New competition tool in the European regulation: the market analysis Olivier Mellina-Gottardo 10 March 2003

Disclaimer The views expressed in this presentation are those of the author, and do not necessarily represent the views of the Autorité de Régulation des Télécommunications (ART), the Chairman, or any Executive Board member (Commissioners). Only the Chairman and the Commissioners are authorized to speak in the name of the ART.

The new European regulatory framework, the market analysis A tool for an adaptive regulation Phases of the market analysis Examples

Purpose of the market analysis Old regulatory framework Defined markets, with no possibility to change Defined obligations New regulatory framework Only the non-competitive markets will be regulated An analysis of the markets is then necessary to estimate its competitive level and the regulation that will occur on it A regulation more coherent with definitions of the competition authorities  beginning interaction with competition authorities and progressive transfer with a growing competition

Market analysis steps A three-year cycle: Definition of a market Similar definition as the competition laws Analysis of the market Degree of competition (one or several significant market power undertakings or “SMP”) Potential competition problems Proposed “Remedies” for the market Remedies = Obligations imposed to the SMPs Remedies to the identified competition problems Consultations and approval by the European Commission Daily regulation with the imposed obligations

The new European regulatory framework, the market analysis A tool for an adaptive regulation Phases of the market analysis Examples

Step 1: definition of a market (1) Recommendation of the European Commission (11 February 2003) 18 identified markets, taking count of all the previously regulated markets + new ones Retail level Access to public telephony for residential customers Access to public telephony to non-residential customers Local and national calls for residentials International calls for residentials Local and national calls for non-residentials International calls for non-residentials Minimum set of leased lines Wholesale level 8 Call origination for fixed telephony 9 Call termination for fixed telephony 10 Transit services in fixed telephony 11 Wholesale unbundled access for voice and broadband 12 Wholesale broadband access 13 Wholesale terminating segments of leased lines 14 Wholesale trunk segment of leased lines 15 Access and call origination on mobile telephony 16 Voice call termination on mobile telephony 17 Wholesale market of international roaming 18 Broadcasting transmission services

Step 1: definition of a market (2) Definition of a retail market: definition must be coherent with rules of the competition laws: Homogeneous market: Substitutability of demand Substitutability of offer Coherent geographical area Can be checked with SNIP test Defined with a prospective point of view Identification of the corresponding wholesale market or markets NRAs should economically demonstrate any segmentation or different definition of the markets indicated by the European Commission Example in Great Britain: Segmentation of the international calls according to destinations

Step 1: definition of a market (3) New market not identified by the Commission: Allowed by the new regulatory framework Shall be correctly defined, and proved that there are three concomitant criteria to regulate it: Existing barriers to entry: Cost of infrastructure Necessary high network capillarity to deliver services on it Costs of a new-entrant intrinsically higher than the present actors No potential natural competition on this market: No available alternative infrastructures No viable alternative in those areas (desert, low-density areas) Competition laws insufficient to regulate it and protect consumer: Accounting separation in a vertically integrated undertaking Wholesale market not completely developed

Step 2: identifying competition level and SMP (1) On an identified market, evaluation of competition level Dominance of one undertaking, indices: High market share (<25%: no dominance, >40% probable dominance) Dominance on another market and leverage on this one Technical advance Financial resources Scale economy Vertical integration Excessive prices and profitability International comparisons

Step 2: identifying competition level and SMP (2) Collective dominance of two or more undertaking “acting on the market as if they were a single undertaking”: Obvious agreements Tacit collusion Indices for a NRA: Market concentration Transparency Maturity Cost symmetry Possible retaliation

Step 2: identifying competition level and SMP (3) Difference between regulation and competition laws Dominance is not abuse of dominant position (art. 82): Fact of a market position for regulation Anti-competitive behavior for competition laws Collective dominance or technical agreements are not anticompetitive concerted practices (art. 81) Pertinent market may be different (prospective aspect of regulation) Regulation tries to analyze risks of anti-competitive behavior when one or two SMP, and to prevent them “ex-ante” with regulation, when competition laws punish them “ex-post”. Risks of anticompetitive behavior: predation, exclusion squeeze, discrimination, etc.

