ECTA Relevant market recommendation response
October 2006
Summary
ECTA welcomes the opportunity to comment on the Commission’s proposals to amend the Recommendation on Relevant Markets. Whilst technically a Recommendation, ECTA considers this an invaluable element of the Framework which has served to provide a baseline for harmonisation across Europe. When coupled with deadlines for completing reviews (as proposed by the Commission in its consultation on the legislative Framework), it should also assist in ensuring that regulators act in a timely and pro-active manner to assess areas where competitive failure is likely.
Given its role in setting the stage for regulatory intervention, it is particularly important that the Recommendation evolves at the right pace, is based on objective analysis and does not exclude important aspects where competitive problems exist or create loopholes or uncertainty. The Commission’s annual implementation reports and ECTA’s own assessments demonstrate that the problem in Europe is far more often that regulators do not take appropriate action or do not do so swiftly enough to address market failure (see introduction). The threat of ‘over-regulation’ or unnecessary regulation appears according to the evidence to be much less pronounced.
In this context, we are particularly concerned to ensure that the Commission’s proposal to remove retail markets does not leave a vacuum which can be exploited to leave consumers or competitors open to abuse. An incumbent’s incentive will always be to target better offers at those customers who are most attractive to its competitors, leaving others paying high prices with poor service. Equally, in circumstances where access and non-discrimination rules are not fully effective, they will have every incentive to gain an unfair advantage from their market power in the underlying infrastructure by launching services before others are able to enter the market, bundling services to extend dominance from one market into another or simply through measures designed to make it more difficult for customers to switch.
We should not forget the substantial benefits of competition (in terms of better value for consumers, increased productivity for businesses and greater innovation and investment), and the long path still ahead to stimulate competition across Europe. Against this, the cost of measures to ensure that wholesale remedies can be made to work and that, in the meantime, wholesale dominance is not leveraged to foreclose retail markets pales into insignificance.
Our second key concern is to ensure that the Recommendation continues to be fit for purpose as we migrate towards so-called next generation networks – whether at the access or core level. Telecoms is continually evolving (when there is the competitive stimulus to do so), and it is vital that regulation continues to ensure that loopholes do not arise through failure to apply the principle of technological neutrality.
A vibrant market will be one in which barriers to competition are addressed up front so that all operators start with the same opportunity to innovate in providing services to consumers and businesses. Otherwise we face a constant catch-up in which regulators act only when the market has already been captured and face an uphill struggle in restoring the competitive balance.
The Recommendation therefore should encourage regulators to examine networks on a forward-looking with a focus on their capabilities and the possibility for others to replicate these networks and not on the material they are made of, the transmission mechanism, or on evidence that the market has already been foreclosed.
For this reason also, the Recommendation should make clear that there is no justification for regulatory holidays for certain networks or technologies. Rather regulators should ask the question – could someone else build this to compete effectively in a reasonable timeframe? If we leave it unregulated, would it develop competitively? If the answer is no, we have a potential new monopoly on our hands, and the evidence comprehensively shows that monopolies are not the way to boost investment, broadband development, or innovation in Europe’s economy.
Specific proposals
Retail markets: ECTA does not consider that the Commission has justified the removal of these markets on the basis of the evidence. It is therefore vital that:
· Retail markets are reincluded in the list; and/or
· Clarification is provided on the application of remedies to enforce non-discrimination and prevent foreclosure to ensure that all regulators have the necessary legal certainty (see below)
Remedies: ECTA welcomes the clarification that remedies may be applied across markets to ensure that obligations are effective. In addition it would be helpful to explain that remedies to enforce wholesale conditions may, where appropriate include:
· pre-notification requirements in adjacent and downstream markets eg of prices, KPIs or product developments
· the ability for regulators to set conditions aimed at preventing markets from being foreclosed (eg through unreasonable bundling, end-user discrimination, extended contract terms etc), in particular in circumstances where access and non-discrimination requirements may not be in place or their effectiveness is not yet proven
· the ability for regulators to prevent the provision of a product or bundle which would entrench the market power of a dominant player in circumstances where the market has not been effectively opened for competition
Emerging markets: This concept should be further clarified to avoid any legal uncertainty. ECTA suggests that the most appropriate explanation would be for the Commission to make clear that there is no need for regulators to carry out a separate assessment on whether a market is ‘emerging’. Rather regulators should assess:
· What is the relevant wholesale market? Is that market new or part of an existing market? It is crucial to examine the wholesale market in order not to restrict assessment to the potential SMP operators’ retail plans, but take account of the retail possibilities for the whole market.
· For new markets, does it meet the 3 criteria test?
· If it meets the test and SMP is found, what is the relevant cost of capital bearing in mind the risk involved?
Next generation networks: In order to ensure that the Recommendation is capable of dealing with developments within the period of its application, it is vital that:
· References to ‘public telephone networks’ are replaced with more generic terms
· The definition of the local loop is neutral in terms of material and technology, and naked bitstream is required in addition to traditional bitstream, with access points in locations which allow full use of competitor’s own networks
· Leased lines are clearly identified as being technologically neutral so as to include alternative interfaces such as Ethernet
Wholesale line rental: It is important that wholesale line rental is explicitly mentioned as a remedy for dominance in access. Many customers remain reliant on WLR in order to have a true competitive choice.
Mobile services: In view of the trend towards converged services for businesses and bundles for consumers, ECTA’s fixed members consider it vital that:
· the market for mobile access and origination is retained in the list. Not all mobile markets are competitive – as a result of oligopolistic structures or lack of scale economies – and increasingly the competitiveness of this market will affect the development of converged services as a whole.
