Review of Wholesale International Services Markets a Consultation on Proposals for Market Identification and Market Power Determinations

Review of wholesale international services markets A consultation on proposals for market identification and market power determinations

Consultation

Publication date: 9 March 2006 Closing Date for Responses: 18 May 2006

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Contents

Section Page 1 Summary 1 2 Introduction 5 3 Market definition 15 4 Assessment of market power 29 5 Revocation of SMP conditions 45

Annex Page 1 Responding to this consultation 46 2 Ofcom’s consultation principles 48 3 Consultation response cover sheet 49 4 Consultation questions 51 5 Draft notification of revocation 52

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Section 1 1 Summary

This consultation document

1.1 This document is a consultation on Ofcom’s proposals to identify wholesale international services markets and make market power determinations in respect of those markets.

1.2 A review of wholesale international services markets formed part of Ofcom’s programme for deregulation set out in its final statements of 22 September 2005 on the Strategic Review of Telecommunications, and undertakings in lieu of a reference under the Enterprise Act 2002. In these statements, Ofcom undertook to review and conduct further analyses of wholesale international services to ascertain whether, in the light of competitive developments in these markets, British Telecommunications plc (“BT”) and Cable & Wireless plc (“C&W”) continue to have significant market power (“SMP”) as found in an earlier review.

1.3 Ofcom has conducted its review pursuant to section 84 of the Communications Act 2003 (“the Act”) which concerns the review of services markets which have previously been identified for the purposes of making market power determinations.

The previous market review

1.4 On 18 November 2003, the Office of Telecommunications (“Oftel”) published a statement called Wholesale international services markets (the “November 2003 Statement”) in which Oftel identified 235 economic markets on a route-by-route, country-by-country, basis for wholesale international services (the conveyance of traffic to termination points outside the United Kingdom). Oftel found:

• 123 wholesale international services markets in which no provider had SMP; • 108 wholesale international services markets in which BT had SMP; and • 4 wholesale international service markets in which C&W had SMP. 1.5 For all wholesale international services markets for which Oftel concluded that BT and C&W respectively had SMP, Oftel imposed conditions requiring the provision of network access; not to unduly discriminate; the publication of a reference offer (although this was not applied to C&W); and the notification of prices. BT was also required to prepare separate accounts for its retail and wholesale businesses.

Identification of markets

1.6 Based on the analysis set out in Section 3 of this review, Ofcom proposes that the relevant services markets remain the United Kingdom (“UK”) markets for wholesale international services to network termination points in territories outside the UK

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identified on a route-by-route, country-to-country (e.g. UK to France, UK to US etc)1, basis.

1.7 Ofcom’s review concurs with Oftel’s 2003 identification of 235 separate route-by- route economic markets on the basis of the absence of demand- and supply-side substitutability between them. In view of the quality of evidence, supply-side substitutability, in particular indirect means of routing traffic to far-end destinations, is examined at the stage of the assessment of SMP. This approach is consistent with both the European Commission’s (the “Commission’s”) market analysis guidelines2 and that taken previously by Oftel and set out in its November 2003 Statement.

Assessment of market power

1.8 Ofcom’s approach to the assessment of market power focuses on single firm dominance, using analyses of barriers to entry and market shares as the key indicators of the nature of competition on different routes. Ofcom has also considered other factors such as economies of scale, vertical integration, access to capital markets and countervailing buyer power. Again, this is consistent with the relevant guidelines and the previous approach.

1.9 Ofcom considers that wholesale international services to destinations, where there is competition in the supply of telecommunications services, are effectively competitive due to the accessibility of far-end termination. Barriers to entry tend to be highest where there is no competition between providers at the far-end; where only one UK provider is able to negotiate reasonably priced access to the far-end destination; and where it is not possible for providers to bypass traditional accounting-rate routing arrangements.

1.10 Ofcom has analysed a range of sources of evidence in order to assess ease of market entry on each route. This includes information produced by the International Telecommunications Union (“ITU”) on telecommunications markets and the development of competition in most countries around the world, the allocation by the ITU of International Signalling Point Codes (“ISPCs”) and the Federal Communications Commission’s (“FCCs”) list of International Simple Resale (“ISR”) approved countries.

1.11 Ofcom has assessed all 235 route-by-route markets. The above-mentioned market entry evidence confirmed that 104 of 123 markets, previously found to be effectively competitive, should remain so. But new evidence showed that entry barriers were low enough for Ofcom to propose that a further 46 of the 112 markets, in which SMP had previously been found, should now be identified as effectively competitive and regulation revoked.

1.12 Ofcom took two approaches to calculating market shares. It secured data direct from the main UK wholesale suppliers; and used third-party data provided by TeleGeography who publish annual global traffic statistics mostly sourced directly

1 Excludes routes from the UK to certain overseas cities (e,g, New York) and certain overseas terminating communications providers (e.g. mobile providers) which might be priced differently at the wholesale level. 2 Commission guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services (2002/C165/03).

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from carriers. This is a widely used publication in the field of international communications3.

1.13 The market share of BT varies significantly but was only persistently greater than 50% on five routes that collectively account for less than 0.1% of all international traffic originating in the UK. C&W’s market share was persistently greater than 50% on six routes, accounting for less than 0.01% of all international traffic originating in the UK. BT was found to have a persistent share of between 40% and 50% on two further routes, on both of which it does not have a correspondent agreement. C&W was not found to have persistent market share between 40% and 50% on any routes.

1.14 Based on its analysis of this market share evidence, Ofcom has found that of the remaining 85 markets, 72 should be identified as being effectively competitive. This includes 55 markets in which either BT or C&W were previously found to have a position of SMP. Ofcom therefore proposes to revoke regulation in these markets.

1.15 Ofcom considered more detailed evidence on the availability of alternative methods for routing international traffic in the remaining 13 markets. In particular, Ofcom examined whether the current communications provider with SMP has a correspondent agreement with a provider in the destination country, whether any other communications provider has a correspondent agreement with a provider in the destination country, whether indirect routing arrangements are likely to be available to competitors on similar terms and the availability of other alternatives such as buying capacity from trading exchanges.

1.16 Based on this further analysis, Ofcom proposes that all the remaining 13 markets are identified as effectively competitive and, in respect of 11 of those 13 markets in which SMP had previously been found, that SMP conditions are revoked.

1.17 In summary, based on the above analyses, Ofcom proposes to make no finding of SMP in any of the 235 wholesale international services markets.

Revocation of SMP services conditions

1.18 Section 84(4) of the Act provides that where on, or in consequence of, a further analysis Ofcom determines that a person to whom SMP conditions apply is no longer a person with SMP in that market, they must revoke every SMP services condition applied to that person by reference to the market power determination made on the basis of the earlier analysis. Section 48 of the Act provides the procedure for revoking conditions.

1.19 Ofcom therefore proposes to revoke conditions KA1, KA2, KA3 and KA4 previously imposed on BT and set out in Schedule 3 of the Director General of Telecommunications’ (the “Director’s”) notification pursuant to Section 48(1) and Section 79 of the Act of 18 November 2003. Ofcom also proposes to modify the SMP services conditions on BT in relation to regulatory accounting in respect of various markets notified to BT on 22 July 2004 such that the wholesale international

3 TeleGeography has been updating its information on global traffic since 1989 and has considerable experience in researching these markets and collecting data from carriers and other organisations such as national regulatory authorities. It has a long historical data series for most carriers and countries enabling TeleGeography to pick up on anomalies. For further information see http://www.telegeography.com/products/tg/index.php

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conveyance markets numbered 11 in Part 1 of Schedule 1 to that notification to which the conditions apply shall be revoked.

1.20 Ofcom proposes to revoke conditions KB1, KB2, KB3 and KB4 previously imposed on C&W and set out in Schedule 4 of the above-mentioned Director’s notification of 18 November 2003.

Effect of the proposals

1.21 Ofcom has given careful consideration to the effect of its proposals to deregulate wholesale international services markets. Ofcom proposes to revoke ex ante competition regulation in wholesale international services markets. Companies competing in these markets remain subject to the Competition Act.

1.22 Ofcom notes that the Director’s decision in November 2003 to deregulate a significant number of medium-sized wholesale international services markets did not result in any recorded complaints about anti-competitive behaviour, breaches of certain ex ante conditions or disputes. Ofcom proposes the deregulation of the remaining smallest markets. Collectively these 112 markets account for only 5% (about £35 million) of the total value of all 235 wholesale international services markets (some £600 million).

1.23 The revocation of SMP conditions previously imposed on BT and C&W will further reduce the burden, in particular the costs of regulation, incurred by the regulated and regulator in these markets.

1.24 Ofcom does not anticipate that its proposals will have any significant impact on the overall trend of UK wholesale international services markets in which BT’s market share has dropped from 90% to 30% as growing numbers of competitors have entered the markets. Whilst the smaller markets may be less attractive to wholesale competitors they are nevertheless easier than ever to access as more far-end destinations become liberalised and as technology offers alternatives to legacy routing arrangements.

Questions being asked in this consultation

1.25 In this document Ofcom sets out specific questions on which it seeks responses from stakeholders in addition to any other comments respondents may wish to make. Ofcom would particularly invite comments from BT and C&W; their competitors in the supply of wholesale international services and all customers who purchase these wholesale services. A list of all the questions can be found at Annex 4.

1.26 Details on how to respond to this consultation at set out in Annexes 1 to 3. The consultation period runs for 10 weeks. The closure date for responses is 5pm on Thursday 18 May 2006.

Next steps

1.27 When Ofcom has considered representations, including any made by the Commission and other National Regulatory Authorities (“NRAs”), it may give effect to its proposals. Ofcom will do this by publishing a final Notification as provided for under section 79 of the Act.

1.28 Ofcom intends to conclude its review of wholesale international services markets by the end of July 2006.

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Section 2 2 Introduction

Background

2.1 This consultation sets out Ofcom’s proposals for deregulating wholesale international services markets.

The regulatory regime

2.2 The regulatory framework for electronic communications networks and services entered into force on 25 July 2003. The framework is designed to create harmonised regulation across Europe and is aimed at reducing entry barriers and fostering prospects for effective competition to the benefit of consumers. The basis for the regulatory framework is five European Union (“EU”) Communications Directives:

• Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services (the “Framework Directive”); • Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities (the “Access and Interconnection Directive”); • Directive 2002/20/EC on the authorisation of electronic communications networks and services (the “Authorisation Directive”); • Directive 2002/22/EC on universal service and users’ rights relating to electronic communications networks and services (the “Universal Service Directive”); and • Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector (the “Privacy Directive”). 2.3 The Framework Directive provides the overall structure for the regulatory regime and sets out fundamental rules and objectives which read across all five Directives. Article 8 of the Framework Directive sets out three key policy objectives which have been taken into account in the preparation of these proposals, namely promotion of competition, development of the internal market and the promotion of the interests of the citizens of the EU. The Authorisation Directive establishes a system whereby any person will be generally authorised to provide electronic communications services and/or networks without prior approval. The general authorisation replaces the former licensing regime. The Universal Service Directive defines a basic set of services that must be provided to end-users. The Access and Interconnection Directive sets out the terms on which providers may access each others’ networks and services with a view to providing publicly available electronic communications services. These four Directives were implemented in the United Kingdom (“UK”) on 25 July 2003. This was achieved via the Communications Act 2003 (the “Act”).

2.4 The Privacy Directive established users’ rights with regard to the privacy of communications. This Directive was adopted slightly later than the other four Directives and was implemented by Regulations which came into force on 11 December 2003.

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Market reviews

2.5 The Directives require national regulatory authorities (“NRAs”), such as Ofcom, to carry out reviews of competition in communications markets to ensure that regulation remains appropriate and proportionate in the light of changing market conditions.

2.6 Each market review has three stages:

• definition of the relevant market or markets; • assessment of competition in each market, in particular whether any undertakings have significant market power (“SMP”) in a given market; and • an assessment of appropriate regulatory obligations where there has been a finding of SMP. NRAs are obliged to impose some form of regulation where there is SMP. 2.7 More detailed requirements and guidance concerning the conduct of market reviews are provided in the Directives, the Act and in additional documents issued by the European Commission (the “Commission”) and Ofcom.

The relationship between the market reviews and Competition Act 1998 and Enterprise Act 2002 investigations

2.8 The economic analyses carried out in this consultation are for the purposes of determining whether an undertaking or undertakings have SMP in relation to the markets in question. It is without prejudice to any economic analyses that may be carried out in relation to any investigation or decision pursuant to the Competition Act 1998 or the Enterprise Act 2002.

2.9 The fact that economic analyses carried out for a market review is without prejudice to future competition law investigations and decisions is recognised in Article 15(1) of the Framework Directive which provides that: “…The recommendation shall identify…markets…the characteristics of which may be such as to justify the imposition of regulatory obligations …without prejudice to markets that may be defined in specific cases under competition law…”.

2.10 Its intention is further evidenced in the Commission Guidelines, which state:

Paragraph 25: “… Article 15(1) of the Framework Directive makes clear that the markets to be defined by NRAs for the purpose of ex ante regulation are without prejudice to those defined by national competition authorities and by the Commission in the exercise of their respective powers under competition law in specific cases.” (repeated in paragraph 37);

Paragraph 27: “…Although NRAs and competition authorities, when examining the same issues in the same circumstances and with the same objectives, should in principle reach the same conclusions, it cannot be excluded that, given the differences outlined above, and in particular the broader focus of the NRAs’ assessment, markets defined for the purposes of competition law and markets defined for the purpose of sector-specific regulation may not always be identical”; and

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Paragraph 28: “…market definitions under the new regulatory framework, even in similar areas, may in some cases, be different from those markets defined by competition authorities.”

Summary of the history of wholesale international services regulation

2.11 Initially only British Telecommunications plc (“BT”) and Mercury Communications Limited (now part of Cable & Wireless) were licensed to provide wholesale international services over their own international infrastructure.

2.12 In 1993, with the ending of the fixed line “duopoly”, wholesale international services were partly opened up to competition by the granting of international simple resale (“ISR”) licences which allowed ISR on a few international routes where the destination market was liberalised.

2.13 Full liberalisation of wholesale international services took place in December 1996 from which time all UK operators could apply for an international facilities licence to offer international facilities. Subsequently the Public Telecommunications Operator (“PTO”) licence was expanded to cover use of international facilities.

2.14 In March 2000, the Director General of Telecommunications (the “Director”) published a Statement on Competition in International Markets4 setting out his views on the state of competition on certain retail International Direct Dial (“IDD”), wholesale international and international private leased circuit (“IPLC”) routes. The Director analysed each international route (or country-pair) as a separate market. The Director determined 26 wholesale international routes to be “effectively competitive” and, accordingly, reduced regulatory controls on Concert Communications Company (“Concert”) which then provided international facilities to BT5.

2.15 In March 2002 the Director published a further Statement on Competition in International Markets6, as a result of requests from BT and Communications Networking Services (UK) (“CNS”)7, for a review of competitive conditions on the remaining wholesale international routes not previously determined to be effectively competitive. The Director determined that a further 20 international routes were competitive and, as before, reduced the level of regulation.

