German cablecos unite with DT to opposed Vodafone’s purchase of Unitymedia

Deutsche Telekom has joined forces with cable industry associations and some smaller MSOs in Germany in a bid to overturn the European Commission’s decision, announced last week, to allow Vodafone’s acquisition of Unitymedia as part of a larger deal.

It had become almost inevitable the Commission would clear the way for Vodafone to gobble up Liberty Global’s Unitymedia business in Germany – along with UPC cable assets in Hungary, Romania and the Czech Republic – after concessions were offered in May 2019.

These otherwise minor concessions included granting Telefónica Deutschland full access to the Unitymedia cable network. Prior to this olive branch, the €18.4bn  deal looked unlikely to receive approval, although the European Union does tend to treat cases in Germany differently than those elsewhere, with seemingly less concern over antitrust issues.

Deutsche Telekom itself can feel aggrieved, given its past treatment not just by the EU but also the country’s own regulator, the Bundeskartellamt or Cartel Office, which it might have hoped would intervene this time. After all, DT itself once owned nearly all German cable companies but it was the Bundeskartellamt that forced it to sell them off separately in 2001. 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 clearer and more recent precedent in 2013 at the time Vodafone became a major force in German broadband and TV with the acquisition of Kabel Deutschland for $10bn. At the time, Kabel Deutschland tabled a bid for smaller rival MSO Tele Columbus, which would have made Vodafone even stronger in Germany, but that was blocked by the country’s regulators.

DT argues that Vodafone is being treated more leniently than it has in the past 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 might argue that the landscape has changed, and so historical precedent has become irrelevant, but that only focuses attention on the situation on the ground in Germany. On that basis, the country cannot be compared with others where the cable sector has been consolidated by a single vendor, as Virgin Media has in the UK.  In the UK the whole cable sector only accounts for about 20% of the total broadband market, while in Germany approaching 60% of the 40m households are served by cable. After acquiring Unitymedia, Vodafone would have 80% of the cable market and therefore close to 50% of the broadband field.

In TV, Vodafone would be even more dominant depending on how the numbers are counted. Market shares in German pay-TV are slightly harder to assess than those in many other markets because cable operators there distinguish between ‘enhanced subscribers’ and ‘basic subscribers’ (who pay little or nothing but do not access any encrypted premium content). They are therefore not pay-TV subscribers in the commonly understood sense. However, basic customers often also receive broadband from cable operators, which are therefore in a strong position to upsell them premium video packages and so those numbers do give an indication of market power.

On that basis, Unitymedia has over 6m basic cable subscribers, while Vodafone has approaching 8m, so the combined total is 14m. By comparison, Sky Deutschland has 4.8m video subscribers and DT itself 3.3m.

The groups considering legal action against the European Commission’s decision to approve Vodafone’s acquisition of Unitymedia are not quite on the same page and have differing perspectives. DT itself is focusing on the impact on media diversity and control over distribution packaging visibility of content, concerns which are naturally shared by German commercial broadcaster association VAUNET.

German fiber optic cable operator association BREKO, as well as Tele Columbus as one of the largest remaining operators, expressed a more local concern over supply of fiber to the country’s housing market. BREKO feared that with a market share of around 75%, Vodafone would have less incentive to participate in the country’s fiber roll-out, having its extensive cable network in place. Tele Columbus feared that “re-monopolization of the cable market” would weaken competition in the supply of the housing market and lead to rising infrastructure and media provision costs for housing companies at the expense of tenants.

But German cable operator association FRK was worried about DT’s dominance too. “The now manifested duopoly of Vodafone and Telekom with its concentrated power will threaten the existence of small and medium sized players in unequal competition,” warned FRK chairman Heinz-Peter Labonte. This muddies the water slightly, but it is clear that all parties are seeking a judicial review.

Telefónica is one notable absentee from the list of complainants, despite having earlier urged the EU to block the deal. It is presumably satisfied with the concessions it has already gained from Vodafone, which allow it access to Unitymedia’s cable footprint to sell broadband services, reaching 23.7m households at download speeds up to 300Mbps.

While blocking the deal would be in the interests of German consumers and its remaining independent cable industry, the most likely outcome now is that it will still go ahead but with further concessions from Vodafone that may include guarantees to housing associations and commitment to fiber roll-out.

The wider deal reduces the Liberty Global footprint to the UK, Ireland, Belgium, Switzerland, Poland, Slovakia, and a 50% shareholding in the Dutch VodafoneZiggo business. But even the usually stalwart Virgin Media suffered hefty video subscriber losses in the first quarter.

Liberty Global’s total video footprint suffered a decline of 52,800 subscribers during the quarter, with Virgin Media incurring a 24,300 decline across the UK and Ireland, dropping to a total base of just over 4.1m. The cord cutting saga in Europe seems minimal in comparison to recent pay-TV losses at the US heavyweights but, as always, Europe eventually follows suit and Liberty Global looks to be playing its cards right by getting out of pay-TV hard and fast, rather as Dish may do with its mobile alliance with T-Mobile USA (see separate item).

Unitymedia saw declines of 15,400 video subs in the first quarter, falling to 6.27m, while the UPC business in Central Europe experienced a loss of 13,100 video subscribers, dropping to 2.46m.

From Liberty Global’s nine territories, just three filed positive video subscriber data, with Poland leading the pack with 8,400 gains, while Slovakia added 1,300 and Ireland just 1,000. A drop in the ocean really, so should we expect additional asset sales with Poland and Slovakia top of the list? Perhaps, but more pressingly, Liberty is reportedly on the market for a mobile operator or possibly broadcast assets.