· on-net off-net non-discrimination should be enforced for mobile termination. This is clearly not the case in many countries and results in a distortion in the market.
Within three years we expect that, particularly for business services the market will have moved towards converged IP platforms providing converged voice and data services for both fixed and mobile. In circumstances where mobile markets are not fully competitive, companies without a mobile arm would be excluded from contesting contracts despite having led the charge in innovation on fixed business services.
Television services: ECTA considers that it would be helpful to clarify that regulators should address any bottlenecks to competition in the provision of television services where possible through broadband markets (for IPTV), and – in relation to ‘trunk’ transmission of TV signals – through leased line markets. This should minimise the need to intervene specifically through market 18. Specific care should be taken by regulators in broadband markets to ensure that products are suitable for the provision of IPTV services and that underlying dominance is not leveraged in the development of content distribution networks for IPTV, whilst not undermining incentives for competitors to invest.
Difference between business and residential markets: The current recommendation discusses different geographical markets but makes no reference to the potential differences that an accurate analaysis of demand and supply would find between residential and business markets for the same physical products. An appropriate analysis is required for those product markets, such as broadband, where the conditions of competition may be different and consequently require different remedies. The recommendation should explicitly discuss this issue.
Leased line segmentation: The Recommendation should clarify that remedies should allow competitors to offer nationwide service taking account of the competitive conditions in rural areas as well as cities. Recent proposals by regulators to segment by bandwidth or by contract value would not have permitted this.
Contents
Summary 1
Specific proposals 2
Contents 4
1. Introduction 5
2. General comments 7
2.1 Removal of retail markets 7
2.2 Cross-market remedies 7
2.3 Bundling 8
2.4 Role of competition law 9
2.5 Next generation networks 10
2.6 Emerging market definition 12
2.7 Three criteria test 12
2.8 Geographic segmentation 13
2.9 Methodologies 13
3. Market by market analysis and proposals 14
3.1 Fixed narrowband voice 14
3.2 Broadband 16
3.3 Leased lines 19
3.4 Wholesale market for mobile access and call origination 20
3.5 Broadcasting 23
1. Introduction
The Review of the Recommendation on Relevant Markets comes at a critical juncture for the industry. The telecoms sector has begun to recover after the dot com bubble burst, incumbent operators have begun upgrading core networks, mirroring developments amongst their competitors. Bandwidths have also been increasing rapidly since liberalisation of broadband markets and some operators are planning investments to upgrade to greater speeds still.
It may be tempting, looking at what seems to be substantial progress, to conclude that we can start rolling back regulation, and just let competitive forces take over. And it is easy to assume that regulation is bad, costly, and is holding back investment.
The problem is that the facts simply do not support it. There has indeed been good progress in Europe in the past few years, to the extent that developments compare favourably with many other parts of the world. However, it is vital to recognise that:
· this progress has been largely as a result of market opening regulation, and that more progress has been made in those countries which pursued that agenda vigorously than those which have held back leaving market forces to take their course. This is corroborated by both the Commission’s Implementation report and ECTA’s regulatory scorecard.
· We are still very far from achieving an environment in which competition is fully sustainable in the absence of regulation. At the deepest points in the network, incumbents retain on average more than 90% of the access lines used to supply customers with telephony (and all NRAs found SMP on M1&2) and 80% of the lines used to supply broadband. Even at the retail level which displays most evidence of competition it is notable that for retail leased lines (market 7) of the 17 regulators who assessed this market only one found partial competition, and in the retail voice markets a substantial majority of reviews still found the incumbent dominant
We do not see from this story a conclusion that there is widespread over-regulation and that regulation can be rolled back, but rather that the good practice regulation more prevalent in some countries should be applied properly in all countries and in a way which really focuses on giving the necessary certainty for competitors (and not just the incumbent) to invest.
The countries which have achieved the best results have mostly done so through rigorous and detailed implementation of the ladder of investment for consumer and business services whilst safeguarding against behaviours that could set competition back and which undermine competitor’s investments. And the benefits are substantial. Broadband penetration has expanded in countries which have taken action and investment by all players has been stimulated. On a Europe-wide scale SPC Network has estimated that if all countries were so diligent we could gain an extra 20 million broadband lines and an extra €13b of investment per year.
Against this, we are looking at a question of whether it will benefit Europe to remove regulation, particularly in retail markets, Whilst clearly such regulation should be appropriate and proportionate, in circumstances where it is needed either to achieve pro-competitive objectives or in extreme cases to protect consumers from excessive pricing, it would seem very unlikely that the costs of such regulation (consisting of administration and some market rigidities (which could be managed)), would exceed the benefits from increasing certainty and helping to secure a competitive outcome.
It is also notable that the share and financial performance of incumbents in markets considered to be more tightly regulated (including where retail monitoring is applied) has not been unduly affected by regulation, and indeed the regulatory costs of applying market opening measures have often been exceeded by benefits due to the overall expansion of markets from increased competition.
The arguments to support continued, judicious use of measures to promote competition and prevent foreclosure also apply very much to the issue of ‘regulatory holidays’ for access network upgrades.
In the context of the EU Framework, a regulatory holiday only has meaning if it refers to relaxation of regulation that would otherwise be applied on the basis of a market analysis. This means in effect that incumbents are arguing for regulation not to be applied in areas where competition would not otherwise be effective – possibly even a near monopoly. History and international comparisons do not bear out the suggestion that such monopolies would be good for investment, innovation or consumers.
· Historically, the development of Internet services was most swift in countries where alternative operators were not prohibited from offering dial-up services. The upgrade from narrowband to broadband was most swift and effective in countries where there was competitive pressure from cable and/or local loop unbundling