2.16 Since February 1997, the Director had determined that Cable & Wireless (“C&W”), then Mercury, had market power in retail and wholesale international markets and thus imposed regulatory obligations on the company. On various occasions between 1997 and 2001, the Director determined that C&W no longer had market influence on

4 See http://www.ofcom.org.uk/static/archive/oftel/publications/pricing/ciim0300.htm 5 Concert was the outcome of a joint venture between BT and AT&T Corporation of the United States (“AT&T”) to offer a combined international telecommunications service to their respective customers. It became operative in January 2000. In April 2002 Concert was dissolved with BT and AT&T each taking ownership of substantially the same businesses and assets that each had originally contributed to the joint venture. 6 See http://www.ofcom.org.uk/static/archive/oftel/publications/licensing/2002/intl0302.htm 7 As part of dissolution of Concert (see footnote 2), the assets and business that would otherwise have been returned to BT were placed in a separate company called CNS (UK). CNS (UK) is a wholly owned subsidiary of BT. It sits within BT Global Services and owns and manages the IDD platform on behalf of BT Group. Communications providers cannot interconnect directly with CNS(UK) but do so via BT Wholesale.

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certain international routes. By April 2001 the Director determined that C&W had market influence in relation to just 38 wholesale IDD routes.

2.17 In these reviews of competition in international markets, during the period 2000 to 2002, the Director designated those routes which were considered to be “effectively competitive”, and thus subject to reduced regulation, as “Category A routes”. Those routes considered “prospectively competitive” and thus subject to full regulation were designated as “Category B routes”.

2.18 In November 2003, following the implementation of the European regulatory framework for electronic communications networks and services described in paragraphs 2.2 to 2.4 above, the Director published his Identification and Analysis of the Market and Determination on Market Power in relation to Wholesale International Services8 (“the November 2003 Statement”). This was preceded by the publication of a consultation document in March 20039 and an explanatory statement and notification in August 200310.

2.19 The Director identified 235 route-by-route markets. He considered that wholesale international services to liberalised destinations were effectively competitive due to the availability of alternative methods of carriage and therefore should not be subject to regulatory controls. With regard to routes to non-liberalised markets, the Director assessed whether the markets are competitive mainly on the basis of the number and market share of providers and pricing trends.

2.20 The Director found that there were 123 competitive markets and 112 non-competitive markets. With regard to the latter, the Director concluded that BT had SMP on 108 markets and C&W had SMP on 4 markets.

2.21 In relation to his findings of SMP, the Director imposed ex ante obligations on BT and C&W in the form of requirements to, respectively, provide network access on reasonable request; not to unduly discriminate; to publish a reference offer; and to notify charges terms and conditions. In the case of the C&W, the Director gave his consent that the company was not obliged to publish a reference offer primarily on the grounds of proportionality.

2.22 The Director also imposed accounting separation obligations on BT in relation to certain wholesale international service markets. This requirement was set out separately in a Final statement and notification on the regulatory financial reporting obligation on BT and Kingston Communications published by Ofcom on 22 July 200411.

8 Oftel’s final explanatory statement and notification on wholesale international service markets dated 18 November 2003 is at http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/wis1103.pdf 9 Oftel’s consultation is at http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/eu_idd/index.htm 10 Oftel’s explanatory statement and notification is at http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/idd0803.pdf 11 Ofcom’s final statement and notification on the regulatory financial reporting obligations on BT and Kingston Communications published on 22 July 2004 is at http://www.ofcom.org.uk/consult/condocs/fin_reporting/fin_report_statement/finance_report.pdf

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Developments in international markets

2.23 The international long-distance telephone call market has altered considerably since 1985, when the majority of countries maintained monopoly international long- distance markets, to 2004 when 92% of the world’s telecoms traffic came from liberalised markets. During this period aggregate international voice traffic had grown, fairly consistently, by around 11-16% per year12.

2.24 Switched international traffic grew by 11% in 2004 to 197.8 billion minutes. Nearly 82% of total switched telephone traffic is generated by the 20 largest traffic originating countries. The UK is the second largest country for outgoing switched international traffic accounting for some 8.1% of worldwide traffic13.

2.25 Between 1997 and 2001 international Voice over Internet Protocol (“VoIP”) traffic grew at a rapid rate. This has moderated to between 30% to 40% in 2004/5 but is still increasing three times faster than switched traffic. The key destinations for VoIP traffic, which include Latin America, Asia, Eastern Europe and Africa, suggest that international termination-rate arbitrage remains an important factor14.

2.26 Although mobile phone subscribers now account for 59% of worldwide telephone lines, they only account for 24% of outgoing international calls and 35% of incoming international calls are terminated on mobile phones15.

2.27 Few mobile network operators maintain their own international networks, often relying instead on wholesale international services providers to connect calls. Mobile network operators therefore contribute to international carriers’ wholesale international services revenues whilst at the same time, to the extent that there is substitution at the retail level, eroding higher revenue retail traffic from fixed lines. High mobile termination rates had made traffic to mobile subscribers increasingly significant in value terms. For example, Western European mobile subscribers received 13% of international calls but these calls accounted for 18% of international carriers’ termination costs16.

2.28 Although international call prices have declined every year since at least 1988 leading to a decline in revenues for long distance carriers, the last two years has seen an up-turn in worldwide retail revenues. A fall in international call prices of 17% has been more than offset by aggregate traffic growth of 29%17.

Forward looking approach

2.29 Looking at international markets more generally, although a growing number of carriers have or are substituting Internet Protocol (“IP”) for Time Division Multiplexing (“TDM”) networks, underlying business models have not changed. The vast majority of international traffic is originated and terminated on the switched telephone network. While VoIP providers connect to their subscribers via a broadband connection, most of the calls are to telephone numbers connected to the Public

12 TeleGeography 2006 Global Traffic Statistics & Commentary published November 2005. 13 Ibid. 14 Ibid. 15 Ibid. 16 Ibid. 17 Ibid.

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Switched Telephone Network (“PSTN”). As consequence, VoIP providers must rely on wholesale international service providers to carry their international call traffic.

2.30 It is probable that aggregate international traffic (switched and VoIP) will continue to increase. But in the longer term IP-to-IP voice communications may reshape the market18.

2.31 Ofcom does not anticipate any reversal of the trends which have led it to conclude that the regulation of wholesale international services markets can be removed even from those routes which attract very small traffic volumes. As liberalisation of telecommunications markets and technological developments have spread and continue to spread around the world, so opportunities to access far-end destinations via an increasing number of means has facilitated market entry into the wholesale supply of international call conveyance.

2.32 Ofcom will continue to review developments in wholesale international services markets particularly the impact of IP.

Review of services market identifications and determinations

2.33 Section 84(2) of the Act requires that Ofcom, at such intervals as it considers appropriate, carry out further analysis of previously identified markets for the purposes of either or both of the following:

• Reviewing market power determinations made on the basis of an earlier analysis; • Deciding whether to make proposals for the modification of SMP conditions. 2.34 If Ofcom determine that a person to whom any existing SMP conditions apply is no longer a person with SMP in that market or markets, then section 84(4) of the Act requires Ofcom to revoke every SMP services condition applied to that person.

2.35 Section 84(5) and (6) of the Act provide that Ofcom may review any previous decision identifying the markets and if Ofcom concludes that the markets have changed it must identify the markets now considered to be appropriate and these shall be the markets analysed for the purpose of determining market power.

Strategic context and timing for this review

2.36 Ofcom has initiated a review of wholesale international services markets following its wide ranging Strategic Review of Telecommunications (the “Telecoms Review”). The Telecoms Review, which began in April 2004, was designed to set out a strategic direction for Ofcom’s telecommunications activities. One of the fundamental questions for the Telecom’s Review was whether there was scope for a significant reduction in regulation in cases where enduring economic bottlenecks did not exist. Section 5 of Ofcom’s published final statements19 on the Telecoms Review sets out Ofcom’s approach to deregulation and its immediate forward programme of work on the scope for a reduction in ex ante competition regulation in specific markets. In this section Ofcom highlights that it has undertaken to review wholesale international

18 Ibid. 19 Final Statements on the Strategic Review of Telecommunications, and undertakings in lieu of a reference under the Enterprise Act 2002 published at http://www.ofcom.org.uk/consult/condocs/statement_tsr/statement.pdf

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services to ascertain whether, in the light of competitive developments in these markets, BT and Cable & Wireless C&W continue to have SMP.

Market operation – types of traffic carriage

2.37 There are six basic ways in which wholesale international services are carried. These are:

• Direct conveyance; • Simple transit; • Refile; • Switched bypass/ISR; • Global operator’s internal network carriage; and • VoIP bypass. 2.38 (The term “hubbing” is also in common usage in relation to international traffic carriage. Its meaning appears to vary from a general term to describe indirect conveyance or specifically to describe re-filing.)

2.39 A summary of each of these methods is set out below:

2.39.1 Direct conveyance

ο The caller dials an international telephone number.

ο The originator operator routes the call over its international facilities to a correspondent operator in the destination country.

ο The correspondent operator receives a settlement payment from the originating operator and terminates the call.

2.39.2 An agreement exists between the originating operator and its correspondent operator in the destination country. The agreement between operators for direct conveyance is often referred to as a “correspondent agreement” or a “bilateral agreement” and the route to which these agreements relate is often referred to as “bilateral route”.

2.39.3 Simple transit

ο The caller dials an international telephone number.

ο The originating operator routes the call over international facilities to a correspondent operator in a hub country.

ο The transit operator routes the traffic to the destination country.

ο The transit operator declares this traffic as transit traffic to the destination.

2.39.4 A three party agreement exists between the originating, transit and terminating operators for settlement purposes.

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2.39.5 Refile

ο The caller dials an international telephone number.

ο The originating operator sends the call to a hub country via the PSTN or over a private leased line.

ο The refile operator re-originates the call over the PSTN.

ο The call is delivered to the final destination via the refile operator, which pays the settlement charge to the terminating operator.

2.39.6 International refile exploits the fact that international accounting rates, which are the rates at which international operators account to each other for the calls they originate and terminate, are negotiated on a bilateral basis between countries, and may differ significantly depending on the partner.

2.39.7 For example, the combined accounting rate between country A and country B, and country B and country C can be less that the single accounting rate between country A and country C. In this case, operators would have a financial incentive to route, or refile, country A to country C traffic through country B.

2.39.8 Switched bypass/ISR

ο The caller dials an international telephone number.

ο The call is routed over a private leased line to a switch in the destination country (but not usually to the incumbent operator e.g. to an alternate fixed operator or a mobile operator).

ο The call is re-routed to the incumbent operator’s network and completed as a local call on the PSTN.

ο The originating operator pays no international settlements.

2.39.9 Switched bypass exploits the fact that in a number of cases international accounting rates are well above the cost of local termination in the destination country. Depending on the telecommunications legislation in the destination country, this practice may be prohibited in that country.

2.39.10 Global operator’s internal network

ο The caller dials an international telephone number.

ο The call is routed over the originating operator’s international network to the destination country.

ο The call is terminated in the destination country.

2.39.11 Many operators in the global international services marketplace have a presence in more than one country. In the case of each of these overseas operations, a market for delivery of international services traffic will exist.

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2.39.12 Each of the overseas operations will be able to buy and sell international services delivery. In such circumstances an operator may choose to route traffic originating in country A to its presence in country B (a transit country) in order to buy call termination to the final destination.

ο The caller dials an international telephone number.

ο The call is routed over the originating operator’s international network to a transit country.

ο The call termination to the destination country is then bought in the ‘local market’ in the intermediary country.

ο The call is delivered to the destination country either using its facilities in the transit country (or via a transit operator) via its correspondent delivery method or by other means.

2.39.13 Even in the absence of an internal network, carriers may route traffic via an international private line to a third country to buy international services delivery in that third country. This is similar to “Switched bypass” above, but the destination country is not limited to that in which the private line terminates.

2.39.14 VoIP bypass

ο The caller dials an international telephone number.

ο The call is routed over the PSTN to a gateway computer.

ο The call is converted from analogue voice to IP and sent over a data network such as the Internet to a gateway in the terminating country.

ο The call is converted back from IP to analogue voice.

ο The originating operator pays no international settlements.

2.39.15 VoIP bypass relies on IP backbone networks not being used to their full capacity and so allowing operators to carry voice traffic at lower rates than could be achieved over switched networks. Additionally in destination countries where international termination rates are high and national termination rates are lower, as the voice traffic re-enters the PSTN at a national switch rather than an international switch, the operator is able to avoid the high termination charge paying only the national charge.

2.39.16 In some countries VoIP bypass is prohibited as it avoids the international accounting rate mechanism (though its use is often hard to detect). VoIP bypass is often of particular importance for the introduction of competitive international services conveyance to such countries despite being prohibited. In certain countries, it has expedited the liberalisation of that country’s international telecommunications market.

2.40 Although not a type of international traffic carriage, the operation of trading exchanges (sometimes known as capacity or bandwidth exchanges) is described below:

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ο The caller dials an international telephone number.

ο The call is routed to a trading exchange where delivery to the destination is purchased via the exchange’s trading mechanisms (this is usually via an ‘anonymous’ transaction between the buyer and seller managed by the trading exchange).

ο The seller delivers the call to the destination however it chooses.

2.40.2 Examples of trading exchanges are Arbinet and Band-X.

2.40.3 Whilst the trading exchanges have a physical presence in a country (i.e. their switch), the markets in which they operate effectively transcend national boundaries as operators from many countries will be connected to the exchanges via international private lines for both buying and selling.

2.40.4 As some trading exchanges are perceived by some operators to offer lower call quality than that offered by other carriage methods20, they may not be perceived as attractive conveyance methods in certain circumstances.

2.40.5 Trading exchanges provide evidence of a wider competitive market operating above and beyond national boundaries.

Structure of this consultation document

2.41 The rest of the document is structured as follows:

2.41.1 Section 3 reviews Oftel’s previous decision on the identification of 235 route- by-route (country pair) wholesale international services markets;

2.41.2 Section 4 assesses whether there is SMP in each wholesale international services market and, in particular, whether there continues to be SMP in those markets where Oftel made SMP findings in 2003; and

2.41.3 Section 5 sets out the revocation of existing remedies in cases where SMP is no longer found.

20 Ofcom notes that certain trading exchanges provide call quality information/options in the form of call completion rates (known as Answer-Seizure Ratio or ASR).

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Section 3 3 Market definition

Introduction

Identification of markets

3.1 Section 84(5) of the Act provides that before reviewing market power determinations made on the basis of an earlier analysis, Ofcom may review the previous decision concerning the identification of the markets. In doing so Ofcom must, as set out in Section 79 of the Act, identify the markets in which, in its opinion, circumstances in the UK are such that it is appropriate to consider such a determination and to analyse those markets. Ofcom is required to take the utmost account of all applicable Guidelines and Recommendations issued by the Commission.

3.2 The purpose of this section is to review Oftel’s decision in 2003 which resulted in the identification of 235 distinct wholesale international services markets.

Commission’s approach to market definition

3.3 Recital (7) of the Commission Recommendation of 11 February 200321 (the “Recommendation”) clearly states that the starting point for market definition is a characterisation of the retail market over a given time horizon, taking into account the possibilities for demand- and supply-side substitution. The wholesale market is identified subsequently to this exercise being carried out in relation to the retail market. This approach is repeated in paragraph 3.1 of the main Recommendation and is exactly that set out above and followed by Ofcom.

