Annex 1

Analysis of the markets for call origination, call termination and transit services on the fixed network

Revised and updated

24 March 2006

Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

Contents

Table of contents ...... 2 Summary and conclusion ...... 5 1 Background and legal framework for market analyses...... 7 1.1 Background...... 7 1.2 Legal framework for the market analyses...... 8 1.3 General – Market Definition...... 10 1.3.1 The product market...... 10 1.3.2 The geographic market ...... 11 1.3.3 Criteria for identifying divergent relevant product markets ...... 11 1.4 Introduction to the analyses of the markets for call origination, call termination and transit services on the fixed network ...... 12 2 Overview and history ...... 13 2.1 Brief summary of developments in the retail markets for fixed telephony .. 13 2.2 Interconnection ...... 14 2.3 Change in demand for fixed telephony...... 15 2.4 Business models for fixed telephony ...... 17 3 Description and definition of the relevant product markets...... 19 3.1 Overview of the predefined product markets in the Recommendation ...... 19 3.1.1 The Recommendation’s approach to the division into relevant product markets...... 19 3.1.2 The Recommendation’s definition of Market 8 (call origination)...... 20 3.1.3 The Recommendation’s definition of Market 9 (call termination)...... 20 3.1.4 The Recommendation’s definition of Market 10 (transit services) ..... 21 3.2 NPT’s assessment of delineations between Markets 8 – 10 and other product markets...... 21 3.2.1 Assessment of the boundary between mobile telephony and fixed telephony...... 22 3.2.2 Assessment of the boundary between telephony and Internet services24 3.2.3 Assessment of the boundary between dial-up Internet and access to the Internet based on broadband/dedicated access ...... 25 3.2.4 Assessment of any boundary between internal use and external services ...... 25 3.2.5 Assessment of the boundary between Markets 8 – 10 and transmission capacity ...... 26 3.3 Assessment of delineations in Markets 8, 9 and 10...... 27 3.3.1 Assessment of the boundary separating Markets 8 – 10...... 27 3.3.2 Assessment of the definition of Market 8 (call origination)...... 28 3.3.3 Assessment of the definition of Market 9 (call termination) ...... 29 3.3.4 Assessment of the definition of Market 10 (transit) ...... 30 3.4 NPT’s assessment of definitions of Markets 8 – 10 related to special issues little discussed in the Recommendation...... 31 3.4.1 Assessment of the definitions of Markets 8 – 10 in relation to functions in telephone exchanges that are necessary for interconnection ...... 31 3.4.2 Assessment of the definitions of Markets 8 – 10 in relation to indirect interconnection and resale traffic...... 31 3.4.3 Assessment of the definitions of Markets 8 – 10 in relation to calls to value added services (VASs) ...... 32

2 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

3.4.4 Assessment of the definitions of Markets 8 – 10 in relation to calls to/from other types of network ...... 34 3.5 Assessments of the definitions of Markets 8 – 10 in relation to calls based on VoB...... 35 3.5.1 Different categories of VoB...... 35 3.5.2 VoB adapted for the residential market ...... 36 3.5.3 VoB adapted for the business market ...... 38 3.5.4 Supply-side substitution...... 39 3.5.5 Is VoB an emerging market? ...... 39 3.5.6 VoB as a basis for interconnection ...... 40 3.5.7 Conclusion in relation to VoB ...... 40 3.6 Conclusion ...... 41 4 Definition of the relevant geographic market for call origination...... 43 5 Assessment of criteria for significant market power in the market for call origination...... 44 5.1 Market share...... 44 5.2 Profitability and price developments ...... 46 5.3 Entry barriers...... 47 5.3.1 Control of infrastructure not easily duplicated ...... 47 5.3.2 Sunk costs...... 48 5.3.3 Economies of scale and scope...... 48 5.3.4 Access to financial resources...... 49 5.3.5 Access to distribution and sales channels ...... 50 5.3.6 Barriers to expansion...... 50 5.3.7 Regulatory entry barriers...... 51 5.4 Potential competition and innovation ...... 52 5.5 Provider behaviour...... 53 5.5.1 Bundling of products/product differentiation ...... 53 5.5.2 Leverage of significant market power to closely related markets ...... 54 5.6 Conditions on the demand side...... 56 5.6.1 Market power/countervailing buying power...... 56 5.6.2 Customers’ freedom of choice and possible costs of switching/lock-in effects...... 57 5.6.3 Customers’ access to information...... 57 6 Designation of providers with significant market power in the area of call origination...... 59 7 Definition of the relevant geographic markets for call termination ...... 62 8 Assessment of criteria for significant market power in the markets for termination ...... 64 8.1 General considerations on assessing criteria for significant market power and competition issues in Market 9 ...... 64 8.2 Market share...... 64 8.3 Profitability and price developments ...... 65 8.4 Entry barriers and potential competition...... 67 8.5 Conditions on the demand side...... 68 8.5.1 General considerations on countervailing buying power in Market 9. 68 8.5.2 Countervailing buying power in relation to Telenor’s call termination services...... 68 8.5.3 Countervailing buying power in relation to other call termination services...... 69

