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

2. 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.

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

4. 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

5. 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

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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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.

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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)

20. 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.

21. 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

22. 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

23. Operators in presence
Sources: OMSYC study for ART (2004), see

24. Parallel, but differentiating uses
Average monthly calls (min)
Penetration rates
Sources: OMSYC study for ART (2004), see

25. Revenues and margins Average revenue per consumer
Average net margin per consumer
Sources: OMSYC study for ART (2004), see

26. 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

27. Focus on UK and France Converging to different competition situations

28. 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

29. Questions? Olivier Mellina-Gottardo
Autorité de Régulation des Télécommunications
Unité Évaluations Économiques
7 square Max Hymans, F Paris cedex 15
Phone:
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