The long running saga of Vodafone’s controversial bid to acquire Unitymedia, Germany’s last major cable operator outside its control, has entered its final chapter as two regional cablecos join Deutsche Telekom in a last ditch legal attempt to overturn the European Union’s approval of the deal in July 2019. Some would call it the epilogue rather than the last chapter given that the effort has little chance of success and has probably only been made in the hope of extracting a few late concessions from Vodafone in order to avoid further delay.
Vodafone first announced it had agreed in principle to buy Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania, in May 2018 for a total €18.4 billion ($20 billion), including Unitymedia, with the EU approval coming 14 months later. Now the case has been referred to the European Court of Justice by Deutsche Telekom, along with cable operators Tele Columbus, which has 3.6 million connected households, and the smaller NetCologne with 518,000 customers.
Any hopes of success for the legal rearguard action hinge on the peculiarities of Germany’s broadband and pay TV markets rather than wider competition consideration and the former is unlikely to weigh heavily with the European Court. There would have been better prospects of success at the German level, but even there the real case for blocking the takeover is fairly thin. As we have reported before, the fact the acquisition would reconsolidate the German cable market after earlier splits only mirrors what has happened in some other European countries, such as the UK. Even if the takeover goes ahead Vodafone would not have the near total monopoly of cable that Liberty Global’s Virgin Media enjoys in the UK, given that other MSOs led by Tele Columbus account for about 4.5 million dwellings between them.
In fact, on the German front it could be argued the consolidation strengthens competition in the all-important broadband sector, by creating a more potent force against the market leader, the former incumbent telco Deutsche Telekom. According to our research arm Rethink TV, Deutsche Telekom had 13.8 million broadband subs at the end of 2019, 41% of the 33.9 million total, while Vodafone would still be well behind on 10.1 million or 30% after taking in Unitymedia.
It is true the enlarged Vodafone Germany would be the biggest in pay TV with 7.58 million subscribers as of December 2019, but still under half (46%) the total 16.5 million, followed by Sky Deutschland on 4.25 million and Deutsche Telekom on 3.54 million. But then we have to consider that Germany is not an ordinary country for pay TV because a large number of MDUs (Multi Dwelling Units) are served by basic cable services at very low rates, increasingly alongside SVoD offerings like Netflix.
This means that true pay TV market shares of German cablecos are lower than the headline figures for comparative purposes on the wider European and global stage. About 4.7 million of Unitymedia’s 6.3 million cable customers are still on basic packages, so only 1.6 million genuinely count as pay TV. Similarly, a significant proportion of the customers Vodafone inherited from its earlier acquisition of Kabel Deutschland are still on basic packages, so in reality the company is on a par with Sky Deutschland for premium pay TV. It is true though that German cable operators usually supply broadband to these basic customers and so are in a strong position to upsell them premium video packages. Therefore, the higher numbers of basic subscribers are not irrelevant and give some indication of market power.
It is true also that Deutsche Telekom, if not the smaller MSOs joining it in the legal action, has reason to feel aggrieved over its past treatment not just by the EU but also the country’s own regulator, the Bundeskartellamt or Cartel Office, both of which have been inconsistent in their rulings over time. DT once owned nearly all German cable companies itself and it was the Bundeskartellamt that forced it to sell them off separately in 2001, when it would have obtained a better price from a single package. At that time Telekom had planned to sell six cable firms to the forerunner of Liberty Global, but the Bundeskartellamt blocked that deal and forced the operators to be sold separately.
There was a more recent precedent in 2013 that is more relevant, from the time Vodafone first became a major force in German broadband and TV with that acquisition of Kabel Deutschland for $10 billion. Kabel Deutschland had itself tabled a bid for Tele Columbus, which would have made Vodafone even stronger in Germany, but that was blocked.
DT argues that the regulator has been more lenient towards UK-based Vodafone than to itself and that historical precedent has not been followed. Not surprisingly, it had hoped the EU would delegate the decision over the Vodafone takeover of Unitymedia to the local regulators, but the EC decided to take a European-wide view, on which basis there is less of a threat to competition.
Of course, the EU and Vodafone argue that the landscape has changed, and so historical precedent has become irrelevant given the new competitive threats on the European media landscape from Comcast, Disney and Apple beside Netflix, even if here we are looking more on the content and video side. It is clear though that ironically, at the time of Brexit, the EU views Vodafone as a pan-European force capable of meeting US competition across the whole converged entertainment and communications front more effectively than say Telekom or Telefonica.