Step 3: imposing remedies to SMP (1) Old regulatory framework: when SMP, all obligations available no “collective dominance”: some non-SMP undertaking, but part of an oligopoly could not be easily regulated New regulatory framework, more flexibility Each remedy must be justified by the identified competitive problem and proportional (no obligation imposed if not strictly necessary) Remedies can be imposed with two degrees: on the wholesale market also on the retail market if necessary

Step 3: imposing remedies to SMP (2) Choice of remedies on the wholesale markets: Reasonable demand to access network: Interconnection (fixed, mobile) Itinerancy (mobile) Basic infrastructures (pylons, sheaths, buildings) Conditions of non-discrimination (prices, information, quality) Non-excessive prices, cost-orientation (LRIC, retail minus) Transparency: publication of prices (in advance) publication of a detailed reference offer (modification power for the NRA) Accounting separation for a vertically integrated undertaking (in order to compare transfer and wholesale price) with power of asking accounting documents

Step 3: imposing remedies to SMP (3) Choice of remedies on the retail markets, only if remedies on the wholesale market cannot ensure respect of competition effectiveness on the retail market: special conditions on the market time for the remedies on the wholesale market to be efficient  wholesale markets regulated before retail markets Any possible and justified obligation, including: price control, non-discrimination

Step 4: consultations, approvals Before and during the analysis: Data gathering on the operator from the NRAs (power of the new regulatory frame) Public consultations on the analysis: Market definition submitted to the competition authority Market definition and remedies published for a consultation: operators may object Final submission to the European Commission: Approval on all or part of market definition, SMP designation, remedies Special approval necessary for “new markets” not initially foreseen by the Commission

Step 5: everyday regulation For regulated markets, like in old regulatory framework: In case of a reference offer: definition (new modification powers) Price control or price cap or if such an obligation has been imposed Etc. For unregulated markets: Competition laws fully apply (competitions authorities are competent): NRA is a consulted technical expert on anticompetitive problems like predation, squeeze, etc. Market to be potentially reviewed in the next market analysis

The new European regulatory framework, the market analysis A tool for an adaptive regulation Phases of the market analysis Examples analysis of OfCom on the fixed telephony retailed market in UK

Step 1: market definition Each market is segmented geographically: A special area in “Kingston upon Hull”, where the historical operator is not British Telecom, but Kingston Telecom Rest of United Kingdom Access markets are segmented on technologic criteria: Residential analogue lines Business analogue lines Business ISDN 2 lines Business ISDN 30 lines Communication markets divided according to destination: Local communications National communications Fixed to mobile communications International communications (another division into 177 destinations, each one being considered as a separate market)

Step 2: SMP designation Kingston upon Hull: Kingston is dominant on all markets Rest of UK: British Telecom is dominant on all markets except the international calls for business customer Arguments: Market share more than 70% for BT on access, more than 50% on communications (except professional) Barriers to entry and scale economy Excessive prices etc.

Step 3: remedies Kingston Telecom and British Telecom : Publication of tariffs Non-discrimination British Telecom : Price-cap RPI-RPI (constant despite of inflation) till 2006 on all residential markets except ISDN2, based on the 80% smallest consumers Price-cap of RPI+0% if British Telecom accept to implement a “wholesale line rental” on the wholesale market of access

The new European regulatory framework, the market analysis A tool for an adaptive regulation Phases of the market analysis Examples mobile market diversity in Europe: example of a need for individual national market analysis

Operators in presence Sources: OMSYC study for ART (2004), see www.art-telecom.fr

Parallel, but differentiating uses Average monthly calls (min) Penetration rates Sources: OMSYC study for ART (2004), see www.art-telecom.fr

Revenues and margins Average revenue per consumer Average net margin per consumer Sources: OMSYC study for ART (2004), see www.art-telecom.fr

A wide range of strategic situations Distance to an average revenue per customer Relative market share (competition position) Sources: OMSYC study for ART (2004), see www.art-telecom.fr

Focus on UK and France Converging to different competition situations

Result of the market analysis UK (2003): no mobile operator has a significant market power on access and calls origination markets no longer obligations on Vodafone and O2 market is considered competitive other indices: high number of MVNO Regulation of this market is no longer necessary Competition laws will be sufficient France: results of the market analysis in 2004

Questions? Olivier Mellina-Gottardo Autorité de Régulation des Télécommunications Unité Évaluations Économiques 7 square Max Hymans, F-75730 Paris cedex 15 Phone: +33 1 40 47 71 57 Fax: +33 1 40 47 71 93 Mail: olivier.mellina-gottardo@art-telecom.fr