1. Juni 2001
Mag. Matthias Brandl, LL.M.
In July 2000, the European Commission published its proposals for the new telecommunications regulatory package, which is designed to respond to the rapid change of market structure, in particular with respect to the increasing liberalisation at European level and the ongoing convergence between telecommunications, broadcasting and IT sectors.

Generally spoken, the proposed new EC legislative framework for telecommunications intends to gradually decrease regulatory interventions in the light of growing competition on the telecommunications markets. In this context, the Commission introduces a new concept to determine telecommunications operators ("TOs") with significant market power ("SMP") which can be subject to ex-ante obligations by the National Regulatory Authorities ("NRAs") in order to ensure the development of competitive markets. This article focuses on this evolving concept of market dominance on EC level and its consequences for TOs.

1. The Concept of Market Dominance under existing EC Telecommunications Law

a) Market Definition

The first step to assess market power is to define the market concerned. The existing ONP-Framework governing ex-ante regulation in the telecommunications field defined the following relevant markets in the telecommunications area (Annex I of the ONP-Interconnection Directive 97/33/EC):

· fixed public telephone networks and fixed public telephone services;
· the public provision of leased lines;
· public mobile telephone networks and public mobile telephone services; and
· interconnection services.

b) The Concept of Significant Market Power

The concept of SMP as developed in the framework of the ONP-Directives is different from the definition of market dominance under general EC Competition law. Pursuant to the relevant ONP-Directives, a TO is generally deemed to have SMP if it holds a market share of at least 25%. The NRAs may, however, deviate from the 25% threshold when determining SMP, thereby taking into account

· the TO´s ability to influence market conditions,
· its turnover relative to the size of the market,
· its control over the means of access to end users,
· its access to financial resources, and
· its experience in providing products and services in the market (Art 4 para 3 item 2 Interconnection Directive 97/33/EC and Art 2 Voice Telephony Directive 98/10/EC).

The scope of the SMP concept as introduced by the Commission in the ONP-Framework is broader than the notion of market dominance under general EC Competition law (Art 81 and 82 EC Treaty). By subjecting the telecommunications sector to a special (and more stringent) regime in terms of determination of market dominance, the Commission intended to ensure development of effective competition on the evolving European telecommunications markets.

TOs notified by the NRA to the Commission as having SMP are subject to significant ex-ante obligations under the respective ONP-Directives.

2. SMP under the Proposed New Regulatory Package

a) The New Concept of ex-ante Regulation in the Telecommunications Sector

In its proposed reform Directives, the Commission wants to introduce a new system for ex-ante regulation of telecommunications markets.

Art 14 of the proposal for a Directive on a Common Regulatory Framework for Electronic Communication Networks and Services (hereinafter referred to as "Framework Directive") provides for the Commission to issue a Decision on Relevant Product and Service Markets, addressed to the Member States. In this decision, the Commission shall identify those product and service markets in which the imposition of regulatory obligations in a form of specific measures addressed to undertakings having SMP may be justified. The notion of SMP is defined in Art 13 of the proposed directive (for details see below point c).

Within two months of the date of adoption of the decision, NRAs shall carry out an analysis of the product and service markets identified in the decision. Such analysis shall be in accordance with Guidelines on Market Analysis and Declaration of SMP (hereinafter referred to as the "Guidelines"; a draft of the Guidelines was already published by the Commission on 28 March 2001, COM(2001) 175) as also published by the Commission. In the respective market analysis, the NRAs shall determine whether a given market in their territory is already characterised by effective competition and shall designate SMP operators in those markets. If the NRA concludes that there is no effective competition in the market (and Competition law remedies do not suffice to address any identified problems), the NRA must impose proportionate ex-ante obligations on operators designated as having SMP, or maintain such obligations already existing. The specific obligations which may be imposed by the NRAs are set out under the proposed "Directive on Universal Service and User´s Rights relating to Electronic Communication Networks and Services” (COM (2000) 392) and the proposed "Directive on Access to and Interconnection of Electronic Communication Networks and Associated Facilities” (COM (2000) 384).

b) Market Definition

As already set out above, the Commission, under Art 14 of the proposed Framework Directive, shall issue a decision identifying those product and service markets in which the imposition of ex-ante regulatory obligations on SMP-operators may be justified.