3.4 Paragraph 3.1 of the Recommendation states that because market analysis is forward looking, markets are defined prospectively taking account of expected or foreseeable technological or economic developments over a reasonable horizon linked to the timing of the next market review. Again, this is the approach followed by Ofcom.

3.5 Paragraph 3.1 of the Recommendation also states that market definition is not an end in itself, but a means to assessing effective competition for the purposes of ex- ante regulation. Ofcom has adopted an approach by which this consideration is at the centre of its analysis. The purpose of market definition is to illuminate the situation with regard to competitive pressures. For example, Ofcom's approach to supply-side substitution explicitly identifies as the key issue the question of whether additional competitive constraints on pricing are brought to bear by additional suppliers entering the market. Thus, the key issue is not the market definition for its own sake, but an identification of the extent and strength of competitive pressures.

3.6 Paragraph 4 of the Recommendation states that markets should be examined in a way that is independent of the infrastructure being used, as well as in accordance with the principles of competition law. Again, this approach is key to Ofcom's

21 Commission Recommendation of 11 February 2003 on relevant product and services markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services.

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analysis. Ofcom's approach is based on a competition law assessment of markets and an assessment of the extent to which switching among services by consumers constrains prices, irrespective of the infrastructure used by the providers of those services.

Account taken of the Commission’s Recommendation

3.7 The Commission has identified in its Recommendation on relevant product and service markets, a set of markets in which ex ante regulation may be warranted. The Recommendation seeks to promote harmonisation across the European Community (“EC”) by ensuring that the same product and service markets are subject to a market analysis in all Member States. However, NRAs are able to regulate markets that differ from those identified in the Recommendation where this is justified by national circumstances. Accordingly, NRAs are to define relevant markets appropriate to national circumstances, provided that the utmost account is taken of the product markets listed in the Recommendation.

3.8 The Director took the utmost account of the Recommendation when defining the relevant markets for wholesale international services in Oftel’s 2003 decision and considered that there were national circumstances that justified a market definition outside the Recommendation.

3.9 Section 3.2 of the explanatory memorandum to the Commission’s Recommendation on relevant product and services markets states that the Commission expects NRAs to consider three criteria when they identify markets other than those appearing in the Recommendation. Wholesale international services markets do not appear on the Commission’s list, consequently in its Wholesale international services markets explanatory statement and notification of 26 August 200322, the Director considered whether or not the three criteria were met, namely:

• Whether there were barriers to entry; • Whether the markets had characteristics that tended towards effective competition; and • The relative efficiency of competition law and complementary ex-ante regulation. 3.10 Ofcom considers that there is no need, nor is it appropriate, to consider whether the markets identified in this document fulfil the above three criteria. This is because these criteria were considered when the markets were first reviewed in 2003 and, additionally, Ofcom is now proposing to find that no undertaking has SMP in any of the markets under consideration.

3.11 Ofcom has taken the utmost account of the Recommendation in coming to its proposal on market definition in this review.

General approach to market definition

3.12 There are two dimensions to the definition of a relevant market: the relevant products to be included in the same market and the geographic extent of the market. Ofcom’s approach to market definition follows the Commission Guidelines and that used by UK competition authorities, see Office of Fair Trading Market Definition Guideline,

22 Oftel’s explanatory statement and notification is at http://www.ofcom.org.uk/static/archive/oftel/publications/eu_directives/2003/idd0803.pdf

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OFT 403, December 200423, which is in line with those used by the Commission (as set out in its Notice on the definition of the relevant market for the purposes of EC competition law24) and US competition authorities.

3.13 Market boundaries are determined by identifying constraints on the price-setting behaviour of firms. There are two main competitive constraints to consider: how far it is possible for customers to substitute other services for those in question (demand- side substitution); and how far suppliers could switch, or increase, production to supply the relevant products or services (supply-side substitution) following a price increase.

3.14 The concept of the ‘hypothetical monopolist test’ is a useful tool to identify close demand-side and supply-side substitutes. A product is considered to constitute a distinct market if a hypothetical monopoly supplier could impose a small but significant, non-transitory price increase (“SSNIP”) above the competitive level without losing sales to such a degree as to make this unprofitable. If such a price rise would be unprofitable, because consumers would switch to other products, or because suppliers of other products would begin to compete with the monopolist, then the market definition should be expanded to include the substitute products.

3.15 In the remainder of this section, the market will be defined first on the demand-side. The analysis of demand-side substitution will be undertaken by considering if other services could be considered as substitutes by consumers, in the event of the hypothetical monopolist introducing a SSNIP above the competitive level.

3.16 Supply-side substitution possibilities will then be assessed to consider whether they provide any additional constraints on the pricing behaviour of the hypothetical monopolist, which have not been captured in the demand-side analysis. In this assessment, supply-side substitution will be considered as a low cost form of entry, which could take place within a relatively short period of time. That is, for supply-side substitution to be relevant, there would need to be additional competitive constraints arising from entry into the supply of the service in question, from suppliers who are able to enter quickly and at low cost, by virtue of their existing position in the supply of other services.

3.17 There might be suppliers who provide other services but who might also be materially present in the provision of demand-side substitutes to the service for which the hypothetical monopolist has raised its price. However, such suppliers are not relevant to supply-side substitution since they supply services already identified as demand- side substitutes. As such, their entry has already been taken into account and so supply-side substitution cannot provide an additional competitive constraint on the hypothetical monopolist. However, the impact of expansion by such suppliers can be taken into account in the assessment of market power.

3.18 A third factor that is sometimes an additional consideration is whether common pricing constraints exist across customers, services or areas such that they should be included within the same relevant market even if demand- and supply-side substitution are not present.

23 Published by the OFT at http://www.oft.gov.uk/NR/rdonlyres/972AF80C-2D74-4A63-84B3- 27552727B89A/0/oft403.pdf 24 Published by the Commission, Official Journal C 372 , 09/12/1997 P. 0005 – 0013 see http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=3 1997Y1209(01)&model=guicheti

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3.19 Although the focus of this market review is the wholesale level, Ofcom briefly consider the relevant retail market definition. This is because the analysis of retail market definitions is logically prior to the definition of the wholesale markets, the demand for wholesale services being derived from demand at the retail level. The definition of retail markets is likely to affect the assessment of SMP if a related wholesale market exists, since the relevant wholesale market will generally be as broad as, or broader than, the demand-side substitutes in the relevant retail market.

3.20 In this review, wholesale international services are not supplied directly to end users, but rather to third parties who wish to supply services downstream that can, in turn, be used to provide an end-to-end service to end users. It is still, though, necessary to begin an assessment of the relevant market at the retail level, since it is important for Ofcom to consider the impact of any switching at the retail level on wholesale markets. At the beginning of the next section Ofcom considers the relevant downstream markets, with a focus on fixed retail markets, although Ofcom notes that wholesale IDD services form an input into both fixed and mobile retail markets. All calls made from mobile phones are typically bought as a bundle, arguably suggesting that, at the retail level, a single market for mobile access and calls might exist. However, the inputs needed to produce retail calls of different types, including wholesale IDD calls on different routes, are complements rather than substitutes from the perspective of mobile operators. The possible existence of a retail mobile cluster market does not have any implications for the breadth of the relevant upstream market.

3.21 Ofcom does not consider that increasing volumes of international calls made from mobile networks are likely to have any obvious impact on the competitiveness of the wholesale IDD market. Wholesale IDD charges account for a much smaller proportion of retail call prices from mobiles than is the case from fixed lines, making, other things being equal, call volumes less responsive to wholesale price increases. Additionally, the scope for the use of VoIP at the retail level is currently relatively limited in the case of calls made from mobile networks.

The relevant downstream markets

Introduction

3.22 The focus of this review is on wholesale international services, which as explained at paragraph 3.20 above, are sold to communications providers that offer retail products including retail calls. However, in order to carry out a review of the market definition it is necessary to first consider the boundaries of the relevant downstream retail market(s).

Retail market issues

3.23 The relevant retail markets were identified by Oftel on 28 November 2003 in its Final explanatory statement and notification on fixed narrowband retail services markets25. These retail markets were considered more recently by Ofcom when, on 18 August 2005, Ofcom published its review of BT’s network charge controls. In the course of network charge control review Ofcom concluded that there had been no material

25 Final explanatory statement and notification on fixed narrowband retail services markets published by Oftel on 28 November 2003 at http://www.ofcom.org.uk/consult/condocs/narrowband_mkt_rvw/fixednarrowbandrsm.pdf

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change in the retail markets since Oftel’s above-mentioned market review in November 200326.

3.24 For the purpose of this review, Ofcom considers only those issues which may have specific relevance to a review of the identification of the relevant markets at the wholesale level.

Separate markets for fixed and mobile voice calls

3.25 In relation to the question of whether there are separate markets for fixed and mobile voice calls it is sufficient to note that whilst mobile call volumes are increasing and call volumes from fixed lines are in decline there is nevertheless significant evidence to suggest that consumers are not simply substituting fixed line calls for mobile calls. The reviews referred to in paragraph 3.23 above discuss this evidence in further detail. An important factor is that most UK consumers have a fixed line as well as a mobile. Those consumers who were using their mobile to make calls rather than their fixed line were doing so because they value the mobility of the service and/or the functionality of the mobile handset. Hence, although there has been a move to using mobile services, it is not clear that consumer sensitivity to a small increase in relative prices is sufficient for fixed and mobile calls to be placed in the same market on the basis of a SSNIP test.

3.26 Ofcom therefore remains of the view that mobile voice services are in a separate market to fixed voice services at the retail level.

Separate markets for residential and business calls

3.27 Demand-side substitution between retail and business customers is unlikely given that suppliers are able to identify residential and business customers and charge different tariffs. Additionally, since residential and business customers tend to be in different geographic locations, a potential network access competitor would need to incur significant sunk costs to switch supply between residential and business markets. Even Carrier Pre-Selection (“CPS”) providers would need to adjust their business model in order to substitute between retail and business markets. This limits the potential for supply-side substitution as well.

3.28 On this basis, Ofcom’s view is that there are distinct product markets corresponding to retail and business segments.

Route-specific markets exist where underlying wholesale markets are not competitive/substitutable

3.29 Given the variety of prices and competitive conditions27 associated with international calls on different routes, Ofcom considers it appropriate to start with a narrow market definition that reflects these route-by-route variations, and then consider whether this is broadened by demand- and/or supply-side substitution. At the retail level, most of the bigger players within the market tend not to charge on a more granular basis than one based on country-specific rates. On the basis of apparent common pricing

26 Explanatory statement and notification of decisions on a review of BT’s network charge controls published by Ofcom on 18 August 2005 at http://www.ofcom.org.uk/consult/condocs/charge/statement/statement_ncc.pdf 27 As examples see Figure 1 and Figure 2.

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constraints of this sort, the starting point for Ofcom’s analysis is a narrow country- specific market definition, e.g. the market for retail calls from the UK to the US.

3.30 Such a market definition is not broadened by demand-side substitution following a SSNIP. A caller making calls from the UK to the US is unlikely to respond to a SSNIP from a hypothetical monopolist supplier of such calls by substituting a call from, for example, the UK to France.

3.31 The potential for further substitution (beyond the above route-by-route definition) on the supply side is of considerable importance in defining the market for retail IDD calls. For supply-side substitution to be considered, then, for example, a provider offering retail calls to France would need to be able to switch easily to begin the provision of retail calls to the US. The feasibility of such substitution is described below.

3.32 For companies already offering calls from the UK, it is necessary to consider whether they would be able to switch resources into the provision of calls to any other destination at short notice. In order to undercut a hypothetical monopolist charging prices above the competitive level, potential suppliers would need to be able to switch both quickly and at low cost, and not to be at a material competitive disadvantage vis-à-vis the monopolist in terms of its cost base.

3.33 In the case of the provision of retail IDD calls, there are potentially two relevant sets of upstream markets, namely, firstly, network services such as call origination, and, secondly, markets for wholesale IDD. Taking the availability of cost based inputs of the former sort as given (e.g. because of the network charge control), the key consideration is the availability of the second type of input, i.e. wholesale IDD services.

3.34 For retail IDD routes where the corresponding (in terms of destination) wholesale IDD markets are competitive, supply-side substitution between different retail routes should be feasible, because of the availability of a cost-based wholesale input. However, this would not be the case on retail IDD routes that are not effectively competitive at the wholesale level, because the wholesale input would not be available on terms to enable them to compete with the monopolist.

3.35 Supply-side substitution at the retail level is therefore likely to be possible on routes where wholesale inputs are available to all retailers at cost-based levels.

3.36 Where wholesale markets are effectively competitive, cost based wholesale inputs should be freely available to retailers who wish to provide services on any particular route. It can therefore be argued that the ease with which retailers can switch into provision of services on routes which are effectively competitive at the wholesale level is such that, for all those markets where competition at the wholesale level is effective, there is a single retail market.

3.37 However, where competition at the wholesale level is not effective, it cannot be assumed that, in the absence of regulation, cost based wholesale inputs would be freely available. A retailer wishing to switch into the provision of services on a route that was not effectively competitive at the corresponding wholesale level would therefore face a barrier to entry in that it faces higher costs than incumbents (including the hypothetical monopolist). It is therefore not appropriate to depart from a route-by-route market definition at the retail level for those routes where wholesale competition is not effective. Ofcom therefore propose to define a single retail market

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for all those routes where competition at the wholesale level is effective. Other markets remain (as previously) defined on a route-by-route basis.

3.38 Accordingly, Ofcom’s initial view is that there are potentially two groupings of routes for the purposes of retail market definition. This identifies two sets of markets at both the residential and business level, namely:

• “competitive wholesale routes” – these retail markets correspond to those international routes that are competitive at the wholesale level. Here, there is a single residential retail IDD market and a separate single business retail IDD market, and • “non-competitive wholesale routes” - these are all other retail IDD routes i.e. ones where the corresponding wholesale market is not competitive. In such cases, the relevant market is a route-by-route retail IDD market, again split between business and residential calls. Retail geographic market issues

3.39 BT’s uniform pricing (required for basic retail telephony services including international telephone calls covered by the Universal Service Obligation) means that any response by BT to competition in a given area in the form of lower prices would apply throughout the UK excluding the Hull area. This suggests that the geographic extent of the relevant markets should be regarded as the whole of the UK (excluding the Hull area) and the Hull area. Hull is a separate market because the uniform pricing constraint in the rest of the UK does not apply. BT does not operate in the Hull area, where Kingston Communications is the incumbent operator.

3.40 Ofcom’s view is therefore that the extent of the geographic market is the whole of the UK (excluding the Hull area) where a uniform constraint holds. It is important to note that, even were another view to be taken on this definition, there would not be a material impact on the underlying wholesale international services markets, since these services are bought at one of the UK’s international switches, of which the choice between them may not be easily mapped to a particular area within the UK.