3 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

8.5.4 Conditions on the demand side – summary ...... 71 9 Designation of providers with significant market power in the area of call termination ...... 72 10 Definition of the relevant geographic market for transit services...... 75 11 Assessment of criteria for significant market power in the market for transit services...... 77 11.1 Market share...... 77 11.2 Profitability and price developments ...... 78 11.3 Entry barriers...... 79 11.3.1 Entry barriers in relation to offering conveyance of traffic from another network to a third network...... 80 11.3.2 Entry barriers to conveyance of traffic on an operator’s own network80 11.4 Potential competition and innovation ...... 81 11.5 Provider behaviour...... 82 11.5.1 Bundling of products/product differentiation ...... 82 11.5.2 Leverage of significant market power to closely related markets ...... 82 11.6 Market power/countervailing buying power...... 84 12 Designation of providers with significant market power in the area of transit services...... 86 Annex 1. Glossary………………………………………………………...….88

4 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

Summary and conclusion

This document is the Norwegian Post and Telecommunications Authority (NPT)’s updated version of the market analyses NPT circulated for national consultation on 26 July 2004 and which was revised on 15 September 2005 in connection with the notification of decisions. The document constitutes an annex to decisions concerning directives on specific obligations in the following product markets: • Call origination on the public telephone network provided at a fixed location • Call termination on individual public telephone networks provided at a fixed location • Transit services in the fixed public telephone network In this version of the market analyses, which serves as the basis for the decisions on specific obligations in the aforementioned markets, only minor changes have been made compared with the version of 15 September 2005. The product markets constitute Markets 8, 9 and 10, respectively, of ESA’s list of 18 relevant product markets for ex ante regulation. NPT has found it expedient to harmonise these analyses in a joint document in which the first three chapters are common to all of the analyses. Chapter 1 contains a description of the background and legal framework for the analyses and introduces the remaining parts of the document. Chapter 2 provides a description of the relevant product markets and related retail markets. In Chapter 3 the respective markets are delineated on the basis of ESA’s three predefined markets. On the basis of assessments of, inter alia, demand-side and supply-side substitution, NPT has concluded that there are no national circumstances warranting that relevant markets in Norway should be defined differently from the predefined markets. In Chapters 4 and 10 NPT has concluded that the geographic market for call origination and transit services is Norway. In the area of call termination, where each operator’s services constitute a separate relevant market, the geographic scope is regarded to correspond to the coverage of the individual providers’ networks, see Chapter 7. In the market for call origination, NPT has found that Telenor ASA has significant market power. Here, NPT has attached importance, inter alia, to the company’s large market share of over 90 %, high entry barriers (as a result of dependence on the access network) and that the options for end users are largely restricted to services based on call origination from Telenor. In the market for termination of voice calls, NPT has found that all operators who at the time in question have such services and have influence over their own termination charge have significant market power within their networks. NPT has found that the providers in this market are Consorte AS, Equant Norway AS, MCI WorldCom AS, NetCom AS, NextGenTel AS, Priority Telecom Norway AS / UPC Norge AS / SmartCall AS, TDC Song AS, Tele2 Norge AS, Telio AS, Telenor ASA and Ventelo Norge AS. The reason that these providers have been found to have significant market power is their 100 % market share, the absolute barriers to entry that exist and the fact that these providers have incentives to charge high prices. Apart from Telenor, however, the market power of all of these providers is counteracted to a degree by the

