The Armenian telecommunications and competition authorities are facing a serious challenge. They need to make a decision on the biggest centralization on the Armenian telecommunications market ever: acquisition of the subsidiary of the world's largest telecommunication holding VEON by a locally owned operator Ucom. There were some publications discussing the benefits of this possible transaction including inter alia attraction of foreign investments, expanding possibilities for the deployment of 5th generation networks (5G) and better security of electronic communication that will be managed by a local owner, not a foreign investor. The authors of the publications also referred to the unavoidable centralization of telecommunications markets as a global trend in leading and developing economies.
Surprisingly, none of the authors of these articles have mentioned a single threat of market concentration, which is subject to analysis and decision making of the competition and industry regulatory authority. It is especially strange taking into account the fact that the VEON Armenia's predecessor's ArmenTel's monopoly that ended just 12 years ago has slowed down the development of the market compared to other countries of the region. The concentration of a particular market could have some short-term positive impacts, but also may produce long–term negative consequences for both the industry and the consumers. Some of the most obvious negative consequences are discussed in this article alongside the analysis of benefits mentioned in the articles published by other authors. As you will see the benefits are not that obvious and the threats are quite real and should not be ignored by the authorities.
Investments attraction
Ucom is a company that has been founded by Armenian investors and is one of the most successful technology business startups in Armenia. Though the company's full ownership has always been unclear the former head of state revenue authority has been frequently mentioned as the final beneficiary of the company shares. Emerged as an alternative to and the only serious competitor of ArmenTel, the dominant landline telecommunications operator of that time, Ucom has grown very fast and became a serious threat for ArmenTel's monopoly on the broadband internet and corporate telephony markets. The history of Ucom's growth would not be completed without mentioning the tax benefits that the company several times has been granted in the form of VAT exemption.
However, the emergence of other strong competitors, such as Rostelecom and wireless Internet service offered by MTS Vivacell a little bit slowed down Ucom's development and the company owners started looking for potential investors or even full-shares buyers. The company's shares solicitation with third mobile entry Ucom received an offer to purchase its shares and became second universal, i.e. landline and wireless network operator. Orange decision to quit the Armenian market was not unexpected.
Orange's owner (France Telecom) that paid almost 50 mln Euro for entry license, was planning to become at least second by size mobile service provider on the Armenian market. But after 6 years of operation did not come close to ArmenTel by both revenue and subscribers base. The company that has been granted several preferences such as mobile number portability and infrastructure sharing (was not fully implemented for technical reasons) that supposed to ease its entry to a new market, failed to become a successful case of European tech business investment in Armenia.
Nevertheless, in spite of favorable conditions and preferences, Orange has faced problems with tax authorities that billed 2 billion dram fine due to tax miscalculation, which was the biggest tax penalty that has ever been imposed on telecom operators in Armenia. In spite of several rumors that fine has nothing to do with further acquisition of the company by Ucom, but it definitely influenced Orange's decision to quit the Armenian market. In 2015 the largest European investor decided to quit the Armenian telecommunications market.
Has this concentration on telecommunications markets brought new investments? To answer this question, we need to take into account that shortly before the acquisition Ucom asked regulator's permission for pledging shares against a loan. In other words, Orange's owners took out of Armenia the amount of money in hard currency approximately equal to the market value of the company and the merged companies added that amount to their depts. It does not sound like an investment attraction, does it?
Right the same will happen with purchasing VEON Armenia. The owner of the incumbent operator will take millions of dollars out of Armenia. Where the money for purchasing VEON's shares will come from we do not know. It could be one more loan against the shares of the purchased company, it could be Ucom's offshore owner's capital (part of the company’s shares is owned by an offshore company). Whatsoever, the investment attraction does not sound so realistic.
The arguments about financing after purchasing Orange that authors of the mentioned articles brought as a benefit are preposterous: all the operators had to make financial contributions to survive on a highly competitive telecom market. Such kind of financial inputs aimed at strengthening own productive capacity cannot be deemed as investments.
Good for competition
The success of Ucom is partially the VEON Armenia (ArmenTel's) failure to offer competitive services on the semi-monopolized market of broadband Internet. In spite of the formal liberalization of the market, VEON Armemia (Armentel) remained to be the only operator having widely developed infrastructure. Till now VEON Armenia is the only landline service provider in some areas due to the high cost of building of new infrastructure in rare populated areas. Nevertheless, the Armenian broadband Internet access market is very competitive and operators have to work on minimal profit margin. Moreover, the quality of services (bandwidth, which often referred to as "speed") is so high that users often share one connection and thus down the actual price per user.
For the above-mentioned reasons the price competition on the Internet broadband market is not feasible for almost five years and market participants compete solely on scope and quality of service. Saying the quality of services, we usually mean bandwidth stability, fault rates and downtime, as well as different parameters of customer support services such as, for example, waiting time, response time, problem-solving rates and other well-known indicators. After the merger of biggest landline service providers in areas without the presence of third landline operators service quality competition will be unavoidably deterred.
Judgement about the best structure for competitive mobile telecom markets can be made by analyzing other countries' experiences. Most of the countries including those are of Armenia's size and population (Slovakia, Macedonia, Estonia) have either three or more mobile operators or two network operators and two or three virtual service providers (MVNO). By the way, MVNO's are the best solution for strengthening service level competition at the markets with relatively small number of telecommunications undertakings and should be considered as an option in Armenia.
More secure communication
One of the fundamental issues for communication security is the redundancy of channels. Unfortunately, Armenian authorities have never paid significant attention to the issue of redundancy and emergency channels. All Armenian outbound connections go through the territory of Georgia without significant backup via a satellite connection. The merger may and may not affect redundancy depending on the decision of the company’s management, but it should be on the focus of the authorities. Unless the regulator would impose minimum redundancy standards (number of outbound connections) insufficient redundancy will definitely affect reliability and the security of the communication.
VEON is the publicly traded company (IPO) with shares on NASDAQ and Amsterdam Stoke Exchange. As a publicly trading company, it has to comply with several legal and security standards defined under the US and Netherlands legislation. In particular, VEON Armenia has to comply with the world's toughest privacy and personal data protection regulations of the European Union. The price that VEON's headquarter may pay for the violation of the European Union's General Data Protection Regulation (GDPR) could be a cost of a medium size telecommunication company.
From that perspective, local ownership does not make communication more secure. It does not mean that Ucom is less responsible in terms of protecting customers' data or privacy. However, the fact that it does not need to comply with higher (comparing with Armenian) standards can potentially be a risk of lоwing them for cost-cutting or any other reasons.
Good for the market and the economy
Market concentration mergers and acquisitions are usually transactions that businesses undertake to expand market share, make competition softer and, as a result, optimize marketing and client acquisition costs. Optimization of cost is unavoidable for this case as well and that means hundreds of job cuts, optimization of radio spectrum and, therefore, decrease radio-frequency fees paid to the state budget. It will naturally lead to optimization of sale and support offices, rent cuts, cutting advertising and merchandising costs.
Would the government offer released frequencies to a new entrant? It is the main question that the government authorities have to decide and the question that market participants and potential investors want to know. However, the authorities first and foremost have to decide about competition safeguards and market protection, because after purchasing VEON Armenia's shares Ucom will become almost monopolist of underground infrastructure parallel with a widely developed ground cables network.