Conclusion on relevant downstream markets

3.41 The relevant retail markets are:

• in the UK relating to residential customers: ο a single market for calls where corresponding wholesale markets are effectively competitive; and

ο multiple markets for calls where corresponding wholesale markets are not effectively competitive

• in the UK relating to business customers: ο a single market for calls where corresponding wholesale markets are effectively competitive; and

ο multiple markets for calls where corresponding wholesale markets are not effectively competitive

• in the Hull area relating to residential customers:

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ο a single market for calls where corresponding wholesale markets are effectively competitive; and

ο multiple markets for calls where corresponding wholesale markets are not effectively competitive

• in the Hull area relating to business customers: ο a single market for calls where corresponding wholesale markets are effectively competitive; and

ο multiple markets for calls where corresponding wholesale markets are not effectively competitive.

3.42 Given that, as explained in Section 4, Ofcom’s view is that all the corresponding wholesale markets are effectively competitive, there is therefore, one retail market for calls originated by business customers and another for calls originated by residential customers in each of the UK (excluding the Hull area) and the Hull area.

3.43 For the purposes of defining the wholesale market, discussed in the following sub- sections, it is necessary to focus on demand-side substitution at the retail level because this may constrain the prices of wholesale inputs even if there is no wholesale level substitution. The retail market analysis suggests, on the demand side, each route is a separate market. This is then an appropriate starting point for the analysis of the wholesale market definition.

The relevant upstream markets

Introduction

3.44 Wholesale international services possess distinct characteristics that have a twofold effect on the application of the SSNIP test. Both result from the number and diversity of different geographic destinations at which called parties may be located.

3.45 Firstly, the distinction between demand- and supply-side substitution, may not always be clear cut in the case of markets that are initially defined narrowly on a route-by- route basis. Retail IDD suppliers may be largely indifferent to the means by which calls are routed between a pair of countries subject to minimum quality standards being satisfied. This means that, when assessing whether alternative routings of a call are substitutes, the distinction between demand- and supply-side substitution may become blurred. In the previous review, Oftel took the view that such substitution was most appropriately characterised in terms of the supply side. Ofcom believes that this approach remains appropriate. However, Ofcom notes that whether indirect routing is characterised as demand- or supply-side substitution, it should logically have no bearing on the outcome of its market definition or assessment of market power, provided constraints on pricing are correctly identified.

3.46 Secondly, product markets must be defined with a geographic element in mind (e.g. “calls from the UK to the US”), meaning that the need for a distinct analysis of the product and geographic markets is arguably less clear than for many communications markets.

3.47 What remains important in defining such markets is that all relevant competitive constraints are captured. Ofcom believes that the analysis outlined below achieves this.

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3.48 The key issue that Ofcom considers is whether, as has previously been argued by Oftel, it is appropriate to adopt a disaggregated route-by-route market definition. An alternative to this would be to adopt the market definition advocated by BT in its responses to previous consultations and in submissions made to Ofcom in response to requests for information, under which there is a single market for the conveyance of traffic to all destinations.

3.49 Before considering the scope for demand- and supply-side substitution between routes, it is worth looking at some possible indicators of variations in competition between routes. In Figures 1 and 2 below, Ofcom briefly examine the differences between different routes of (plotted against BT’s average wholesale price on each route):

• price trends; and • BT’s market share. 3.50 In addition to informing the market definition exercise, this data gives some idea as to the practical implications of adopting alternative market definitions, by, for example, showing on how many routes BT has a market share above a certain threshold.

3.51 Figure 1 below plots, based on BT’s carrier price list as of December 2005 (and assuming equal weights on day, evening, and weekend charges regarding average time of day profile), the trend in prices on each route against the average price as of end 2005. It should be noted that far-end termination charges, which are beyond the control of wholesale providers and as such not related to the degree of competition on the route (although bypass, if possible, will put downward pressure on termination charges), are an important determinant of these wholesale prices. This means that changes in wholesale prices will in many cases reflect factors other than changes in competitive conditions.

Figure 1– BT average price changes plotted against current wholesale price

20% 8 15% 10% 5% 0% 0 50 100 150 200 250 -5%

-10% -15% -20% -25% Avge price change p.a. since 199 -30% Current BT Wholesale price (ppm)

3.52 Figure 2 below plots BT’s volume market share for 2004/05 on all routes against the average price as of end 2005.

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Figure 2 – BT’s market share plotted against total minutes

100%

90%

80%

70%

60%

50%

40%

30%

20%

BT volume market share (2005) 10%

0% 1 10 100 1,000 10,000 Total 2004/05 minutes (m)

3.53 Again, the picture is one of significant variations between routes, with BT ranging from having almost no share on a route, to it having a share of over 90%.

3.54 The scatters above are informative, but focusing on market shares alone would provide an insufficient basis upon which to assess the degree of competition in the provision of calls on different routes, In order to do so it is necessary to consider other factors, notably the extent of barriers to entry, as has been done in this review’s SMP assessment.

Product markets

3.55 Following on from the retail market definition set out above, a route-by-route basis, (where a route is defined as being from one country to another country) is an appropriate starting point for the application of the hypothetical monopolist test in a wholesale context.

Demand-side substitutability

3.56 Demand side analysis considers the reactions of purchasers of the wholesale hypothetical monopolist’s product to an attempt to implement a SSNIP as described in paragraph 3.14. If such an attempt were to result in purchasers substituting other products for the product of the hypothetical monopolist, these other products would be included in Ofcom’s product market definition.

3.57 It is clear that, for reasons similar to those outlined in the retail analysis above, on the demand side at least, a wholesale call from the UK to any destination other than the US is not a substitute for calls from the UK to the US.

3.58 Ofcom has treated the competitive constraints imposed by the various available forms of indirect routing as being supply-side factors.

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Supply-side substitutability

3.59 The supply side analysis considers the reactions of other producers to the wholesale hypothetical monopolist’s attempt to implement a SSNIP. If such an attempt would result in other producers switching into the supply of the hypothetical monopolist’s product, such that the firm would not be able to profit from the SSNIP, these other suppliers are included in the product market definition.

3.60 According to paragraph 52 of the Commission’s Guidelines:

“In assessing the scope for supply substitution, NRAs may also take into account the likelihood that undertakings not currently active on the relevant product market may decide to enter the market, within a reasonable time frame, following a relative price increase, that is, a small but significant, lasting price increase. In circumstances where the overall costs of switching production to the product in question are relatively negligible, then that product may be incorporated into the product market definition. The fact that a rival firm possesses some of the assets required to provide a given service is immaterial if significant additional investment is needed to market and offer profitably the services in question. Furthermore, NRAs will need to ascertain whether a given supplier would actually use or switch its productive assets to produce the relevant product or offer the relevant service (for instance, whether their capacity is committed under long-term supply agreements, etc.). Mere hypothetical supply- side substitution is not sufficient for the purposes of market definition.”

3.61 A hypothetical monopolist supplier of wholesale international services from the UK to the US could be constrained to charge the competitive level by credible threats of entry from other suppliers.

3.62 A potential source of supply-side substitution into the provision of IDD calls at the wholesale level would be existing suppliers of IDD calls at the retail level. However, retailers (other than those that are already in the market and therefore already imposing a constraint) would face significant barriers to entry into the wholesale market, including the costs involved in acquiring a switch and a transmission network, and the need to establish relationships with providers in destination countries. This means that it is unlikely that retail suppliers of IDD calls could easily enter the market for wholesale international services, and it remains appropriate to separate the provision of international services into wholesale and retail markets.

3.63 The most likely source of supply-side substitution in wholesale IDD is therefore likely to be supply-side substitution between routes. This means that the most important market definition issue is, as discussed in the November 2003 Statement, whether indirect routing imposes a constraint on the hypothetical monopolist.

3.64 As explained at paragraphs 2.37 to 2.40, a number of routing methods enable the traditional IDD model of correspondent agreements to be bypassed. Such bypass might indicate the possibility of supply-side substitution between different routes. The most important of these alternative methods include:

• ISR; • refile; and

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• VoIP bypass. 3.65 Ofcom has carefully considered the importance of these factors in its market definition. It seems fairly clear that, from a consumer (and hence retail provider) perspective, a call routed from, for example, the UK to Jamaica via the US is in many cases, subject to voice quality being equivalent, a substitute for a call routed direct from the UK to Jamaica.

3.66 Varying amounts of data are available on each of these sources:

• ISR is possible wherever it is permitted at the far end destination. Ofcom have been able to assess this using information sourced from the International Telecommunications Union’s (“ITUs”) World Telecommunications Regulatory Database on whether ISR is permitted and the Federal Communications Commission’s (“FCC’s”) list of ISR approved countries28. • Refile, whether illicit or not, may be commercially attractive whenever there is an imbalance between, for a given destination country, the termination rate faced by UK wholesale providers such as BT and C&W and wholesale providers that originate traffic in other countries. Whilst TeleGeography estimates refile traffic to account for about 15% to 20% of world traffic volumes, it is very difficult to assess the availability of this method on a route-by-route basis. In its response to pre- consultation questions, BT told Ofcom that, “there is no hard evidence in this area”. It is additionally important to note that, whilst such methods may be economic at current prices, it is not necessarily true that they would be in a competitive market. If indirect routings are higher cost than direct, relying on them in the SSNIP test could lead to an excessively broad market definition because they would not constrain the hypothetical monopolist’s price to the competitive level. In the light of these factors Ofcom is inclined not to make any specific provision for the impact of these routing methods in its analysis. • For calls to be sent using VoIP as the underlying delivery mechanism, a similar set of considerations to those outlined in relation to ISR apply. Stakeholders have told Ofcom that many of the places where VoIP has had a significant impact are ones that had already benefited from ISR29. 3.67 It is not immediately obvious whether Ofcom should take account of these factors via its market definition, or alternatively in its assessment of market power. Ofcom’s preference, as that set out in Oftel’s November 2003 Statement, is for the latter approach.

3.68 According to the OFT guidelines, Market definition - Understanding competition law, December 2004:

“What matters ultimately is that all competitive constraints from the supply side are properly taken into account in the analysis of market power. Whether a potential competitive constraint is labelled supply side substitution (and so part of market definition) or potential entry (and so not within the market) should not matter for the overall competitive assessment. If there is any serious doubt about whether or not to account for possible supply side substitution when defining the market and calculating market shares, the market will be defined

28 Published on the FCC’s website at http://www.fcc.gov/ib/pd/pf/isr.html 29 The impact of the growth of VoIP at the retail level remains uncertain, for example providers may buying the inputs needed to offer off-network calls may use traditional IDD products.

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only on the basis of demand side substitutability, and the supply side constraint in question will be considered when analysing potential entry.”

3.69 Ofcom would therefore expect its SMP finding in relation to traffic carried on each individual route to be the same in either case. BT has previously suggested that Ofcom should consider calls to all routes to be part of a single market, and that this market should be declared competitive. But in cases where there are significant bottlenecks at the far-end (precluding the possibility of the widespread evasion of accounting rate-based settlements via refile, ISR or VoIP bypass) and BT has a high share of minutes/revenues (suggesting that other operators are rarely able to undercut BT by sending significant volumes of traffic through the use of indirect routing via transit arrangements or trading exchanges), such an approach does not seem appropriate to Ofcom without at least strongly indicative evidence of the scope for the use of such methods on a particular route. This means that, even if Ofcom were to broaden its market definition because of these factors, the extended broader market would not extend to those routes on which it had found BT to have a position of SMP because it could not be assumed that indirect routing was an effective constraint on those routes.

Product market – summary

3.70 Based on the available information, Ofcom therefore believes that the most appropriate definition of the product market is that for wholesale international services, on a route-by-route basis, i.e. there are 235 distinct product markets corresponding to each of the international routes identified by Oftel in its November 2003 Statement.

Geographic market

3.71 To the extent that a hypothetical monopolist supplier of a product in “market A” would be constrained in its ability to implement a SSNIP by purchasers substituting products from other areas or by producers in other areas switching into supply in this area, these other areas are included in the relevant geographic market. Ofcom does not think that it would be appropriate to define a narrower market than the UK. The issues relating to the position of Kingston upon Hull outlined in the proposed retail market definition are not relevant to wholesale markets since retail providers in Hull, including Kingston Communications, purchase wholesale international calls from national wholesale international services providers.

3.72 In the case of the markets for wholesale international services, there is an argument that the relevant geographic market is broader than that for the UK. This is because of the presence of indirect routed traffic, as described in the product market definition above (assuming that a provider selling to overseas customers, i.e. retailers, could easily begin selling to UK based ones). This might lead to routes being grouped together according to where indirect routing was feasible. However, as described in Ofcom’s analysis of the product market (see above), such indirect routing has been taken into account in its assessment of market power, meaning that Ofcom’s analysis takes all such all such competitive constraints into account.

3.73 Another way in which the geographic market might be broadened is via the consideration of “callback” from, for example the US back to the UK. Such substitution would be unlikely to occur from non-liberalised markets given the likelihood of call origination being more expensive at the far end. Callback between

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liberalised routes would have a similar impact to indirect routing. Ofcom has, as explained above, taken account of indirect routing in its assessment of market power.

Initial conclusions on the relevant market(s)

3.74 In the light of the above discussions of the relevant product and geographic markets, Ofcom proposes to agree with the view held by Oftel in its November 2003 Statement that the relevant market is that for wholesale international services to network terminations points that are outside the UK on a route-by-route basis such that each route constitutes a separate economic market.

Question 1: Do you agree with Ofcom’s proposals for identifying wholesale international services markets on a route-by-route, country-by-country basis?

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Section 4 4 Assessment of market power

Introduction

Market Power determinations

4.1 Section 45 of the Act details the various conditions that may be set under the regulatory framework. Section 46 details whom those conditions may be imposed upon. In relation to SMP services conditions, section 46(7) provides that they may be imposed on a particular person who is a communications provider, or a person who makes associated facilities available, and who has been determined to have significant market power in a “services market” (i.e. a specific market for electronic communications networks, electronic communications services or associated facilities). Accordingly, having identified the relevant market as proposed in Section 3, Ofcom is required to analyse the market in order to assess whether any person or persons have significant market power as defined in section 78 of the Act (Article 14 of the Framework Directive).

Approach used to assess Significant Market Power

4.2 Under section 78 of the Act and Article 14 of the Framework Directive, SMP has been defined so that it is equivalent to the competition law concept of dominance. Article 14(2) of the Framework Directive states that:

"An undertaking shall be deemed to have significant market power if, either individually or jointly with others, it enjoys a position equivalent to dominance, that is to say a position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers."

4.3 Further, Article 14(3) of the Framework Directive states that:

“Where an undertaking has significant market power on a specific market, it may also be deemed to have significant market power on a closely related market, where the links between the two markets are such as to allow the market power held in one market to be leveraged into the other market, thereby strengthening the market power of the undertaking”.

4.4 The Framework Directive and the Commission’s Guidelines state that a market shall be deemed effectively competitive if no communications provider in that market, either individually or collectively, has SMP.

4.5 Therefore, in the relevant market, one or more undertakings may be designated as having SMP where that undertaking, or undertakings, enjoys a position of dominance. Also, an undertaking may be designated as having SMP where it could lever its market power from a closely related market into the relevant market, thereby strengthening its market power in the relevant market.