5 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network bargaining power of their customers. This bargaining power is deemed as being able to prevent these providers from setting extremely high prices over a longer period of time, but is not necessarily strong enough to prevent cases of smaller providers of termination services setting prices that are disproportionately high. In the market for transit services, NPT has found that Telenor ASA has significant market power. Here NPT has attached importance to the company’s large market share, which is substantially higher than 65 %. Furthermore, NPT has attached importance to the existence of high entry barriers owing to the costs connected with the connections to other operators’ networks that are necessary for providing transit services. In addition, NPT has accorded weight to Telenor’s large market share in relevant retail markets having a conserving effect in relation to the company’s market power in the area of transit services.

6 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

1 Background and legal framework for the market analyses

1. This document contains the market analyses that Norwegian Post and Telecommunications Authority (NPT) has carried out in accordance with current regulations for electronic communications for what are considered the relevant markets for: • Call origination on the public telephone network provided at a fixed location • Call termination on individual public telephone networks provided at a fixed location • Transit services in the fixed public telephone network 2. Both the product markets and the geographical markets are defined, and the relevant markets analysed. The market analyses forms the basis of the application of sector-specific remedies in the above-mentioned markets. 3. This document is NPT’s updated version of the analyses circulated for national consultation on 26 July 2004 and revised on 15 September 2005. The following operators submitted comments on the version from 2004: BaneTele, Consorte, Port It, Powertech, Smartcall, Song, TDC, Tele2, Telenor, Teletopia, and UPC. In addition, the Norwegian Competition Authority and Nortib also submitted comments. 4. On the basis of the assessments of the consultative inputs and developments of recent years, NPT revised the 2004 version. However, the changes that were made in this version had no effect on the conclusions from the consultation version. The revised version of the market analysis was included as an annex to the notification of decisions of 15 September 2005. 5. The respondents to the consultation have had none or only some relatively marginal comments on the revised market analyses. Apart from updating of market data based on statistics for the first half of 2005 and some minor editorial changes, this version of the market analyses is identical with the version from 15 September 2005. 6. The markets and the analyses of them will be subject to regular reassessments. In consequence of the growth of Voice over Broadband (VoB), NPT intends to prepare new analyses of these markets over the course of two years. This version is therefore limited in the extent to which it is forward-looking for up to about two years.

1.1 Background

7. In March 2002 the European Union (EU) adopted four new directives that are to provide the regulatory framework for electronic communication networks and electronic communication services in future. A fifth directive was also adopted in October 2002. The directives, which are relevant to the EEA, came into force with effect for Norway from 1 November 2004, from which date they were incorporated into the EEA Agreement and made applicable to the EEA. The five directives are:

7 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

• The Framework Directive - Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services; • The Access Directive - Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities; • The Authorisation Directive - Directive 2002/20/EC on the authorisation of electronic communications networks and services; • The Universal Service Directive - Directive 2002/22/EC on universal service and users’ rights relating to electronic communications networks and services; • The Privacy and Electronic Communications Directive - Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector. 8. The new regulatory framework is to lay the foundations for harmonisation of regulations in the EU/EEA, limit entry barriers and create conditions for sustainable competition for the benefit of users. 9. As described in the document “Methodology for market analysis”1 (the Methodology Document), the work on market analysis may be divided naturally into three phases: 1. Define relevant markets by defining relevant product markets and defining geographic markets. 2. Carry out market analyses of each of the relevant markets, with a view to designating any undertakings with significant market power. 3. Impose obligations on those providers identified as having significant market power. 10. The analyses contain NPT’s evaluations in Phases 1) and 2). The analyses are annexes to decisions in which NPT imposes obligations on the providers considered to have significant market power in the relevant markets.