The purpose of this Commission decision is to provide the industry with legal certainty as to the kind of markets in which regulatory measures may be imposed by the NRAs. However, the NRAs may also define markets that are different from those identified in the decision, provided that the Commission consents to such independent market definitions.

The Commission´s decision on market definition is yet to be published. However, the annex to the proposed Framework Directive sets out a minimum list of markets (as referred to in the proposed User´s Rights and Access Directives) which are to be included in the initial Commission decision.

Without going into detail, it is already evident from this preliminary list of markets that the Commission intends to significantly further subdivide the markets originally defined in the existing ONP-Interconnection Directive.

In the draft Guidelines, the Commission elaborated more specifically on the methods it will use in the future when defining markets in the telecommunications sector. Generally speaking, the Commission intends to adhere to the principles of market definition developed by general EC Competition law. The main criteria for defining a relevant market will thus be the demand-side and supply-side substitutability of the product or service in question. In order to determine whether a product or service is substitutable on the demand-side, the Commission particularly refers to the "hypothetical monopolist test" as already expressly applied to the telecommunications sector by virtue of the Commission´s Access Notice (Commission Notice on the Application of the Competition Rules to Access Agreements in the Telecommunications Sector, para 40). This test involves the assessment of the potential consequences of a small but significant, lasting increase in the price of a given product or service, assuming that the prices of all other products or services remain constant ("relative price increase"). The likely responses by consumers lead to the assessment whether the products or services in question are substitutable and thus constitute a separate market. Where the cross-elasticity of demand between two products or services is high, one may conclude that the consumers view these products or services as close substitutes (Guidelines, para 31).

In the Guidelines, the Commission further established a basic market structure it evidently intends to apply when assessing SMP under the proposed regulatory package:

Following its case law and its position in the Access Notice, the Commission distinguishes between two main types of relevant markets to consider, i.e., the market for services provided to end users (services market) and that of access to facilities necessary to provide such services (access market) (Guidelines, para 55; Access Notice, para 45).

In the fixed services market, the Commission identified the following sub-divisions:

· The voice market is to be distinguished from the data market.
· In the voice sector, the market is further segmented into domestic and international connections, and
· into initial connection, the monthly rental, local calls and long-distance calls.
· The Commission identifies separate markets for provision of voice services to residential and business users (as to the market for business users, the Commission addresses the possibility to further break down this market into separate markets for professional, small firm customers and another for large businesses).
· With respect to retail services offered to residential users, the Commission indicates a further sub-division of this market into the provision of traditional fixed telephony services and high-speed (x-DSL) services.

In the context of mobile communication services, the Commission established the following principles:

· The Commission maintains its opinion that the market for mobile telecommunication services encompasses both GSM 900 and GSM 1800 and possibly also analogue services (Case No. IV/M.1430 – Vodafone/Airtouch). The question whether this market can be further divided into a carrier and a service market shall be decided on a case-by-case basis.
· The Commission further clarifies that mobile voice and paging services will continue to be regarded as two distinct markets.

With respect to the markets for access to infrastructure, the Commission’s view can be outlined as follows:

