |
| Telefónica | 63.1% | 46.7% | 30.6% |
| Yoigo | 1.5% | 0.0% | 5.5% |
Subscriber distribution:
| Company | Fixed Voice | Fixed Internet | Mobile |
|---|---|---|---|
| Orange | 20.9% | 28.2% | 27.4% |
| Vodafone | 23.5% | 22.9% | 25.4% |
| Telefónica | 49.0% | 42.0% | 29.9% |
| Yoigo | 0.9% | 1.4% | 8.7% |
Price Trends
According to CNMC data, the Laspeyres price index for:
- Mobile services: Decreased from 45.0 (Q1 2014) to 24.8 (Q1 2017)
- Fixed telephony: Increased from 89.4 (Q1 2014) to 103.6 (Q1 2017)
Infrastructure Deployment
- Broadband lines per 100 inhabitants: Increased from 26.5 (2014) to 30.3 (2017)
- Mobile lines per 100 inhabitants: Increased from 108.1 (2014) to 110.6 (2017)
Did Consumers Benefit?
This is inherently difficult to measure. Nominal prices per GB of mobile data and fixed Internet bandwidth have decreased globally — a worldwide trend driven by technological innovation rather than corporate restructuring in Spain specifically.
However, 4G coverage and FTTH penetration improved, suggesting the merger didn’t halt infrastructure investment. The remedies appear to have maintained some competitive pressure, with Yoigo/MásMóvil taking up the ADSL wholesale access to compete nationally.
RBC Capital Markets described the post-consolidation Spanish market as “extremely competitive,” attributing this largely to the market repair facilitated by the remedies.
Critical Evaluation: Did the EC Make the Right Call?
The case study authors (from NTNU) offer a nuanced evaluation:
Arguments the EC Got It Right
- Remedies worked: The FTTH divestment and ADSL wholesale access created genuine competition from Yoigo/MásMóvil
- Market not catastrophic: Price trends (especially mobile) and infrastructure deployment remained positive
- Double marginalization eliminated: Combining Orange and Jazztel eliminated inefficiencies from double markup in the mobile market (where Jazztel was an MVNO)
Concerns About the Decision
National vs. European interests: The EC may have prioritized having a larger European player (Orange) over Spanish national competition concerns. Orange’s European-level competitiveness increased, potentially at the expense of Spanish consumers.
Price increase prediction: The EC’s own analysis predicted a 3-6% price increase in Spain. This suggests they acknowledged competitive harm but deemed the remedies sufficient.
Counterfactual uncertainty: Would prices have been lower if the merger had been blocked? The report suggests technological innovation drives most price decreases, making it hard to attribute outcomes to the merger decision.
Vertical integration concerns underplayed: The initial remedies proposed by Orange/Jazztel were rejected by the EC. This suggests their concerns were serious, yet they approved modified remedies fairly quickly.
Lessons for Competition Policy
This case illustrates several important principles in merger review:
1. Market Definition Matters
The decision to treat all fixed Internet access as one market (regardless of speed or technology) versus segmenting it significantly affects the measured market shares and concentration levels.
2. Behavioral vs. Structural Remedies
The EC insisted on structural remedies (asset divestment) rather than behavioral remedies (like price caps). Structural remedies are generally considered more reliable because they don’t require ongoing monitoring and enforcement.
3. Oligopoly Dynamics Are Complex
The elimination of a “maverick” competitor (Jazztel) in an already concentrated market created legitimate concerns about both unilateral effects (Orange raising prices) and coordinated effects (tacit collusion among the remaining three players).
4. Vertical Integration Adds Layers of Complexity
Telecommunications markets are highly vertically integrated. Analyzing horizontal competition while accounting for vertical relationships and potential foreclosure requires sophisticated economic modeling.
5. Regulatory Context Matters
The 2003 EU regulation requiring infrastructure sharing with MVNOs fundamentally changed the competitive landscape. Without this regulation, the market would likely be even more concentrated.
Conclusion: A Balanced Approach?
The Orange-Jazztel merger approval represents a pragmatic approach to competition policy: allowing efficiency gains and market consolidation while imposing structural remedies to maintain competitive constraints.
Whether this was the optimal decision remains debatable. Spanish consumers appear to be no worse off (and possibly better off in mobile services), but:
- Would prices be even lower had the merger been blocked?
- Did the EC prioritize pan-European competitiveness over Spanish national interest?
- Will long-run market dynamics in a three-player oligopoly lead to reduced innovation and higher prices?
What’s clear is that merger review is not a binary choice between approval and prohibition. Creative remedy design — like the FTTH divestment plus ADSL wholesale access package — can thread the needle between allowing beneficial consolidation and preserving competition.
For students of industrial economics, this case demonstrates how theoretical concepts like natural monopoly, oligopoly theory, vertical integration, coordinated effects, and diversion ratios translate into real-world regulatory decisions affecting millions of consumers.
This post summarizes a case study completed for TIØ4118 - Industrial Economic Analysis at NTNU, analyzing the European Commission’s 2015 decision on the Orange-Jazztel merger.