1.2 Legal framework for the market analyses

11. In the context, inter alia, of the EU’s five directives mentioned above, the Norwegian Storting (parliament) has passed the Electronic Communications Act2, which came into force on 25 July 2003. The Act’s definition of significant market power is, in accordance with § 3-1, as follows: “A provider has significant market power when the provider individually or jointly with others has economic strength in a relevant market affording the provider the power to behave to an appreciable extent independently of competitors, customers

1 “Metode for markedsanalyse” (Methodology for Market Analysis) of 24 March 2004, prepared by NPT 2 The Electronic Communications Act, “Ekomloven”, is available [currently not in English] at http://www.lovdata.no/all/hl-20030704-083.html

8 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

and consumers. Significant market power in one market may result in a provider having significant market power in a closely related market.” 12. The term “significant market power” in the Electronic Communications Act is very close to the competition law standard “dominance”. It follows from Norway’s obligations under the EEA Agreement that identification of providers with significant market power is to be carried out in accordance with the guidelines and recommendations prepared by the Commission and the EFTA Surveillance Authority (ESA) under the new framework directive for electronic communication services: • Guidelines on market analysis and the assessment of significant market power (hereinafter referred to as “the Guidelines”) 3 • Recommendation on relevant markets (hereinafter referred to as “the Recommendation”)4 13. The ESA Guidelines and Recommendation have the same legal status in the EEA countries as the European Commission (hereinafter called the Commission) documents have in the EU countries. The documents form the basis for the work on market analyses and imposition of sector-specific obligations. 14. In accordance with the Guidelines a market analysis is to provide the basis for the assessment of relevant markets and of significant market power and the assessment is to accord with competition law methodology. The Guidelines and the Recommendation, together with the provisions of the Electronic Communications Act, particularly §§ 3-1 to 3-3, will therefore form the legal framework for the market analysis. However, the Guidelines are not exhaustive and therefore in its methodology document NPT has elaborated on the criteria for the market analysis on certain points. If the Guidelines and the Recommendation are amended, NPT will amend this document accordingly. It is the current version of the methodology document that provides the basis for the market analyses that NPT undertakes. 15. In accordance with the Electronic Communications Act, ex ante regulation of providers with significant market power is only to be used where this is necessary in order to achieve sustainable competition in the relevant or adjacent market. In the Norwegian market regulatory obligations may only be imposed on operators with significant market power in those markets in which ESA or NPT has decided that sector-specific regulation is necessary. In each of these relevant markets NPT must assess the extent to which sustainable competition exists. Sustainable competition in this context means that there is no operator in the relevant market who, alone or together with others, has significant market power. See more about this under “General – Market Definition”, section 1.3. 16. The document “Methodology for market analysis” prepared by NPT (the methodology document) is not legally binding, but expresses NPT’s understanding of the guidelines to which NPT is obliged to adhere. The market analyses will therefore be carried out in accordance with the perceptions and assessments that are expressed in the methodology document. Should there prove to be discrepancies between the methodology document and the Guidelines or the Recommendation, the methodology document will yield.

3 EFTA Surveillance Authority Guidelines 14 July 2004 4 EFTA Surveillance Authority Recommendation 14 July 2004 with Explanatory Memorandum (EU document prepared in conjunction with the Commission’s Recommendation)

9 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

17. The document “Methodology for market analysis” in no sense regulates the Norwegian Competition Authority’s assessments in accordance with the Competition Act. Even if NPT’s assessments in accordance with the methodology document will largely be based on competition law methodology, and will thus be closely aligned with ordinary competition law, NPT’s assessments will be motivated by the requirement for general ex ante regulation, whilst the competition authorities’ assessments are as a rule ex post in connection with actual cases. The Norwegian Competition Authority’s and NPT’s assessments in accordance with the two sets of rules may therefore differ even within the same or overlapping markets.

