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Cable & Wireless decision not to proceed welcomed

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TEL: 02-62642911 3 1 . May. 99 20 = 32 No .049 P . 0 1 / 0 2



The Australian Competition and Consumer Commission welcomes the Cable & Wireless Optus decision not to proceed with its bid for AAPT.

A number of concerns were raised about the takeover bid by a number of industry participants as well as consumer and user groups.

"After extensive market inquiries, consultant reports, economic and legal advice and consideration of the Issues Involved, the ACCC advised Cable & Wireless Optus that it had serious concerns that the acquisition would have the effect or likely effect of substantially lessening competition In a number of telecommunications markets," ACCC Chairman, Professor Allan Pels, said today.

In light of the ACCC’s conclusions, the ACCC had sought, and received, an undertaking from Optus that it would not proceed with its proposed acquisition of AAPT.

In making its decision, the ACCC concluded there would be a substantial reduction of competition In the following markets:

• the upstream or wholesale market for the provision of a national telecommunications network of line links, switches, points of interconnection, billing and customer support by means of which carriers and carriage service providers are able to provide the range of voice, data, Internet and video telecommunication services to consumers (or end-users); and

• a number of downstream or retail markets, each relating to provision of Internet, data and local access to end-users.

The acquisition of the third largest competitor by the second largest would increase concentration and raise significant Issues under section 50 of the Trade Practices Act 1974. In considering these Issues, the ACCC was required to consider a number of merger factors as set out in section 50 of the Act.

Professor Pels said that an important factor stressed in the Act is the removal of a Vigorous and effective competitor’. The ACCC considers that AAPT is such a competitor. AAPT has been a price leader and has been especially dynamic and Innovative. A range of customers interviewed by the ACCC have indicated that only Telstra, Cable & Wireless Optus, and AAPT are in a position to meet their needs.

An important statutory merger factor Is the ‘nature and extent of vertical integration'. The Industry Is vertically integrated with a large number of retail or downstream service providers relying on access to the three national networks of Telstra, Optus and AAPT to deliver their services to retail customers.

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Professor Pels said that the reliance on competitors' networks is unique in the telecommunications Industry. He said that the ACCC considers that the removal of AAPT as only one of three national network service providers would be likely to have substantial effects on competition at the wholesale or upstream level as well as at retail or downstream levels, given the nature and extent of vertical integration.

Professor Pels said that another factor is 'barriers to entry’. He noted that, while a number of other service providers are entering telecommunications markets at both wholesale and retail levels, the ACCC considered that, should AAPT vacate the market, it would take a significant period of time for a new entrant to provide wholesale network services on the national level and of the full range previously provided by AAPT. AAPT offers a broad range of services both in geographic terms and in terms spanning a wide number of telecommunications services. The ACCC does not believe that the scale and scope of AAPT's current operations can be easily replicated.

To replicate the position of AAPT, new entrants would need to overcome a number of significant barriers, Including brand loyalty and customer inertia, brand and reputation development, access to market and customer information, shortages of expertise,

delays in negotiating access arrangements, access to the radiofrequency spectrum and initial cost disadvantages while developing economies of scale and scope.

As experience In some other deregulating Industries with one or two incumbent players has shown the subsequent prospect of strategic behaviour by them, even though lawful, can further reduce incentive for new entry.

While the ACCC accepts that a number of competitors to Telstra, Cable & Wireless Optus and AAPT operate In a range of product segments at the retail level it is not the case that these players compete vigorously at the wholesale level or are likely to be in

a position to do so in the Immediate future to the same extent as AAPT. Further these players do not have the same scope in terms of geographic coverage and span of product areas as AAPT. As a consequence these players are unable to achieve the same benefits from bundling and full service provision and therefore cannot meet the needs of customers and compete as effectively with Telstra and Cable & Wireless

Optus as AAPT.

The ACCC considered that if the acquisition proceeded there would be an increase in concentration in the telecommunications industry at the wholesale level which would to a large extent revert to a duopoly market structure absent the competitive effect of ' AAPT that would significantly reduce the vigour of competition in the marketplace resulting in detriment to customers.

Further information Professor Allan Pels, Chairman, ACCC, (03) 9290 1812 or pager (016) 373 536 Ms Lin Enright, Director, Public Relations, (02) 6243 1108 or (0414) 613 520 MR 79/99 31 May 1999