There have been a number of recent developments in communications markets that may significantly alter the competitive landscape. First, the UK Competition and Markets Authority (CMA) has provisionally cleared BT to takeover the EE mobile phone network. The deal will allow BT to re-establish itself as a mobile network provider, having previously owned O2 until it was sold in 2005. The CMA said that:
They operate largely in separate areas with BT strong in supplying fixed communications services (voice, broadband and pay TV), EE strong in supplying mobile communications services, and limited overlap between them in both categories of service.
BT will therefore be in a better position to compete with rivals such as Virgin Media who were early movers in offering. 
Second, O2 itself (currently owned by Telefónica) is the subject of a takeover bid from Hutchinson Whampoa who already owns the mobile network Three. Because the companies meet their turnover criteria, this deal is being investigated by the European Commission (EC) and the signs don’t look good. If it goes ahead, it would create the largest mobile operator in the UK and leave just three main players in the market. The EC is concerned that the merger would lead to higher prices, reduced innovation and lower investment in networks. Previously, considerable consolidation in telecommunications markets across Europe has been allowed. However, recent evidence, including the prevention of a similar deal in Denmark, suggests the EC is starting to take a tougher stance.
If we compare the two proposed takeovers, it is clear that the O2–Three merger raises more concerns for the mobile communications market because they are both already established network providers. 
However, it is increasingly questionable whether looking at this market in isolation is appropriate. As communication services become increasingly intertwined and quad-play competition becomes more prevalent, a wider perspective becomes more appropriate. Once this is taken, the BT–EE deal may raise different, but still important, concerns.
Finally, the UK’s communications regulator, OFCOM, is currently undertaking a review of the whole telecommunications market. It is evident that their review will recognise the increased connections between communications markets as they have made clear that they will:
examine converging media services – offered over different platforms, or as a ‘bundle’ by the same operator. For example, telecoms services are increasingly sold to consumers in the form of bundles, sometimes with broadcasting content; this can offer consumer benefits, but may also present risks to competition.
One particular concern appears to be BT’s internet broadband network, Openreach. This follows complaints from competitors such as BSkyB who pay to use BT’s network. Their concerns include long installation times for their customers and BT’s lack of investment in the network. One possibility being considered is breaking up BT with the forced sale of its broadband network.
It will be fascinating to see how these communications markets develop over time.
BT takeover of EE given provisional clearance by competition watchdog The Guardian, Jasper Jackson (28/10/15)
Ofcom casts doubt on O2/Three merger BBC News, Chris Johnston (08/10/15)
BT and Openreach broadband service could be split in Ofcom review The Guardian, John Plunkett (16/07/15)
Questions
- What are the key features of communications markets? Explain how these markets have developed over the last few decades.
- What are the pros and cons for consumers of being able to buy a quad-play bundle of services?
- How do you think firms that are currently focused on providing mobile phone services will need to change their strategies in the future?
- Why is BT in a powerful position as one of the only owners of a broadband network?
- Instead of forcing BT to sell its broadband network, what other solutions might there be?
Oil prices will remain below $60 per barrel for the foreseeable future. At least this is what is being assumed by most oil producing companies. In the more distant future, prices may rise as investment in fracking, tar sands and new wells dries up. In meantime, however, marginal costs are sufficiently low as to make it economically viable to continue extracting oil from most sources at current prices.
The low prices are partly the result of increases in supply from large-scale investment in new sources of oil over the past few years and increased output by OPEC. They are also partly the result of falling demand from China.
But are low prices all bad news for the oil industry? It depends on the sector of the industry. Extraction and exploration may be having a hard time; but downstream, the refining, petrochemicals, distribution and retail sectors are benefiting from the lower costs of crude oil. For the big integrated oil companies, such as BP, the overall effect may not be as detrimental as the profits from oil production suggest.
Articles
BP – low oil price isn’t all bad new BBC News, Kamal Ahmed (27/10/15)
Want to See Who’s Happy About Low Oil Prices? Look at Refiners Bloomberg, Dan Murtaugh (31/10/15)
Low prices are crushing Canada’s oil sands industry. Shell’s the latest casualty. Vox, Brad Plumer (28/10/15)
Data
Brent spot crude oil prices US Energy Information Administration
BP Quarterly results and webcast BP
Questions
- Why have oil prices fallen?
- What is likely to happen to the supply of oil (a) over the next three years; (b) in the longer term?
- Draw a diagram with average and marginal costs and revenue to show why it may be profitable to continue producing oil in the short run at $50 per barrel. Why may it not be profitable to invest in new sources of supply if the price remains at current levels?
- Find out in what downstream sectors BP is involved and what has happened to its profits in these sectors.
- Draw a diagram with average and marginal costs and revenue to show why profits may be increasing from the wholesaling of petrol and diesel to filling stations.
- How is price elasticity of demand relevant to the profitablity of downstream sectors in the context of falling costs?
After initial resistance, the brewer SAB Miller last week agreed to a merger with Anheuser-Busch InBev (AB InBev). The merging parties own over 400 brands between them. These include Budweiser, Stella Artois and Beck’s, which are owned by AB InBev, and Peroni and Grolsch by SAB Miller. Furthermore, they are currently the number one and two firms in the market respectively. If the merger goes ahead the new entity would control almost one third of global beer production.