1.3 General – Market Definition

18. As stated above, in regard to the market analyses, NPT must assess whether the predefined markets suit Norwegian circumstances. A description/definition of the product market is to be given and the geographic market defined. Subsequently an assessment has to be made as to whether the market conditions are of such a nature that there is a need for sector-specific regulation.

1.3.1 The product market 19. A relevant product market comprises products or services (the terms are used interchangeably below without difference in meaning) that are sufficiently substitutable. The starting point for the definition of a relevant product market is an assessment of demand-side substitutability. However substitutability may also exist on the supply side and may thus be relevant in definition of the relevant market5. 20. Demand-side substitutability exists when two or more products in the market are, in the perception of the end user, mutually exchangeable or substitutable on the basis of characteristics, price and area of utilisation. 21. Supply-side substitutability exists when providers of other (non-substitutable) products, as a response to a marginal price change in the short term, can change their production or distribution and offer substitutable products without incurring significant additional costs or substantial risk. 22. An acknowledged method of analysing substitutability is the so-called “hypothetical monopolist test” (SSNIP)6, where one endeavours to find the best- defined market in which a hypothetical monopolist can exercise market power. The test is done on the basis of a small, but significant (in practice 5-10 %) and lasting price increase in the relevant product, based on the assumed price level in a market with effective competition. All other prices are assumed to be unchanged. Then one assesses the effect of the price increase in the relevant market and assesses the total effect on the producer’s revenues as a result of the price increase. 23. The method depends on a significant amount of data that will often be difficult to produce. The Recommendation does not make use of the SSNIP test an absolute requirement in market definition for the market analyses. Approximation methods may therefore also be used, and in this analysis NPT has not carried out a complete SSNIP test.

5 See the Guidelines, paragraph 40, and Explanatory Memorandum to the Recommendation, section 3.1. 6 Small but Significant Non-transitory Increase in Price. See the Guidelines, paragraph 41.

10 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

24. The hypothetic assessment should be supplemented by actual information on behaviour on the supply and demand sides to the extent that such information is available. On the demand side, allowance should be made, inter alia, for the end users’ access to information, switching costs and other lock-in mechanisms. On the supply side, account should be taken of the actual potential a provider has to change production as well as any regulatory conditions that prevent rapid market entry by competitors in the market.

1.3.2 The geographic market 25. Once the relevant product markets are determined, the geographic market is defined. The outer geographic borders for the relevant product market will as a rule be determined by the extent of the network and the jurisdiction of the legal regulation of the market. Whether a more detailed geographic definition of the market has to be carried out will rest on an assessment of the substitutability of the relevant products and services on the supply and demand sides, with a small but significant non- transitory increase in price as described above. 26. The relevant geographic market is that area in which the relevant products and services are provided on sufficiently similar or homogeneous competitive terms. In assessment of substitutability on the demand side one should take account of preferences and geographic purchase patterns, if such information is available. With this as the basis the markets can be defined regionally within the national frontiers, nationally or trans-nationally. NPT can only define regional or national markets. 27. Assessment of the relevant geographic market will be somewhat different according to whether the assessment is made ex post or ex ante. A definition of geographic markets ex ante must inevitably have a wider basis and a more general approach than is taken with a definition ex post. An ex post definition is based on an actual event the extent of the effects of which one can chart, whilst the forward- looking assessment (ex ante) must be based on completely different circumstances. This will therefore also characterise the scope of the assessment of the relevant geographic market. 28. In accordance with the Electronic Communications Act, § 1-3, cf. Regulation of 4 July 2003 No. 882, the Electronic Communications Act applies to Svalbard, Jan Mayen, the dependencies and Antarctica. However in regard to Svalbard, exceptions have been made for Chapter 3 (significant market power), Chapter 4 (access) and § 9- 3 (consultation procedure). However, electronic communications on Jan Mayen, the dependencies and Antarctica are assumed to have very little significance for the market analyses NPT carries out in accordance with the Electronic Communications Act.