4.6 In assessing whether an undertaking has SMP, this review takes the utmost account of the Commission’s Guidelines.

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4.7 In addition, it is up to all providers to ensure that they comply with their legal obligations under all the laws applicable to the carrying out of their businesses. It is incumbent upon all providers to keep abreast of changes in the markets in which they operate, and in their position in such markets, which may result in legal obligations under the Competition Act 1998 or Enterprise Act 2002 applying to their conduct.

4.8 This section considers the assessment of SMP in the markets for wholesale international services defined in Section 3.

4.9 The SMP analysis is based on the evidence presently available to Ofcom. Ofcom’s view is that an assessment of collective dominance would not be appropriate in these markets. Ofcom’s view is that the lack of homogeneity in the size and business models of firms offering these services, together with the difficulty of monitoring prices charged across a number of routes by (on most routes) a number of players, makes co-ordinated interaction relatively unlikely.

Criteria used in assessing SMP

4.10 In its assessment of SMP in the markets for voice call termination, Ofcom has focused on single firm dominance and has primarily relied on, of the criteria listed in the Commission’s Guidelines:

• ease of market entry; and • market shares. 4.11 Ofcom has also considered a number of other indicators listed in the Commission’s Guidelines. In the markets under review, these factors are relatively minor given that barriers to entry are low and/or market shares are evenly distributed across players.

4.11.1 Economies of scale - the total traffic volume carried by wholesale international services providers over all routes has (because of aggregation) an impact on communication providers’ average costs. Sources of such economies of scale include:

ο the cost of cable capacity, which are typically uneconomic for small providers; and

ο the ownership of cable landing stations in the UK is similarly restricted to the largest international providers (mainly BT and C&W).

The former is most likely to be relevant where there is limited available capacity, limited liberalisation in the destination territory, and low demand within that market. This is reflected in Ofcom’s analysis of barriers to market entry. Ofcom is not aware of any provider that has experienced any material difficulty in obtaining network access to cable landing stations. Ofcom also believes that agreements between the owners of cable landing stations and the submarine cables may well oblige the cable landing station owner to provide access to those persons who contract for capacity on the submarine cable. Accordingly, Ofcom does not consider that access to cable landing stations acts as a barrier to entry in relation to the provision of wholesale international services.

4.11.2 Vertical integration – communications providers that are also active in retail markets are in a somewhat stronger position than standalone wholesale providers effectively benefiting from economies of scope. A vertically

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integrated wholesale provider benefits from a guaranteed wholesale revenue stream (from its retail business), together with the ability to manage its wholesale business more efficiently as a result of information and analysis received from its retail business

4.11.3 Access to capital markets - the overall size and relatively strong balance sheets of incumbents to some extent give them cost advantages over smaller providers (this is more applicable to BT than C&W).

4.11.4 Absence of or low countervailing buyer power - the existence of customers with a strong negotiating position will tend to restrict the ability of sellers to act independently of their customers. Such power is most likely to arise in circumstances where, inter alia, a particular customer accounts for a large proportion of the producer’s total output, is well-informed about alternative sources of supply, is able to switch to other suppliers, possibly including self- supply, quickly and cheaply. Ofcom does not consider that buyer power is likely to be particularly high in most IDD markets. Some buyers of wholesale international services are also wholesale originators of international traffic, giving them a high level of knowledge of the costs of the services involved, and, potentially, the capability to meet their wholesale international services requirements using in-house supplies. Countervailing buyer power might, however, be restricted by the fact that the wholesale customers of BT and C&W also compete with them at the retail level.

Ofcom believes that evidence of competition indicates that these are not significant factors in practice.

Route-by-route assessment

4.12 Ofcom’s methodology, illustrated in Figure 3 below, was to, sequentially:

• start with a list of all 235 route-by-route markets identified in the November 2003 Statement;

• carry out a detailed assessment of barriers to entry on each of these routes, finding any route on which barriers to entry were low, i.e. there was scope for indirect routing, to be effectively competitive;

• carry out an assessment of market shares on any remaining routes, concluding that any route on which either BT or C&W did not have a persistently high market share was effectively competitive; and

• carry out a more detailed assessment of any remaining routes, i.e. routes on which there did not appear to be any evidence of low barriers to entry, and on which one of the two incumbents did have a persistently high share, in order to examine the competitiveness of the route.

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Figure 3 – Method to assessing SMP

All routes

Evidence showing low barriers to entry?

No Yes

A player with persistently Position of no SMP high share? Position of SMP

Yes No

Other evidence that route No is competitive? Yes

4.13 The focus of Ofcom’s analysis, in terms of market shares, was on the two incumbent players, BT and C&W. These two companies, as shown in Figure 6, originate the largest total number of minutes of traffic from the UK. Whilst on some routes, other communications providers may now have a higher share than either of the two established carriers, Ofcom is satisfied that this indicates the absence of barriers to entry and expansion rather than a position of market power, particularly given the continued presence of BT and/or C&W across all markets. The results of each of the stages of Ofcom’s detailed analyses are set out in the sub-sections below.

Ease of market entry

4.14 The threat of competitors entering into a market may prevent firms from raising prices above the competitive level. However, if there are significant barriers to entry, this threat may be weak or absent. Incumbent firms may then be able to raise prices and make persistent excess profits without attracting additional competition that would reduce them again.

4.15 In order to begin the provision of wholesale international services, it is not necessary for a company to invest in its own wide-reaching, infrastructure-based, network. A number of business models are possible, all of which require different levels of investment by entrants (although incumbents with monopoly infrastructure and correspondent agreements may be in a somewhat stronger competitive position on smaller routes).

4.16 The provision of international wholesale services is, however, characterised by potentially significant contractual barriers to entry, which occur on a route-specific basis. A potentially significant source of entry barriers that is specific to wholesale international services is the need to gain the access required to terminate calls at the far-end destination. Barriers to entry are highest in cases where, inter alia:

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• there is no competition between different communications providers at the far end; • only a small number (e.g. one) of UK wholesale providers are able to negotiate reasonably priced access to the far end destination; and • it is not possible for wholesale providers to bypass traditional, accounting rate- based, routing methods. 4.17 Wholesale international services providers often negotiate “correspondent” agreements with one or more communications providers in the destination country for all markets on which they have a direct wholesale route. Such agreements between UK providers and those in destination countries are usually called “correspondent agreements” or “bilateral agreements”. The ability (or otherwise) to negotiate a bilateral agreement on fair and reasonable terms may represent a barrier to entry on certain routes.

4.18 Ofcom has analysed a range of sources of evidence in order to assess the extent of barriers to entry on different routes. Ofcom regards there as being evidence that entry barriers are low on a route if any of the following apply:

• ITU data (on a route-by-route basis) suggests that (relating to far-end destinations): ο there is competition in international facilities i.e. competition in the provision of international gateways facilitating alternative far-end termination30;

ο International Signalling Point Codes (“ISPCs”)31 have been assigned to more than one far-end provider indicating alternative access to far-end termination;

ο termination via VoIP is permitted32; and

ο ISR is permitted33.

• Other: ο the destination country is on the FCC’s list of ISR approved countries.

30 The ITU carries out annual regulatory surveys (see http://www.itu.int/ITU- D/treg/Events/Survey/survey.asp) and publishes regulatory profiles by country and region (see http://www.itu.int/ITU-D/treg/profiles/guide.asp?lang=en). This source includes information on (1) the level of competition (whether monopoly, partial or full competition) in relation to the provision of international gateways; (2) whether VoIP calls from abroad are allowed to be terminated and (3) whether ISR is permitted. This information is used by Ofcom as indicators of alternative access to far- end termination. 31 International Signalling Point Codes (“ISPCs”) are needed by operators of telecoms systems who plan to establish Signalling System No 7 (SS No 7) signalling relations in the international intermediate signalling network with other telecoms system operators. ITU allocates and assigns ISPCs in accordance with Recommendation Q.708 and holds a register of assignees. For the purposes of this assessment, Ofcom has used the register (as at October 2005) to identify those countries in which more than one operator has been assigned an ISPC as an indicator of alternative access to far-end termination of international traffic. 32 See footnote 30. 33 See footnote 30.

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4.19 Ofcom has taken these indicators as evidence of low barriers to entry on a route on a forward-looking basis, since they suggest that competitive entry to markets is possible using one or more of the six basic methods of traffic carriage described in Section2, paragraph 2.39. It should be noted that some of these methods may, being less direct, be less efficient from a cost perspective than direct routing. Whilst the use of indirect routing is economic given the current levels of accounting rates, this might not be the case if accounting rates were closer to cost. This effect might be mitigated somewhat if the use of indirect routing allowed providers to exploit economies of scale e.g. because of aggregation. Information supplied to Ofcom by stakeholders in response to requests for information suggests that the use of indirect routing is widespread on most routes.

4.20 As explained in paragraph 4.16 above, in some cases IDD markets are characterised by potentially significant contractual barriers to entry which arise on a route specific basis. A particularly important barrier to entry is the need to gain access to terminate calls at the far-end destination.

4.21 Using the information sources referred to in paragraph 4.18 above, Ofcom concluded that, because of the growing scope for routing traffic to even relatively inaccessible destinations, barriers to entry are sufficiently low on 46 of the previously declared non-competitive routes for these now to be considered as being effectively competitive. These routes, and the basis for this view, are shown in Figure 5 below along with confirmation of low barriers to entry on 104 of 123 routes found to be effectively competitive by Oftel in 2003.

Figure 5 – The 150 routes on which Ofcom found evidence of low barriers to entry

ITU data on ITU data whether ITU data on ITU list of on Included international comp allocated Route whether on FCC’s VOIP calls international ISPCs as ISR is ISR list termination is gateways at Oct 05 permitted permitted

Afghanistan 9 9 Albania 9 9 Algeria 9 9 Angola 9 9

Antigua and Barbuda 9 9 Argentina 9 9 9 Armenia 9 Aruba 9

Australia 9 9 9 9 Austria 9 9 9 9 Bahrain 9 9 9 9 Bangladesh 9 9 Barbados 9 9 9 9 Belgium 9 9 9 Belize 9 9 Bolivia 9 9 Botswana 9 9 Brazil 9 9

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Brunei Darussalam 9 9 9 Bulgaria 9 Burundi 9 Cameroon 9 Canada 9 9 9 9 Cayman Islands 9 Chad 9

Chile 9 9 9 9 China 9 9 Colombia 9 9 Costa Rica 9 Côte d'Ivoire 9 9 9

Croatia 9 9 9 9 Cuba 9

Cyprus 9 9 9 9 Czech Republic 9 9 9 9 Denmark 9 9 9 9 Dominica 9 9 Dominican Republic 9 9 9 Ecuador 9 9 Egypt 9 9 9 El Salvador 9 9 9 Estonia 9 9 9 9 Faroe Islands 9 Fiji 9

Finland 9 9 9 9 France 9 9 9 9 9 French Polynesia 9 Gabon 9

Gambia 9 9 Georgia 9 9

Germany 9 9 9 9 9 Ghana 9 9 Gibraltar 9 Greece 9 9 9 9 9 Grenada 9 9 Guam 9

Guatemala 9 9 Guinea 9 Guinea Bissau 9 9

Guyana 9 Honduras 9 Hong Kong 9 Hungary 9 9 9 9 Iceland 9 9 India 9 9 9

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Indonesia 9 9 9 9 Ireland 9 9 9 9 9 Israel 9 9 Italy 9 9 9 Jamaica 9 9 9 9 Japan 9 9 9 9 9 Jordan 9 9 9 9 Kenya 9 9 Kirgizstan 9 9 9 Korea (South) 9 9 Kuwait 9

Latvia 9 9 Lesotho 9 Liechtenstein 9 9

Lithuania 9 9 9

Luxembourg 9 9 9 9 9 Macau 9 Madagascar 9 9 9 Malaysia 9 9 9 Maldives 9 Malta 9 9 9 Mauritania 9 Mauritius 9 9 9 9

Mexico 9 Moldova 9 9 9 9

Mongolia 9 9 9 Morocco 9 9 9 Mozambique 9 9 Namibia 9 Nepal 9 Netherlands 9 9 Netherlands Antilles 9 9 New Caledonia 9 New Zealand 9 9 9 9 Nicaragua 9 9 9 Nigeria 9 9 9 Norway 9 9 9 9 Oman 9 9 Pakistan 9 9 9 Panama 9 9 9 Paraguay 9 Peru 9 9 9 Philippines 9 Poland 9 9 9 9 Portugal 9 9 9 9 Puerto Rico 9

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Qatar 9 Romania 9 9 9 Russian Federation 9 Rwanda 9 Saint Kitts & Nevis 9 Saint Lucia 9 9 9 Saint Vincent & the 9 9 9 Grenadines Samoa 9 Saudi Arabia 9 9 Senegal 9 Seychelles 9 Sierra Leone 9

Singapore 9 9 9 9 9 Slovak Republic 9 9 9 Slovenia 9 9 9 9 9 Somalia 9 South Africa 9 9 9 Spain 9 9 9 9 Sri Lanka 9 9 Sudan 9 Suriname 9 Sweden 9 9 9 9 Switzerland 9 9 9 9 9 Syria 9 Taiwan 9 Tanzania 9 Thailand 9 9 Togo 9 Trinidad & Tobago 9 9 9 Tunisia 9 9 Turkey 9 9 9 9 9 Uganda 9 9 United Arab Emirates 9 9 9 Uruguay 9 9 9 USA 9 9 Venezuela 9 9 9 9 Vietnam 9 Yemen 9 Zambia 9 9 9 Zimbabwe 9 9

Source: Ofcom research described in paragraph 4.18 above. Routes shown in purple are those in which no provider was found to have SMP in Oftel’s 2003 review. Routes shown in pink are those in which either BT or C&W were found to have SMP in Oftel’s 2003 review.

Market shares

Introduction

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4.22 The OFT’s Competition Law guideline, Assessment of Market Power34, states that:

There are no market share thresholds for defining dominance under Article 82 or the Chapter II prohibition. An undertaking’s market share is an important factor in assessing dominance but does not determine on its own whether an undertaking is dominant (paragraph 2.11)

The European Court has stated that dominance can be presumed in the absence of evidence to the contrary if an undertaking has a market share persistently above 50 per cent. The OFT considers that it is unlikely that an undertaking will be individually dominant if its share of the relevant market is below 40 per cent, although dominance could be established below that figure if other relevant factors (such as the weak position of competitors in that market and high entry barriers) provided strong evidence of dominance (paragraph 2.12).

…while consideration of market shares over time is important when assessing market power, an analysis of entry conditions and other factors is equally important. All relevant factors will be viewed in the round (paragraph 4.5).

4.23 The Commission’s Notice on the definition of the relevant market for the purposes of EC competition law states that:

As a rule of thumb, both volume sales and value sales provide useful information. In cases of differentiated products, sales in value and their associated market share will usually be considered to better reflect the relative position and strength of each supplier

4.24 The background to the results set out in the next sub-section is that BT’s aggregate share of all volumes measured across all routes has been declining for a number of years, as shown in Figure 6 below.