This merger represents the continuation of AB InBev’s aggressive expansion plans through mergers and acquisitions as it follows its merger with Interbrew in 2004 and with InBev in 2008. It seems that one key attraction of a merger with SAB Miller is its dominant position in rapidly growing African markets.
A second motivation for the merger appears to be an attempt to counter the rise of small independent craft beer producers. For example, in the USA craft beer’s share of the market has grown from 5 to 11% since 2011. It has been suggested that the leading breweries combining forces represents one of several strategies being used to try to counter the threat of craft breweries. Additional strategies include creating their own craft products that are marketed as independant products and attempting to buy-up craft beer producers. For example, in 2011 AB InBev purchased the Goose Island brand.
Commenting on the planned merger between SAB Miller and AB InBev, a spokesman for the Campaign for Real Ale group expressed concern that:
independent beers may find it harder to get space in pubs and supermarkets because of the increased market presence of AB InBev.
Given the market positions of SAB Miller and AB InBev, it is likely that their merger will face considerable scrutiny by competition agencies in a number of jurisdictions. In fact it has been reported that plans have already been set in motion to sell SAB Miller’s interests in the USA to try to placate potential concerns from competition agencies in the USA and China.
Interestingly, SAB Miller has also protected itself by negotiating a clause that requires AB InBev to pay it $3bn if the deal falls through, for example on competition grounds. It remains to be seen what conditions competition authorities will require before the merger can go ahead and it is even possible they will try to completely block the deal.
Why beer drinkers lose in the SABMiller-AB InBev merger Fortune, John Colley (13/10/15)
Can craft beer survive AB InBev? The Budweiser maker’s acquisitions are unsettling the craft movement Bloomberg Business, Devin Leonard (25/06/15)
Questions
- How important do you think it is to consumers who a particular brand of beer is produced by?
- How serious a threat do you think independent craft beer producers are to the leading breweries?
- Outline some of the factors competition agencies will look at when they consider the merger between SAB Miller and AB InBev.
- Why might AB InBev have been willing to agree to pay a fee to SAB Miller in the event of the merger falling through?
Over 2015 quarter 3, stock markets around the world have seen their biggest falls for four years. As the BBC article states: ‘the numbers for the major markets from July to September make for sobering reading’.
• US Dow Jones: –7.9%
• UK FTSE 100: –7.04%
• Germany Dax: –11.74%
• Japan Nikkei: –14.47%
• Shanghai Composite: –24.69%
So can these falls be fully explained by the underlying economic situation or is there an element of over-correction, driven by pessimism? And, if so, will markets bounce back somewhat? Indeed, from 30 September to 2 October, markets did experience a rally. For example, the FTSE 100 rose from a low of 5877 on 29 September to close at 6130 on 3 October (a rise of 4.3%). But is this what is known as a ‘dead cat bounce’, which will see markets fall back again as pessimism once more takes hold?
As far as the global economic scenario is concerned, things have definitely darkened in the past few months. As Christine Lagarde, Managing Director of the IMF, said in an address in Washington ahead of the release of the IMF’s 6-monthly, World Economic Outlook:
I am concerned about the state of global affairs. The refugee influx into Europe is the latest symptom of sharp political and economic tensions 
in North Africa and the Middle East. While this refugee crisis captures media attention in the advanced economies, it is by no means an isolated event. Conflicts are raging in many other parts of the world, too, and there are close to 60 million displaced people worldwide.
Let us also not forget that the year 2015 is on course to be the hottest year on record, with an extremely strong El Niño that has spawned weather-related calamities in the Pacific.
On the economic front, there is also reason to be concerned. The prospect of rising interest rates in the United States and China’s slowdown are contributing to uncertainty and higher market volatility. There has been a sharp deceleration in the growth of global trade. And the rapid drop in commodity prices is posing problems for resource-based economies.
Words such as these are bound to fuel an atmosphere of pessimism. Emerging economies are expected to see slowing economic growth for the fifth year in succession. 
And financial stability is still not yet assured despite efforts to repair balance sheets following the financial crash of 2008/9.
But as far as stock markets are concerned, the ECB is in the process of a massive quantitative easing programme, which will boost asset prices, and Japan looks as if it too will embark on a further round of QE. Interest rates remain very low, and, as we discussed in the blog Down down deeper and down, or a new Status Quo?, some central banks now have negative rates of interest. This makes shares relatively attractive for savers, so long as it is believed that they will rise over the medium term.
Then there is the question of speculation. The falls were partly due to people anticipating that share prices would fall. But has this led to overshooting, with prices set to rise again? Or, will pessimism set in once more as people become even gloomier about the world economy? If only I had a crystal ball!