· The Commission proceeds from the assumption that the access market comprises all types of infrastructure that can be used for the provision of a given service (see, for instance, Case No. IV/36.359 – British Interactive Broadcasting/Open, in which the Commission held that with respect to the provision of voice services to consumers, the relevant infrastructure market included both the copper network of the incumbent and the cable networks of the cable operators, as well as possibly wireless fixed networks). Whether this market is to be divided into further sub-markets shall be decided on a case-by-case basis.
· With respect to access to the local loop, the Commission, in line with its Communication on Unbundling the Local Loop (Commission Communication on Unbundled Access to the Local Loop: enabling the competitive provision of a full range of electronic communication services, including broadbend multi-media and high-speed internet, OJ C272, 23.9.2000) established that for the time being, access to termination points of a specific network usually constitutes a separate product market. This situation might change if in the future alternative local loop networks (such as fibre-optic networks, wireless local loops or upgradable TV networks) can be considered as substitute to the fixed local loop infrastructure.
· In the context of access to mobile networks, the Commission wants to distinguish between two distinct markets for call origination and call termination. The Commission further raises the question whether access to any individual mobile network might be considered as separate access market (as opposed to only part of a unified market for access to all mobile networks). The Commission argues in this context that an undertaking that wants to terminate calls to the subscribers of a given mobile network has, in principle, no other choice but to interconnect its own network with the network to which the called party has subscribed. A respective definition of interconnection markets in the mobile field would imply that every mobile network operator has SMP on the (separate) market for interconnection to his network.
· With respect to internet access, the Commission holds that access via different infrastructure (for instance cable and satellite access services) might be regarded as substitutable and thus be included in the same product market. Access to the internet via a mobile phone (2G or 3G) is, however, unlikely to be regarded as substitute for other access methods, in particular due to difference in sizes of the screen and the format of the material that can be obtained (Case No. COMP/M.1982 – Telia/Oracle/ Drutt ).

With respect to the determination of the relevant geographic markets, the Commission intends to follow the concept as already established in general EC Competition law and its previous decisions in telecommunications cases. Consequently, the relevant market shall be determined on the basis of the main criteria, (i) the area covered by a network and (ii) the existence of legal and other regulatory instruments.

c) The New Concept on Calculation of SMP

Under the proposed Art 13 of the Framework Directive, an undertaking shall be deemed to have SMP if, "either individually or jointly with others, it enjoys a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately Consumers".

This definition of SMP is consistent with the European Court of Justice´s and the Commission´s definition of market dominance under general EC Competition law. The Commission thus decided to align the definition of SMP under the ONP-Directives to the ECJ´s definition of dominance within the meaning of Art 82 of the EC Treaty. By replacing the broader SMP-definition as applied so far under the ONP-Directives with the closer general definition of dominance, the Commission significantly reduces the threshold for regulatory interventions by the NRAs. The Commission in this way responds to increasing competition on the markets and wants to introduce a concept that can be applied more flexibly to a rapidly changing market environment.

As to the criteria to be considered when determining market power, the Commission, in line with the principles developed by the ECJ, particularly refers to market shares of the undertaking concerned. In the Commission´s decision-making practice, the threshold for market dominance to arise is usually set at about 40%, while a company with 50% market share is usually regarded as dominant, safe in exceptional cases. Since under the previous concept of SMP under the ONP-Directives, the threshold for market dominance was in principle a market share of 25%, it is evident that under the new regime fewer operators will be deemed to have SMP. However, the Commission states that the fact that an undertaking with a strong position on the market (such as an incumbent) is gradually losing market share, might indicate that the market is becoming more competitive, but does not by itself preclude the existence of SMP of the operator concerned. Fluctuating market shares over a longer period may indicate, on the other hand, a lack of market power.

The Commission stresses that not only market shares, but also other criteria will be taken into account when determining SMP. Such criteria are, for instance, the overall size of the undertaking, its technological advantages, control of infrastructure, its vertical integration, the existence of barriers to enter the market and the absence of potential competition. The Commission acknowledges that it is eventually for the NRAs to decide upon the most appropriate criteria for determining SMP on a given market. It is interesting to note that the Commission obviously excludes the application of the "essential facilities" doctrine to the ex-ante assessment of SMP within the meaning of Article 13 of the Framework Directive. The Commission argues that this doctrine is only relevant in Art 82 cases, but not with respect to the imposition of ex-ante obligations on TOs (Guidelines, para 73). This view seems to be somewhat inconsistent with the concept to align assessment of SMP to the notion of dominance under Art 82 of the EC Treaty. It remains to be seen whether the Commission will in fact adhere to this position in its future case law.