Figure 6 – BT’s aggregate share of all volumes across all routes

34 http://www.oft.gov.uk/NR/rdonlyres/A92F91BC-B556-4724-8D2B-7002F6CDEA65/0/oft415.pdf

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100% 90% 80% BT 70% Cable & Wireless 60% MCI Primus 50% Teleglobe 40% COLT BT's share (%) share BT's 30% Energis 20% TeliaSonera 10% Others 0%

3 7 9 1 3 5 89 91 95 9 9 99 9 99 99 00 1 1 1 1 1 1 200 2 200 Source: 1989-2003 - TeleGeography 2005 Report; 2004-2005 BT Forecast

4.25 Figure 6 shows that, since 1989:

• BT’s share across all routes has declined by about 60 percentage points, from being in the region of 90% to below 30%; and • about 10 percentage points of this loss are accounted for by an increase in the volumes of the other incumbent, C&W, with the remaining 50 percentage points being captured by new entrants, of which only MCI has a share above 10%. 4.26 As explained, however, in Section 3, Ofcom’s view is that a route-by-route market definition remains appropriate, meaning that market shares calculated on a route-by- route basis are more informative to its assessment of market power.

Market shares calculated on a route-by-route basis

4.27 Carrying out an assessment of market shares in wholesale international services markets is difficult because of, inter alia:

• the number of routes across which firms offer services; • the relatively large number of players, including overseas operators, active in these markets making identifying the important players on every route difficult; • cross-selling between players leading to double-counting of minutes (e.g. in a case where a smaller originator sells traffic to a retail provider, but sends its traffic to its final destination via C&W, both C&W and the smaller originator will record this as originated traffic). 4.28 Ofcom has focussed its assessment of market shares on those routes in which either BT or C&W were identified as having a position of SMP in the November 2003 Statement. It calculated the share of both BT and C&W based on the returns supplied by these two companies and an estimate of total traffic on each route based on the results of research carried out by TeleGeography (which collects route-by- route data on a volumes basis). In order to enable the use of the TeleGeography data set, and given that not all stakeholders were able to supply revenue market

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share data on all routes, Ofcom’s analysis focuses on volume, rather than revenue, market share information.

4.29 The reference to “persistently greater” in the following paragraphs is important because fluctuations in market shares may (depending on whether the size of the market is expanding, contracting, or relatively stable in aggregate), be consistent with conditions of strong competition between players, with contracts and customers changing hands between suppliers. Paragraph 75 of the Commission Guidelines notes that “…An undertaking with a large market share may be presumed to have SMP, that is, to be in a dominant position, if its market share has remained stable over time. The fact that an undertaking with a significant position on the market is gradually losing market share may well indicate that the market is becoming more competitive, but it does not preclude a finding of significant market power. On the other hand, fluctuating market shares over time may be indicative of a lack of market power in the relevant market.”

4.30 In its route-by-route market power assessment, Ofcom has interpreted cases where neither BT nor C&W had a volume share that was persistently greater (i.e. in both 2003/04 and 2004/05) than 50% as providing evidence of effective competition on that route. As an alternative, Ofcom repeated its analysis using a threshold of 40%, but, since there were no routes with evidence of high barriers to entry on which either BT or C&W had a share that was persistently greater than 40% but not persistently greater than 50%, this did not have an impact on Ofcom’s analysis.

4.31 As set out above, BT and C&W have a high share on some, but not many, routes – in 2003/04 and 2004/05:

• BT’s share on individual routes varies significantly but has only been persistently greater than 50% on five routes that collectively account for less than 0.1% of all traffic originating in the UK; and • C&W’s share on individual routes varies significantly but has only been persistently greater than 50% on six routes that collectively account for less than 0.01% of all traffic originating in the UK. • BT’s share has been persistently between 40% and 50% on only two routes on neither of which it has a correspondent agreement. 4.32 Based on this evidence, Ofcom concludes that a further 55 of the markets in which either BT or C&W was previously found to have SMP, are now effectively competitive. Using the same analysis, Ofcom confirms that a further 19 of the markets which were found to be effectively competitive in 2003 remain so. The shares of BT and C&W on these routes are show in Figure 7 below.

Figure 7 – The routes on which no persistently high volume market share for BT or C&W

BT’s share C&W’s share Route 2003/04 2004/05 2003/04 2004/05 American Samoa n/a 0% - 20% n/a 20% - 40% Andorra 20% - 40% 20% - 40% 20% - 40% 20% - 40% Anguilla 50% - 100% 40% - 50% 20% - 40% 20% - 40% Antarctica Australian Territory n/a 40% - 50% n/a 20% - 40% Azerbaijan 20% - 40% 20% - 40% 20% - 40% 20% - 40% Bahamas 20% - 40% 20% - 40% 0% - 20% 20% - 40%

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Belarus 20% - 40% 0% - 20% 0% - 20% 0% - 20% Benin 0% - 20% 0% - 20% 0% - 20% 0% - 20% Bermuda 20% - 40% 20% - 40% 20% - 40% 50% - 100% Bhutan 20% - 40% 20% - 40% 0% - 20% 0% - 20% Bosnia and Herzegovina 0% - 20% 0% - 20% 20% - 40% 0% - 20% Burkina Faso 0% - 20% 0% - 20% 0% - 20% 0% - 20% Cambodia 0% - 20% 0% - 20% 20% - 40% 0% - 20% Cape Verde 0% - 20% 0% - 20% 0% - 20% 0% - 20% Central African Republic 0% - 20% 0% - 20% 0% - 20% 0% - 20% Comoros 0% - 20% 0% - 20% 0% - 20% 0% - 20% Congo n/a 20% - 40% n/a 20% - 40% Congo, DR 20% - 40% 20% - 40% 0% - 20% 50% - 100% Cook Islands 0% - 20% 0% - 20% 0% - 20% 0% - 20% Diego Garcia n/a 50% - 100% n/a 40% - 50% Djibouti 0% - 20% 0% - 20% 0% - 20% 20% - 40% Equatorial Guinea 20% - 40% 0% - 20% 40% - 50% 40% - 50% Eritrea 20% - 40% 20% - 40% 0% - 20% 20% - 40% Ethiopia 20% - 40% 50% - 100% 20% - 40% 0% - 20% French Guiana 20% - 40% 20% - 40% 20% - 40% 50% - 100% Greenland 0% - 20% 0% - 20% 0% - 20% 20% - 40% Guadeloupe 40% - 50% 20% - 40% 20% - 40% 20% - 40% Haiti 20% - 40% 20% - 40% 0% - 20% 20% - 40% Iran 0% - 20% 40% - 50% 20% - 40% 20% - 40% Iraq 20% - 40% 20% - 40% 0% - 20% 20% - 40% Kazakhstan 0% - 20% 0% - 20% 0% - 20% 20% - 40% Kiribati 0% - 20% 0% - 20% 0% - 20% 0% - 20% Laos 0% - 20% 0% - 20% 0% - 20% 0% - 20% Lebanon 20% - 40% 0% - 20% 0% - 20% 20% - 40% Liberia 0% - 20% 0% - 20% 0% - 20% 20% - 40% Libya 40% - 50% 20% - 40% 0% - 20% 0% - 20% Macedonia 0% - 20% 0% - 20% 40% - 50% 0% - 20% Malawi 0% - 20% 0% - 20% 0% - 20% 0% - 20% Mali 0% - 20% 20% - 40% 0% - 20% 40% - 50% Marshall Islands 0% - 20% 20% - 40% 0% - 20% 0% - 20% Martinique 20% - 40% 20% - 40% 40% - 50% 20% - 40% Mayotte 0% - 20% 0% - 20% 0% - 20% 0% - 20% Micronesia 0% - 20% 20% - 40% 0% - 20% 0% - 20% Midway Islands n/a 0% - 20% n/a 0% - 20% Monaco 20% - 40% 0% - 20% 0% - 20% 0% - 20% Montserrat n/a 40% - 50% n/a 20% - 40% Myanmar 20% - 40% 20% - 40% 0% - 20% 0% - 20% Nauru 40% - 50% 0% - 20% 0% - 20% 0% - 20% Niger 0% - 20% 0% - 20% 0% - 20% 0% - 20% Niue 20% - 40% 50% - 100% 0% - 20% 0% - 20% Northern Marianas n/a 0% - 20% n/a 0% - 20% Palau 0% - 20% 20% - 40% 0% - 20% 20% - 40% Papua New Guinea 20% - 40% 0% - 20% 0% - 20% 0% - 20% Reunion 20% - 40% 20% - 40% 0% - 20% 0% - 20%

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Saint Helena n/a 40% - 50% n/a 20% - 40% Saint Pierre & Miquelon n/a 0% - 20% n/a 0% - 20% San Marino n/a 40% - 50% n/a 20% - 40% Solomon Islands 40% - 50% 50% - 100% 0% - 20% 40% - 50% Swaziland 20% - 40% 20% - 40% 20% - 40% 20% - 40% Tajikistan 20% - 40% 0% - 20% 20% - 40% 20% - 40% Thuraya n/a 0% - 20% n/a 20% - 40% Tonga 0% - 20% 0% - 20% 0% - 20% 0% - 20% Tristan Da Cunha n/a 0% - 20% n/a 0% - 20% Turkmenistan 20% - 40% 20% - 40% 20% - 40% 20% - 40% Turks & Caicos n/a 20% - 40% n/a 20% - 40% Ukraine 0% - 20% 0% - 20% 0% - 20% 40% - 50% Uzbekistan 0% - 20% 20% - 40% 20% - 40% 20% - 40% Vanuatu 20% - 40% 20% - 40% 0% - 20% 40% - 50% Virgin Islands (UK) n/a 40% - 50% n/a 40% - 50% Wake Island n/a 0% - 20% n/a 0% - 20% Wallis & Futuna n/a 40% - 50% n/a 20% - 40% Yugoslavia n/a 0% - 20% n/a 0% - 20%

Source: Ofcom research and market share data published by TeleGeography. Route specific market shares are shown in percentage bands for reasons of commercial confidentiality. Routes shown in purple are those in which no provider was found to have SMP in Oftel’s 2003 review. Routes shown in pink are those in which either BT or C&W were found to have SMP in Oftel’s 2003 review.

Other evidence

4.33 After Ofcom’s initial analysis of barriers to entry and market shares the following markets were subject to a more detailed assessment of market power and, in particular, evidence of market entry:

• Ascension Island; • East Timor; • Falkland Islands (no SMP found in 2003); • Korea, PDR (no SMP found in 2003); • Norfolk Island; • Rodriguez Islands; • Sao Tome and Principe; • Tokelau; • Tuvalu; • Virgin Islands (US;) • Emsat; • Inmarsat; and • Iridium.

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4.34 On these routes, Ofcom looked at more detailed evidence on the availability of alternative methods of routing international traffic. In particular, Ofcom considered whether the wholesale provider currently designated as having SMP, has a correspondent agreement with a provider in the destination country, or uses indirect routing arrangements, which are also likely to be available to competitors. In cases where either BT or C&W had a high share but not a correspondent agreement, Ofcom takes the view that the possibility of market entry should impose a constraint on BT and C&W and such routes are therefore effectively competitive.

4.35 In the case of Ascension Island (a small route that, according to Ofcom’s estimates, is worth considerably less than £100,000 per year), the information supplied to Ofcom suggests that both BT and C&W have a correspondent agreement and a high share (40 - 50% and over 50% respectively). Subject to there being no other evidence of competition concerns on this route, and in all the circumstances of this particular market, Ofcom’s view is that the existence of competition between these two providers is sufficient for the route to be considered effectively competitive (see paragraph 4.9 for a brief discussion of why Ofcom considers it unlikely that there will be problems associated with collective dominance in these markets). The product sold by the two companies is not strongly differentiated and the limited volume of traffic sent to this destination is such that neither company should face significant capacity constraints. BT’s wholesale price on this route has declined at an average compound rate of 8% per annum since 1998.

4.36 It is also worth noting that C&W is vertically integrated with the far-end terminating provider on this route. It is possible that this situation might provide scope for C&W’s UK business to gain an advantage over other UK players on this route. Given that BT’s share is over 40%, it is clear that BT is able to compete in this market. Ofcom believes that, considering all of the available information as a whole, that the balance of evidence is such that it is appropriate to view this route as being effectively competitive.

4.37 Further assessment of the two routes, which were not subject to SMP findings in the 2003 review, the Falkland Islands and Korea (PDR), confirmed that either neither, or both, of BT and C&W have correspondent agreements on these routes. In the absence of evidence of competition concerns on these routes, and in all the circumstances of the markets, Ofcom considers that there are insufficient grounds for a finding of SMP where no one provider is uniquely in a position to negotiate reasonably priced access. On this basis, Ofcom considers these two routes to be effectively competitive.

Forward look

4.38 Ofcom is not aware of any reason why the presence of effective competition should change in the foreseeable future.

Initial conclusion

4.39 Based on the assessment of market power, as set out above and summarised in Figure 8 below, Ofcom proposes to make no finding of SMP in any of the 235 economic markets.

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Figure 8 – SMP assessment methodology on all routes

All routes 235

Evidence showing low barriers to entry?

No 85 Yes 150

A player with persistently 235 Position of no SMP high share? Position of 0 SMP

13 72 Yes No

0 Other evidence that route 13 No is competitive? Yes

Question 2: Do you agree with Ofcom’s proposals to make no finding of significant market power in any of the relevant markets?

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Section 5 5 Revocation of SMP conditions

Introduction

5.1 Section 84(4) of the Act provides that where on, or in consequence of, a further analysis Ofcom determines that a person to whom SMP conditions apply is no longer a person with SMP in that market, they must revoke every SMP services condition applied to that person by reference to the market power determination made on the basis of the earlier analysis. Section 48 of the Act provides the procedure for revoking conditions.

Revocation of BT SMP conditions

5.2 Ofcom proposes to revoke conditions KA1, KA2, KA3 and KA4 previously imposed on BT and set out in Schedule 3 of the Director’s notification pursuant to Section 48(1) and Section 79 of the Act of 18 November 2003.

5.3 Ofcom also proposes to revoke the SMP services conditions on BT in relation to regulatory accounting in respect of wholesale international services as notified to BT on 22 July 2004 in The regulatory financial reporting obligations on BT and Kingston Communications final statement and notification35.

Revocation of C&W SMP conditions

5.4 Ofcom proposes to revoke conditions KB1, KB2, KB3 and KB4 previously imposed on C&W and set out in Schedule 4 of the Director’s notification pursuant to Section 48(1) and Section 79 of the Act of 18 November 2003.

5.5 A draft notification of these revocations is at Annex 5.

35 See http://www.ofcom.org.uk/consult/condocs/fin_reporting/fin_report_statement/finance_report.pdf

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Annex 1 2 Responding to this consultation

How to respond

Ofcom invites written views and comments on the issues raised in this document, to be made by 5pm on Thursday 18 May 2006.

Ofcom strongly prefers to receive responses as e-mail attachments, in Microsoft Word format, as this helps us to process the responses quickly and efficiently. We would also be grateful if you could assist us by completing a response cover sheet (see Annex 3), among other things to indicate whether or not there are confidentiality issues. The cover sheet can be downloaded from the ‘Consultations’ section of our website.

Please can you send your response to [email protected].

Responses may alternatively be posted or faxed to the address below, marked with the title of the consultation.

Warwick Izzard Competition Group

4th Floor Riverside House 2A Southwark Bridge Road London SE1 9HA

Fax: 020 7783 4109

Note that we do not need a hard copy in addition to an electronic version. Also note that Ofcom will not routinely acknowledge receipt of responses.