Articles
Markets see their worst quarter in four years BBC News (1/10/15)
Weak Jobs Data Can’t Keep U.S. Stocks Down Wall Street Journal, Corrie Driebusch (2/10/15)
What the 3rd Quarter Tells Us About The Stock Market In October EFT Trends, Gary Gordon (2/10/15)
The bull market ahead: Why shares should make 6.7pc a year until 2025 The Telegraph, Kyle Caldwell (5/9/15)
Is the FTSE 100’s six year run at an end? The bull and bear points The Telegraph, Kyle Caldwell (24/8/15)
Webcasts
The stock market bull may not be dead yet CNNMoney (29/9/15)
IMF’s Lagarde: More volatility likely for emerging markets CNBC, Everett Rosenfeld (30/9/15)
What’s next for stocks after worst quarter in four year CNBC, Patti Domm (30/9/15)
Global markets to log worst quarter since 2011 CNBC, Nyshka Chandran (30/9/15)
Speech
Managing the Transition to a Healthier Global Economy IMF, Christine Lagarde (30/9/15)
Questions
- Distinguish between stabilising and destabilising speculation. Is it typical over a period of time that you will get both? Explain.
- What is meant by a ‘dead cat bounce’? How would you set about identifying whether a given rally was such a phenomenon?
- Examine the relationship between the state (and anticipated state) of the global economy and share prices.
- What is meant by (a) the dividend yield on a share; (b) the price/earnings ratio of a share? Investigate what has been happening to dividend yields and price/earnings ratios over the past few months. What is the relationship between dividend yields and share prices?
- Distinguish between bull and bear markets.
- What factors are likely to drive share prices (a) higher; (b) lower?
- Is now the time for investors to buy shares?
Many Chinese people have taken to investing on the Chinese stock market, seeing it as a way of making a lot of money quickly. From October 2014 to June this year the market soared, rising by 126% from 2290 to 5166.
More and more people used their savings to buy stocks and China now has over 90 million individual investors. And it was not just savings that were invested. Increasingly people have been borrowing money to invest, seeing it as an easy way of making money. Unlike stock markets in developed countries, where the majority of shares are held by financial organisations, such as pension funds, holdings by individuals account for about 80% of stocks on the Chinese market.
But since mid-June, share prices have plummeted by 32% (see chart). People have thus seen a huge fall in the value of their savings, while many others have found their shareholdings worth less than their debts. The fall, like the rise that preceded it, has been driven by speculation, fuelled by first optimism and then pessimism.
The Chinese government is worried that the fall might dampen investment and economic growth. It has thus has been supplying liquidity to various institutions to buy shares, but this has had little effect and is dismissed by many as meddling. What is more it could expose companies which take advantage of the liquidity to greater risk.
So serious has been the rout, that over 50% of listed companies have halted trading on the mainland Chinese stock exchanges.
So just why has there been this bubble and why has it burst? What implications will it have for (a) China and (b) the rest of the world? The following articles explore the issues.
China’s stock market fall hits small investors BBC News Magazine, John Sudworth (7/7/15)
China Stocks Plunge as State Support Fails to Revive Confidence Bloomberg (8/7/15)
Chinese stocks are crashing Business Insider UK, Myles Udland, David Scutt (8/7/15)
Shanghai stocks plunge, over 1,200 Chinese companies halt trading Economic Times of India (8/7/15)
Everyone freaking out about China’s stock-market crash is missing one thing Business Insider UK, Elena Holodny (7/7/15)
China’s stock market has lost nearly a third of its value in a month Vox, Timothy B. Lee (8/7/15)
Chinese leaders may be undermined as investors suffer stock market slide The Guardian, Emma Graham-Harrison (8/7/15)
Opinion: China’s stock-market crash is just beginning MarketWatch, Howard Gold (8/7/15)
What does China’s stock market crash tell us? BBC News (22/7/15)
Questions
- What is meant by a ‘bubble’? Has the recent performance of the Shanghai Stock Market been an example of a bubble?
- Is the current fall in share prices in China an example of overshooting? Explain how you would decide.
- Distinguish between stabilising and destabilising speculation. Why does destabilising speculation not go on for ever?
- What is meant by the ‘stock market wealth effect’? How is the fall in the Chinese stock market likely to affect consumption and investment in China? How does the proportion of assets held in the form of shares affect the magnitude of the effect?
- What are the likely implications of the fall in the Chinese stock market for the rest of the world?
- Why has the Hong Kong stock market not behaved in the same way as the Shanghai market?
- What have the Chinese authorities been doing to arrest the fall in share prices? How likely are they to succeed?
Second, O2 itself (currently owned by Telefónica) is the subject of a takeover bid from Hutchinson Whampoa who already owns the mobile network Three. Because the companies meet their turnover criteria, this deal is being investigated by the European Commission (EC) and the signs don’t look good. If it goes ahead, it would create the largest mobile operator in the UK and leave just three main players in the market. The EC is concerned that the merger would lead to higher prices, reduced innovation and lower investment in networks. Previously, considerable consolidation in telecommunications markets across Europe has been allowed. However, recent evidence, including the prevention of a similar deal in Denmark, suggests the EC is starting to take a tougher stance.
However, it is increasingly questionable whether looking at this market in isolation is appropriate. As communication services become increasingly intertwined and quad-play competition becomes more prevalent, a wider perspective becomes more appropriate. Once this is taken, the BT–EE deal may raise different, but still important, concerns.