In its draft Guidelines the Commission emphasises that the principle of leverage of market power from one market to a closely related market would likely have a wide field of application in the telecommunications sector. For instance, an operator who has SMP on an infrastructure market and is also present on the downstream (service) market may be considered by NRAs to have SMP on both markets. This concept will apply, in particular, to vertically integrated telecom operators providing both infrastructure and services which might be found dominant on both the infrastructure and service market, even though their position on either of these markets taken alone would not be strong enough to trigger SMP.

In its Guidelines, the Commission thoroughly analyses the application of the concept of joint dominance. It seems that the Commission intends to rely on this concept more frequently in the future in telecommunications cases. The Commission stresses that recent case law of the ECJ and the Court of First Instance (Joint cases C-395/96 P and C-396/96 P, Compagnie Maritime Belge and Others v Commission (2000 ECR I-1365); case T102/96, Gencor v Commission (1996) ECR II-753) clarified that the existence of structural or economic links between two or more undertakings on a given market is not a mandatory condition for collective dominance to exist. The existence of an oligopolistic or highly concentrated market might suffice, provided that the structure of such market alone is conducive to anti-competitive behaviour on the relevant market. The Commission will particularly be prepared to establish joint dominance on a given oligopolistic market, if such market has certain characteristics favouring co-ordinated behaviour, such as few market players, moderate growth on the demand-side, homogeneous products, similar cost structures and market shares of the participants, transparent market conditions, mature technology, high barriers to entry, lack of potential competition, informal or other links between the market participants, retaliatory mechanisms and a lack or a reduced scope for price competition.

It is evident that the above criteria might match to markets in the telecommunications sector and in particular to mobile markets (which often involve elements of an oligopolistic market structure). In its recent Case law, the Commission has already identified joint dominance of market players on the German and Belgian mobile market. In Vodafone/Airtouch (Case No. IV/M.1430), however, the Commission´s concerns were finally removed after it was secured that at least three large mobile operators were present on the market. However, in the Guidelines, the Commission points out that also markets with more than three players may, under certain circumstances, be considered as being conducive to oligopolistic dominance.

d) Imposition of ex-ante Obligations on SMP Operators

Pursuant to Art 14 of the proposed Framework Directive, NRAs may only impose ex-ante obligations on SMP operators in case the market in question is not effectively competitive. The question whether such effective competition exists is to be assessed by the NRAs. In its Guidelines the Commission does not expressly examine the notion of "effective competition" in terms of Art 14 of the proposed Framework Directive. Consequently, it appears that the Commission equals the criterion of effective competition with the lack of SMP on a given market. If, on the other hand, a TO is deemed to have SMP on a market, effective competition is excluded and the NRA may impose ex-ante obligations on the operator concerned.

When imposing ex-ante obligations, the NRA has to comply with the principle of proportionality and must only impose such obligations which relate to the market on which the TO concerned has SMP. According to the Commission, NRAs must impose at least one regulatory obligation on an undertaking that has been designated as having SMP.

Under the current proposal for the Framework Directive, the Commission shall be entitled to require NRAs to amend or withdraw any imposition or withdrawal of ex-ante obligations, if such measures are incompatible with the objectives of the new framework. The Council, however, wants to reduce the Commission´s powers in this respect to a right to issue mere non-binding opinions. From today´s point of view, it is therefore rather unlikely that the Commission will be granted a right to change decisions by the NRAs.

Finally, it is interesting to note that pursuant to recital 20 of the proposed Framework Directive, ex-ante regulatory obligations shall be justified only for undertakings which have financed infrastructure on the basis of special or exclusive rights or are vertically integrated entities (owning network infrastructure and also providing services over that infrastructure to which the competitors necessarily require access). In effect, this would mean that ex-ante obligations could be imposed only on ex-monopolists and vertically integrated operators. However, since recital 20 is not mirrored in the main text of the proposed directive (which does not provide for a respective limitation of potential ex-ante obligations), it will probably serve as a mere interpretative guidance on the application of Art 14. Thus, it is likely that the Commission and NRAs will particularly be aware of market power of ex-monopolists and vertically integrated operators when exercising their regulatory functions.


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