It would be helpful if your response could include direct answers to the questions asked in this document, which are listed together at Annex 4. It would also help if you can explain why you hold your views, and how Ofcom’s proposals would impact on you.

Further information

If you want to discuss the issues and questions raised in this consultation, or need advice on the appropriate form of response, please contact Warwick Izzard on 020 7783 4127.

Confidentiality

Ofcom thinks it is important for everyone interested in an issue to see the views expressed by consultation respondents. We will therefore usually publish all responses on our website, www.ofcom.org.uk, ideally on receipt (when respondents confirm on their response cover sheet that this is acceptable).

All comments will be treated as non-confidential unless respondents specify that part or all of the response is confidential and should not be disclosed. Please place any confidential parts of a response in a separate annex, so that non-confidential parts may be published along with the respondent’s identity.

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Ofcom reserves its power to disclose any information it receives where this is required to carry out its legal requirements. Ofcom will exercise due regard to the confidentiality of information supplied.

Please also note that copyright and all other intellectual property in responses will be assumed to be licensed to Ofcom to use, to meet its legal requirements. Ofcom’s approach on intellectual property rights is explained further on its website, at www.ofcom.org.uk/about_ofcom/gov_accountability/disclaimer.

Next steps

Following the end of the consultation period, Ofcom intends to publish a statement around the end of July 2006.

Please note that you can register to get automatic notifications of when Ofcom documents are published, at http://www.ofcom.org.uk/static/subscribe/select_list.htm.

Ofcom's consultation processes

Ofcom is keen to make responding to consultations easy, and has published some consultation principles (see Annex 2) which it seeks to follow, including on the length of consultations.

If you have any comments or suggestions on how Ofcom conducts its consultations, please call our consultation helpdesk on 020 7981 3003 or e-mail us at [email protected]. We would particularly welcome thoughts on how Ofcom could more effectively seek the views of those groups or individuals, such as small businesses or particular types of residential consumers, whose views are less likely to be obtained in a formal consultation.

If you would like to discuss these issues, or Ofcom's consultation processes more generally, you can alternatively contact Vicki Nash, the Consultation Champion, at:

Vicki Nash Ofcom (Scotland) Sutherland House 149 St. Vincent Street Glasgow G2 5NW Tel: 0141 229 7401 Fax: 0141 229 7433 E-mail: [email protected]

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Annex 2 3 Ofcom’s consultation principles

A3.1 Ofcom has published the following seven principles that it will follow for each public written consultation:

Before the consultation

A3.2 Where possible, we will hold informal talks with people and organisations before announcing a big consultation to find out whether we are thinking in the right direction. If we do not have enough time to do this, we will hold an open meeting to explain our proposals shortly after announcing the consultation.

During the consultation

A3.3 We will be clear about who we are consulting, why, on what questions and for how long.

A3.4 We will make the consultation document as short and simple as possible with a summary of no more than two pages. We will try to make it as easy as possible to give us a written response. If the consultation is complicated, we may provide a shortened version for smaller organisations or individuals who would otherwise not be able to spare the time to share their views.

A3.5 We will normally allow ten weeks for responses to consultations on issues of general interest.

A3.6 There will be a person within Ofcom who will be in charge of making sure we follow our own guidelines and reach out to the largest number of people and organisations interested in the outcome of our decisions. This individual (who we call the consultation champion) will also be the main person to contact with views on the way we run our consultations.

A3.7 If we are not able to follow one of these principles, we will explain why. This may be because a particular issue is urgent. If we need to reduce the amount of time we have set aside for a consultation, we will let those concerned know beforehand that this is a ‘red flag consultation’ which needs their urgent attention.

After the consultation

A3.8 We will look at each response carefully and with an open mind. We will give reasons for our decisions and will give an account of how the views of those concerned helped shape those decisions.

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Annex 3 4 Consultation response cover sheet

A4.1 In the interests of transparency, we will publish all consultation responses in full on our website, www.ofcom.org.uk, unless a respondent specifies that all or part of their response is confidential. We will also refer to the contents of a response when explaining our decision, without disclosing the specific information that you wish to remain confidential.

A4.2 We have produced a cover sheet for responses (see below) and would be very grateful if you could send one with your response. This will speed up our processing of responses, and help to maintain confidentiality by allowing you to state very clearly what you don’t want to be published. We will keep your completed cover sheets confidential.

A4.3 The quality of consultation can be enhanced by publishing responses before the consultation period closes. In particular, this can help those individuals and organisations with limited resources or familiarity with the issues to respond in a more informed way. Therefore Ofcom would encourage respondents to complete their cover sheet in a way that allows Ofcom to publish their responses upon receipt, rather than waiting until the consultation period has ended.

A4.4 We strongly prefer to receive responses in the form of a Microsoft Word attachment to an email. Our website therefore includes an electronic copy of this cover sheet, which you can download from the ‘Consultations’ section of our website.

A4.5 Please put any confidential parts of your response in a separate annex to your response, so that they are clearly identified. This can include information such as your personal background and experience. If you want your name, address, other contact details, or job title to remain confidential, please provide them in your cover sheet only so that we don’t have to edit your response.

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Cover sheet for response to an Ofcom consultation

BASIC DETAILS

Consultation title:

To (Ofcom contact):

Name of respondent:

Representing (self or organisation/s):

Address (if not received by email):

CONFIDENTIALITY

What do you want Ofcom to keep confidential?

Nothing Name/contact details/job title

Whole response Organisation

Part of the response If there is no separate annex, which parts?

If you want part of your response, your name or your organisation to be confidential, can Ofcom still publish a reference to the contents of your response (including, for any confidential parts, a general summary that does not disclose the specific information or enable you to be identified)?

DECLARATION

I confirm that the correspondence supplied with this cover sheet is a formal consultation response. It can be published in full on Ofcom’s website, unless otherwise specified on this cover sheet, and I authorise Ofcom to make use of the information in this response to meet its legal requirements. If I have sent my response by email, Ofcom can disregard any standard e-mail text about not disclosing email contents and attachments.

Ofcom seeks to publish responses on receipt. If your response is non-confidential (in whole or in part), and you would prefer us to publish your response only once the consultation has ended, please tick here.

Name Signed (if hard copy)

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Annex 4 5 Consultation questions

Question 1: Do you agree with Ofcom’s proposals for identifying wholesale international services markets on a route-by-route, country-by-country, basis?

Question 2: Do you agree with Ofcom’s proposals to make no finding of significant market power in any of the relevant markets?

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Annex 5 6 Draft notification of revocation

NOTIFICATION UNDER SECTIONS 48(2) and 80(1) OF THE COMMUNICATIONS ACT 2003

Proposal to identify markets, make market powers determinations and revoke SMP services conditions applying to BT and C&W in relation to the Wholesale International Services market.

WHEREAS

(A) On 18 November 2003, the Director General of Telecommunications (“the Director”) published a document entitled “Wholesale International Services markets – Identification and analysis of market power and Determination of market power – Final Explanatory Statement and Notification” (“the 2003 Market Review”).

(B) In Annex A to the 2003 Market Review and in accordance with section 79 of the Communications Act 2003 (“the Act”), the Director published a notification (“the November 2003 Notification”) identifying the following markets for the purpose of making a market power determination:

”Wholesale international call conveyance from the United Kingdom to each of the countries, territories and satellite services set out in Schedule 1, on a route by route basis such that each route from the United Kingdom to one of those countries, territories or satellite services constitutes a separate market.”

The markets above are reproduced in Schedule 1 to this Notification.

(C) The Director, in accordance with section 79 of the Act made the following market power determinations in the November 2003 Notification:

(a) in relation to the markets (that is, the route to each country, territory or satellite service) set out in Schedule 2, Part 1, British Telecommunications plc, whose registered company number is 1800000, and any British Telecommunications plc subsidiary or holding company, or any subsidiary of that holding company, all as defined in section 736 of the Companies Act 1985, as amended by the Companies Act 1989 (“BT”);

(b) in relation to the markets (that is, the route to each country or territory) set out in Schedule 2, Part 2, Cable and Wireless plc, whose registered company number is 00238525, and any Cable and Wireless plc subsidiary or holding company, or any subsidiary of that holding company, all as defined in section 736 of the companies Act 1985, as amended by the Companies Act 1989 (“C&W”).”

The markets referred to in (a) and (b) above are set out in Schedule 2 to this Notification.

(D) The Director, in accordance with sections 48(1) and 79 of the Act set SMP services conditions on BT and C&W as set out in Schedules 3 and 4 respectively of Annex A to the

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November 2003 Notification and reproduced in Schedules 3 and 4 respectively to this Notification.

(E) On 29 December 2003, OFCOM took over the responsibilities and assumed the powers of the five former regulators it replaced, including the Director and, by virtue of the Transitional Provisions, the above-mentioned market power determinations made by the Director have effect as if made by OFCOM.

(F) On 22 July 2004, OFCOM published a notification under sections 48(1) and 86(1) of the Act at Annex 2 to the document entitled “The regulatory financial reporting obligations on BT and Kingston Communications – Final statement and notification – Accounting separation and cost accounting: Final statement and notification” (“the July 2004 Notification”) with the effect of setting SMP services conditions on BT as set out in Schedule 2 to that notification in the market defined in Schedule 1, Part 1, Wholesale Market 11 of that notification as:

” Wholesale international call conveyance from the United Kingdom to each of the countries, territories and satellite services set out in Category B at Part 3 of this Schedule, on a route by route basis such that each route from the United Kingdom to one of those countries, territories or satellite services constitutes a separate market.”

(G) In accordance with section 84(2) of the Act, OFCOM has conducted a review of the markets as identified in Schedule 1 of this Notification for the purposes of:

(a) reviewing the relevant market power determinations made on the basis on the analysis set out in the 2003 Market Review; and

(b) deciding whether to modify or revoke the SMP services conditions set by reference to the market power determinations made as a result of the 2003 Market Review.

(H) In making the decisions referred to in paragraphs 1, 2 and 3 OFCOM has considered and acted in accordance with its general duties set out in section 3 of the 2003 Act as well as the six Community requirements set out in section 4 of the 2003 Act.

(I) Copies of this Notification and the accompanying explanatory statement have been sent to the Secretary of State for Trade and Industry in accordance with section 50(1)(a) and section 81(1) of the 2003 Act and to the European Commission and to the regulatory authorities of every other member State in accordance with sections 50(3) and 81(3) of the Act.

NOW THEREFORE

1. For the reasons set out in Sections XX and XX of the explanatory statement accompanying this Notification, OFCOM is proposing that, in accordance with section 80 of the Act, the markets identified in Schedule 1 of this Notification continue to be identified as services markets in relation to which it is appropriate to consider whether to make market power determinations.

2. For the reasons set out in Sections XX and XX of the explanatory statement accompanying this Notification, OFCOM is proposing, in accordance with section 80 of the Act, to make the following market power determinations:

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(a) that no person, either individually or jointly with others, has significant market power in relation to the markets specified in Schedule 1 of this Notification.

3. As a result of this market review, OFCOM is proposing, in accordance with sections 48(1) and 84(4) of the Act to:

(a) revoke every SMP services condition imposed on BT and C&W as listed in the November 2003 Notification and as set out in Schedules 3 and 4 of this Notification; and

(b) revoke the SMP services conditions imposed on BT as set out in Schedule 2 of the July 2004 Notification as they apply to the market defined in Schedule 1, Part 1, Wholesale Market 11 of that notification.

Interpretation

4. Except for references made to identified services markets in this Notification (including the recitals hereto), in the November 2003 Notification and in the July 2004 Notification, and except as otherwise defined in paragraph 5 of this Notification, words or expressions used in this Notification (and in the recitals hereto) shall have the same meaning as they have been ascribed in the Act.

5. In this Notification:

“Transitional Provisions” means sections 408 and 411 of the Act, the Communications Act 2003 (Commencement No.1) Order 2003 (S.I. 2003/1900 (C.77) and the Office of Communications Act 2002 (Commencement No.3) and the Communications Act 2003 (Commencement No.2) Order 2003 (S.I. 2003/3142 (C.125)).

GARETH DAVIES

DIRECTOR OF COMPETITION POLICY

9 March 2006

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Schedule 1

Identified Wholesale International Services Markets

Afghanistan Bermuda Côte d'Ivoire

Albania Bhutan Croatia

Algeria Bolivia Cuba

American Samoa Bosnia and Herzegovina Cyprus

Andorra Botswana Czech Republic

Angola Brazil Denmark

Anguilla Brunei Darussalam Diego Garcia

Antarctica Australian Bulgaria Djibouti

Territory Burkina Faso Dominica

Antigua and Barbuda Burundi Dominican Republic

Argentina Cambodia East Timor

Armenia Cameroon Ecuador

Aruba Canada Egypt

Ascension Island Cape Verde El Salvador

Australia Cayman Islands Equatorial Guinea

Austria Central African Republic Eritrea

Azerbaijan Chad Estonia

Bahamas Chile Ethiopia

Bahrain China Falkland Islands

Bangladesh Colombia Faroe Islands

Barbados Comoros Fiji

Belarus Congo Finland

Belgium Congo, DR France

Belize Cook Islands French Guiana

Benin Costa Rica French Polynesia

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Gabon Japan Mauritania

Gambia Jordan Mauritius

Georgia Kazakhstan Mayotte

Germany Kenya Mexico

Ghana Kirgizstan Micronesia

Gibraltar Kiribati Midway Islands

Greece Korea (South) Moldova

Greenland Korea, PDR Monaco

Grenada Kuwait Mongolia

Guadeloupe Laos Montserrat

Guam Latvia Morocco

Guatemala Lebanon Mozambique

Guinea Lesotho Myanmar

Guinea Bissau Liberia Namibia

Guyana Libya Nauru

Haiti Liechtenstein Nepal

Honduras Lithuania Netherlands

Hong Kong Luxembourg Netherlands Antilles

Hungary Macau New Caledonia

Iceland Macedonia New Zealand

India Madagascar Nicaragua

Indonesia Malawi Niger

Iran Malaysia

Iraq Maldives Nigeria

Ireland Mali Niue

Israel Malta Norfolk Island

Italy Marshall Islands Northern Marianas

Jamaica Martinique Norway

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Oman Senegal Tunisia

Pakistan Seychelles Turkey

Palau Sierra Leone Turkmenistan

Panama Singapore Turks & Caicos

Papua New Guinea Slovak Republic Tuvalu

Paraguay Slovenia Uganda

Peru Solomon Islands Ukraine

Philippines Somalia United Arab Emirates

Poland South Africa Uruguay

Portugal Spain USA

Puerto Rico Sri Lanka Uzbekistan

Qatar Sudan Vanuatu

Reunion Suriname Venezuela

Rodriguez Islands Swaziland Vietnam

Romania Sweden Virgin Islands (UK)

Russian Federation Switzerland Virgin Islands (US)

Rwanda Syria Wake Island

Saint Helena Taiwan Wallis & Futuna

Saint Kitts & Nevis Tajikistan Yemen

Saint Lucia Tanzania Yugoslavia

Saint Pierre & Miquelon Thailand Zambia

Saint Vincent & the Togo Zimbabwe Grenadines Tokelau Emsat Samoa Tonga Inmarsat San Marino Trinidad & Tobago Iridium Sao Tome and Principe Tristan Da Cunha Thuraya Saudi Arabia

