UK sees “substantial lessening of competition” risk in proposed Viasat/Inmarsat merger

The UK’s competition watchdog has concerns about Viasat‘s purchase of Inmarsat. The Competition and Markets Authority (CMA) concluded its Phase 1 investigation into the proposed deal, finding that sufficient potential for reduced competition exists to warrant a Level 2 study. And, more specifically, risk to airlines and passengers with respect to inflight connectivity drives that decision.

Ultimately, airlines could be faced with a worse deal because of this merger, which could have knock-on effects for UK consumers as in-flight connectivity becomes more widespread.

– Colin Raftery, CMA Senior Director

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Theoretically the companies could head off the more detailed review of the deal; the CMA offers a five day window for conversations prior to the ruling taking effect. It does not appear, however, that Viasat intends to pursue that path. CEO Mark Dankberg instead plans to work closely with the CMA and “to reach a satisfactory conclusion in Phase 2.”

The CMA’s focus on inflight wifi as a dealbreaker raises many interesting questions. And its filings answer some of them, with a rather amusing commentary on the industry overall.

CMA accurately notes that only some airlines offer the services today. In the UK that would be British Airways and Virgin Atlantic. Both carriers operate aircraft with connectivity from multiple providers. They benefit from the competition in the market today.

EasyJet, Ryanair, and Wizz Air also have UK subsidiaries, while Jet2 runs leisure route operations from its UK base. Wizz appears happy with its pseudo-connectivity solution, while the others have not pursued a connected strategy yet. Should the theoretical eventual needs of these airlines scuttle the $7.9 billion deal?

Also, as a combined entity, the pair would represent about half the connected aircraft in the global market today, including committed backlogs. Halting a deal at that level of market share is uncommon. Even with the large installation base of the Inmarsat EAN solution on the British Airways short-haul fleet, the share in the UK is not much higher. That said, Viasat’s win of the newest Virgin Atlantic long-haul planes shows a shift in the market dynamics.

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The CMA’s analysis of the overall market is impressive. It correctly identifies the limitations of the networks as they exist today, as well as where they will be in a few years’ time:

Although Viasat currently offers more limited geographic coverage than Inmarsat, and Inmarsat has limited capacity in certain regions, both Parties are launching additional satellite capacity and will soon offer near-global coverage. The Parties would have therefore become stronger competitors absent the Merger.

The report also does a good job identifying the other players and their respective roles:

Of the other IFC providers, the evidence shows that: Panasonic, which was the first-mover in IFC and still has a high share of supply, is in decline, due to its reliance on capacity from third-party SNOs and airlines’ perception that it is expensive and offers old technology; Anuvu competes only for short-haul flights and is considered a weak option by airlines; and Intelsat occupies a modest position in the market and it is uncertain how it will develop in the future.

As for the upstarts OneWeb (in which the UK holds a stake) and SpaceX Starlink, the CMA notes “a number of the barriers to entry are complex technical and regulatory requirements that cannot be overcome through financing alone.” With new connectivity contracts typically running 5 years, and relatively high costs to swap hardware as airlines shift providers, the CMA also raises the concern that airlines could become locked in, leaving too small a market share for the low earth orbit constellation companies. This would lead to a scenario where they would not have a timely, likely, and sufficient chance to compete in the post-merger environment.

The CMA’s initial investigation has found that there is significant uncertainty about when – if at all – these suppliers would be in a position to compete effectively with Viasat and Inmarsat.

For their part, the companies note that the inflight segment represents just 10% of revenue today, and that the LEO operators will be strong competitors. They cite potential for growth in the UK space sector, a key focus of the current government, as a side effect of the merger.

It is also unclear what remedies the two companies could propose that would satisfy the CMA’s concerns about consumer inflight wifi pricing and service quality. It would be unreasonable for the companies to somehow divest that segment of their business.

Their position as both satellite operator and integrator of the services makes separating that out near impossible. Forcing them to offer capacity to third party integrators at competitive rates might work. Though the last time that was tried (Thales reselling Viasat in the US market) it ended rather poorly. (Yes, some planes are still flying under that deal today, but it is not a good situation.)