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Schedule 2

Part 1

Markets for which the Director has found that BT has SMP

Afghanistan Côte d'Ivoire Liberia

Albania Cuba Libya

Algeria Djibouti Liechtenstein

American Samoa East Timor Lithuania

Angola Equatorial Guinea Macedonia

Anguilla Eritrea Madagascar

Antarctica Australian Ethiopia Malawi

Territory Faroe Islands Mali

Armenia Fiji Marshall Islands

Aruba French Polynesia Mauritania

Benin Gabon Mauritius

Bhutan Georgia Mayotte

Bosnia and Herzegovina Greenland Micronesia

Burkina Faso Guam Midway Islands

Burundi Guinea Moldova

Cambodia Guinea Bissau Mozambique

Cameroon Haiti Myanmar

Cape Verde Honduras Namibia

Central African Republic Iraq Nauru

Chad Kiribati New Caledonia

Comoros Korea, PDR Niger

Congo Kirgizstan Niue

Congo, DR Lebanon Norfolk Island

Cook Islands Lesotho Northern Marianas

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Palau Uzbekistan

Papua New Guinea Vanuatu

Puerto Rico Virgin Islands (US)

Rodriguez Islands Wake Island

Romania Wallis & Futuna

Rwanda Emsat

Saint Kitts & Nevis Inmarsat

Saint Pierre & Miquelon Iridium

Samoa Thuraya

San Marino

Sao Tome and Principe

Senegal

Seychelles

Sierra Leone

Solomon Islands

Somalia

Sudan

Suriname

Swaziland

Tajikistan

Togo

Tokelau

Tonga

Trinidad & Tobago

Tristan Da Cunha

Turkmenistan

Tuvalu

Uganda

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Part 2

Markets for which the Director has found that C&W has SMP

Ascension Island

Diego Garcia

Montserrat

Turks & Caicos

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Schedule 3

The SMP services conditions to be imposed on BT under section 45 of the Communications Act 2003 as a result of the market power determination in respect of the markets in Schedule 2, Part 1

Part 1: Definitions and Interpretation of these conditions

1 These conditions shall apply to the markets (that is, the route to each country, territory or satellite service) set out in Schedule 2, Part 1.

2 For the purpose of interpreting the conditions imposed on the Dominant Provider following a review of the markets referred to in paragraph 1 the following definitions shall apply:

“Act” means the Communications Act 2003;

“Access Charge Change Notice” has the meaning given to it in ConditionKA4.2;

“Director” means the Director General of Telecommunications as appointed under section 1 of the Telecommunications Act 1984;

“Dominant Provider” means British Telecommunications plc, whose registered company number is 1800000, and any British Telecommunications plc subsidiary or holding company, or any subsidiary of that holding company, all as defined by Section 736 of the Companies Act 1985 as amended by the Companies Act 1989 (“BT”);

“Reference Offer” means the terms and conditions on which the Dominant Provider is willing to enter into an Access Contract; and

“Third Party” means a person providing a public Electronic Communications Service or a person providing a public Electronic Communications Network.

3 Except insofar as the context otherwise requires, words or expressions shall have the meaning assigned to them and otherwise any word or expression shall have the same meaning as it has in the Act.

4 The Interpretation Act 1978 shall apply as if each of the conditions were an Act of Parliament.

5 Headings and titles shall be disregarded.

Part 2: The conditions

Condition KA1 – Requirement to provide network access on reasonable Request

KA1.1 Where a Third Party reasonably requests in writing Network Access, the Dominant Provider shall provide that Network Access. The Dominant Provider shall also provide such Network Access as the Director may from time to time direct.

KA1.2 The provision of Network Access in accordance with paragraph KA1.1 shall occur as soon as reasonably practicable and shall be provided on fair and reasonable terms, conditions and charges and on such terms, conditions and charges as the Director may from time to time direct.

KA1.3 The Dominant Provider shall comply with any direction the Director may make from time to time under this Condition.

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Condition KA2 – Requirement not to unduly discriminate

KA2.1 The Dominant Provider shall not unduly discriminate against particular persons or against a particular description of persons, in relation to matters connected with Network Access.

KA2.2 In this Condition, the Dominant Provider may be deemed to have shown undue discrimination if it unfairly favours to a material extent an activity carried on by it so as to place at a competitive disadvantage persons competing with the Dominant Provider.

Condition KA3 – Requirement to publish a reference offer

KA3.1 Except in so far as the Director may otherwise consent in writing, the Dominant Provider shall publish a Reference Offer and act in the manner set out below.

KA3.2 Subject to paragraph KA3.8 below, the Dominant Provider shall ensure that a Reference Offer in relation to the provision of Network Access includes at least the following:

(a) a description of the Network Access to be provided, including technical characteristics (which shall include information on network configuration where necessary to make effective use of the Network Access);

(b) the locations of the points of Network Access;

(d) the conditions for access to ancillary, supplementary and advanced services (including operational support systems, information systems or databases for pre- ordering, provisioning, ordering, maintenance and repair requests and billing);

(e) any ordering and provisioning procedures;

(f) relevant charges, terms of payment and billing procedures;

(g) details of interoperability tests;

(h) details of traffic and network management;

(i) details of maintenance and quality as follows:

(i) specific time scales for the acceptance or refusal of a request for supply and for completion, testing and hand-over or delivery of services and facilities, for provision of support services (such as fault handling and repair);

(ii) service level commitments, namely the quality standards that each party must meet when performing its contractual obligations;

(iii) the amount of compensation payable by one party to another for failure to perform contractual commitments;

(iv) a definition and limitation of liability and indemnity; and

(v) procedures in the event of alterations being proposed to the service offerings, for example, launch of new services, changes to existing services or change to prices;

(j) details of measures to ensure compliance with requirements for network integrity;

(k) details of any relevant intellectual property rights;

(l) a dispute resolution procedure to be used between the parties;

(m) details of duration and renegotiation of agreements;

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(n) provisions regarding confidentiality of non-public parts of the agreements;

(o) rules of allocation between the parties when supply is limited (for example, for the purpose of co-location or location of masts); and

(p) the standard terms and conditions for the provision of Network Access.

KA3.3 To the extent that the Dominant Provider provides to itself Network Access that:

(i) is the same, similar or equivalent to that provided to any other Third Party; or

(ii) may be used for a purpose that is the same, similar or equivalent to that provided to any other Third Party, in a manner that differs from that detailed in a Reference Offer in relation to Network Access provided to any other Third Party, the Dominant Provider shall ensure that it publishes a Reference Offer in relation to the Network Access that it provides to itself which includes, where relevant, at least those matters detailed in Condition KA3.2(a)-(p).

KA3.4 The Dominant Provider shall, within one month of the date that this Condition enters into force, publish a Reference Offer in relation to any Network Access that it is providing as at the date this Condition enters into force.

KA3.5 The Dominant Provider shall update and publish the Reference Offer in relation to any amendments or in relation to any further Network Access provided after the date this Condition enters into force.

KA3.6 Publication referred to above shall be effected by:

(a) placing a copy of the Reference Offer on any relevant website operated or controlled by the Dominant Provider; and

(b) sending a copy of the Reference Offer to the Director.

KA3.7 The Dominant Provider shall send a copy of the current version of the Reference Offer to any person at that person’s written request (or such parts which have been requested).

KA3.8 The Dominant Provider shall make such modifications to the Reference Offer as the Director may direct from time to time.

KA3.9 The Dominant Provider shall provide Network Access at the charges, terms and conditions in the relevant Reference Offer and shall not depart there from either directly or indirectly.

KA3.10 The Dominant Provider shall comply with any direction the Director may make from time to time under this Condition.

Condition KA4 – Requirement to notify charges, terms and conditions

KA4.1 Except in so far as the Director may otherwise consent in writing, the Dominant Provider shall publish charges, terms and conditions and act in the manner set out below.

KA4.2 The Dominant Provider shall send to the Director and to every Third Party with which it has entered into an Access Contract covered by Condition KA1 a written notice of any amendment to the charges, terms and conditions on which it provides Network Access or in relation to any charges for new Network Access (an“Access Charge Change Notice”) not less than seven days before any such amendment comes into effect.

KA4.3 The Dominant Provider shall ensure that an Access Charge Change Notice includes:

(a) (a) a description of the Network Access in question;

(b) a reference to the location in the Dominant Provider’s current Reference Offer of the terms and conditions associated with the provision of that Network Access; and

(c) the date on which or the period for which any amendments to charges terms and conditions will take effect (the “effective date”).

KA4.4 The Dominant Provider shall not apply any new charge, term or condition identified in an Access Charge Change Notice before the effective date.

KA4.5 To the extent that the Dominant Provider provides to itself Network Access that:

(i) is the same, similar or equivalent to that provided to any other Third Party; or

(ii) may be used for a purpose that is the same, similar or equivalent to that provided to any other Third Party, in a manner that differs from that detailed in an Access Charge Change Notice in relation to Network Access provided to any other Third Party, the Dominant Provider shall ensure that it sends to the Director an Access Charge Change Notice in relation to the Network Access that it provides to itself which includes, where relevant, at least those matters detailed in paragraphs KA4.3(a)-(c).

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Schedule 4

The SMP services conditions to be imposed on C&W under section 45 of the Communications Act 2003 as a result of the market power determination in respect of the markets in Schedule 2, Part 2

Part 1: Definitions and Interpretation of these conditions

1. These conditions shall apply to the markets (that is, the route to each country or territory) set out in Schedule 2, Part 2.

2. For the purpose of interpreting the conditions imposed on the Dominant Provider following a review of the markets referred to in paragraph 1 the following definitions shall apply:

“Act” means the Communications Act 2003;

“Access Charge Change Notice” has the meaning given to it in Condition KB4.2;

“Director” means the Director General of Telecommunications as appointed under section 1 of the Telecommunications Act 1984;

“Dominant Provider” means Cable and Wireless plc, whose registered company number is 00238525, and any Cable and Wireless plc subsidiary or holding company, or any subsidiary of that holding company, all as defined by Section 736 of the Companies Act 1985 as amended by the Companies Act 1989 (“C&W”);

“Reference Offer” means the terms and conditions on which the Dominant Provider is willing to enter into an Access Contract; and

“Third Party” means a person providing a public Electronic Communications Service or a person providing a public Electronic Communications Network.

3. Except insofar as the context otherwise requires, words or expressions shall have the meaning assigned to them and otherwise any word or expression shall have the same meaning as it has in the Act.

4. The Interpretation Act 1978 shall apply as if each of the conditions were an Act of Parliament.

5. Headings and titles shall be disregarded.

Part 2: The conditions

Condition KB1 – Requirement to provide network access on reasonable Request

KB1.1 Where a Third Party reasonably requests in writing Network Access, the Dominant Provider shall provide that Network Access. The Dominant Provider shall also provide such Network Access as the Director may from time to time direct.

KB1.2 The provision of Network Access in accordance with paragraph KB1.1 shall occur as soon as reasonably practicable and shall be provided on fair and reasonable terms, conditions and charges and on such terms, conditions and charges as the Director may from time to time direct.

KB1.3 The Dominant Provider shall comply with any direction the Director may make from time to time under this Condition.

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Condition KB2 – Requirement not to unduly discriminate

KB2.1 The Dominant Provider shall not unduly discriminate against particular persons or against a particular description of persons, in relation to matters connected with Network Access.

KB2.2 In this Condition, the Dominant Provider may be deemed to have shown undue discrimination if it unfairly favours to a material extent an activity carried on by it so as to place at a competitive disadvantage persons competing with the Dominant Provider.

Condition KB3 – Requirement to publish a reference offer

KB3.1 Except in so far as the Director may otherwise consent in writing, the Dominant Provider shall publish a Reference Offer and act in the manner set out below.

KB3.2 Subject to paragraph KB3.8 below, the Dominant Provider shall ensure that a Reference Offer in relation to the provision of Network Access includes at least the following:

(b) the locations of the points of Network Access;

(e) any ordering and provisioning procedures;

(f) relevant charges, terms of payment and billing procedures;

(g) details of interoperability tests;

(h) details of traffic and network management;

(i) details of maintenance and quality as follows:

(ii) service level commitments, namely the quality standards that each party must meet when performing its contractual obligations;

(iii) the amount of compensation payable by one party to another for failure to perform contractual commitments;

(iv) a definition and limitation of liability and indemnity; and

(v) procedures in the event of alterations being proposed to the service offerings, for example, launch of new services, changes to existing services or change to prices;

(j) details of measures to ensure compliance with requirements for network integrity;

(k) details of any relevant intellectual property rights;

(l) a dispute resolution procedure to be used between the parties;

(m) details of duration and renegotiation of agreements;

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(n) provisions regarding confidentiality of non-public parts of the agreements;

(o) rules of allocation between the parties when supply is limited (for example, for the purpose of co-location or location of masts); and

(p) the standard terms and conditions for the provision of Network Access.

KB3.3 To the extent that the Dominant Provider provides to itself Network Access that:

(i) is the same, similar or equivalent to that provided to any other Third Party; or

KB3.4 The Dominant Provider shall, within one month of the date that this Condition enters into force, publish a Reference Offer in relation to any Network Access that it is providing as at the date this Condition enters into force.

KB3.5 The Dominant Provider shall update and publish the Reference Offer in relation to any amendments or in relation to any further Network Access provided after the date this Condition enters into force.

KB3.6 Publication referred to above shall be effected by:

(d) sending a copy of the Reference Offer to the Director.

KB3.7 The Dominant Provider shall send a copy of the current version of the Reference Offer to any person at that person’s written request (or such parts which have been requested).

KB3.8 The Dominant Provider shall make such modifications to the Reference Offer as the Director may direct from time to time.

KB3.9 The Dominant Provider shall provide Network Access at the charges, terms and conditions in the relevant Reference Offer and shall not depart there from either directly or indirectly.

KB3.10 The Dominant Provider shall comply with any direction the Director may make from time to time under this Condition.

Condition KB4 – Requirement to notify charges, terms and conditions

KB4.1 Except in so far as the Director may otherwise consent in writing, the Dominant Provider shall publish charges, terms and conditions and act in the manner set out below.

KB4.2 The Dominant Provider shall send to the Director and to every Third Party with which it has entered into an Access Contract covered by Condition KB1 a written notice of any amendment to the charges, terms and conditions on which it provides Network Access or in relation to any charges for new Network Access (an “Access Charge Change Notice”) not less than seven days before any such amendment comes into effect.

KB4.3 The Dominant Provider shall ensure that an Access Charge Change Notice includes:

(a) a description of the Network Access in question;

(b) a reference to the location in the Dominant Provider’s current Reference Offer of the terms and conditions associated with the provision of that Network Access; and

(c) the date on which or the period for which any amendments to charges terms and conditions will take effect (the “effective date”).

KB4.4 The Dominant Provider shall not apply any new charge, term or condition identified in an Access Charge Change Notice before the effective date.

KB4.5 To the extent that the Dominant Provider provides to itself Network Access that:

(i) is the same, similar or equivalent to that provided to any other Third Party; or