1.3.3 Criteria for identifying divergent relevant product markets 29. It may become relevant to define markets that diverge from those markets that have previously been defined by ESA. In such cases the consultation procedure under § 9-3 of the Electronic Communications Act is to be followed. When the relevant product market is defined, the following additional criteria, in accordance with section 3.3 of the Explanatory Memorandum are to be present for the market to qualify for sector-specific ex ante regulation in the electronic communications area: 1. There are structural or regulatory entry barriers in the relevant product market.

11 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

2. The market has characteristics such that it will not sufficiently tend towards sustainable competition7. 3. Ordinary competition law does not sufficiently address the objectives behind sector-specific regulation.

1.4 Introduction to the analyses of the markets for call origination, call termination and transit services on the fixed network

30. In this document the analyses of the markets for call origination, call termination and transit services on the fixed network correspond to Markets 8, 9 and 10, respectively, in the Recommendation’s list of relevant product markets for ex ante regulation. 31. Call origination, call termination and transit services constitute the origination, termination and any intermediate conveyance connected with the relaying of calls. Markets 8, 9 and 10 are wholesale markets that primarily constitute inputs in the retail markets for fixed telephony (Markets 3-6), but also providers of mobile telephony and providers on foreign networks demand these inputs (especially call termination). 32. Since Markets 8 – 10 are closely related to those services normally referred to as interconnection, NPT has found it expedient to present the analyses of these markets in a single document. In addition to setting the agenda for the conditions for competition in the retail market, Markets 8 – 10 are key in relation to the principle of end-to-end connectivity. 33. Chapter 2 provides an overview of the demand, regulatory and operator factors related to these product markets. Markets 8 – 10 have both interfaces with one another and interfaces with many of the other predefined markets listed in the Recommendation. The definitions of the various markets have been set on the basis of substitution assessments and appear in Chapter 3. Later in the document, Markets 8, 9 and 10 are described individually with separate chapters for the geographic definitions of the product markets, the assessment of criteria for significant market power and the designation of operators with significant market power, respectively.

7 Here the Recommendation uses the term “effective competition”, which may best be translated into Norwegian as “virksom konkurranse”. The Guidelines define this as a market in which operators with significant market power are absent, cf. paragraph 19. This cannot be interpreted in an antithetical manner, i.e. the presence of a provider with significant market power will prevent the market from becoming more competitive. Proposition No. 58 (2002-2003) to the Odelsting p. 99 states: “If none of the providers has significant market power then there is assumed to be sustainable competition in the market.” While the meaning of the two terms is not exactly the same NPT still believes that they will coincide for this purpose.

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2 Overview and history

34. In paragraph 10 of the Recommendation, ESA states that the starting point for the identification and definition of relevant markets is a characterisation of retail markets over a given time horizon. When the markets involving supply to and demand from end users have been identified, they will form the background for identification of the wholesale markets, which are markets for demand for and supply of products that third parties wish to supply in the retail markets. This means that, in analysing the wholesale markets, NPT has also taken into account the associated retail markets.

2.1 Brief summary of developments in the retail markets for fixed telephony

35. The markets for fixed public telephone services were liberalised in 1998. To begin with, competition was based on carrier selection code calls in the residential market and carrier selection code calls and direct access (business customers with large traffic volumes) in the business market. Beginning 1 January 1998, Telenor was required to prepare a standard interconnection agreement and offer interconnection (call origination, call termination and transit services) on non-discriminatory terms and at cost-oriented prices. 36. In the summer of 1999, carrier pre-selection and number portability were introduced. With carrier pre-selection, Telenor’s competitors could offer all traffic as a bundled product in both the residential and business markets, while number portability helped improve the competitive conditions for competitors of Telenor offering direct access in the business market. 37. Shortly after liberalisation, many of Telenor’s competitors sought an access/subscription product in the upstream market so that they could offer a telephony product package incorporating both subscription and traffic. In the autumn of 2001 NPT ordered Telenor to offer such a product, and Telenor launched its offering starting January 2003. However, the decision was revoked by the Ministry of Transport and Communications on 10 June 2003 due to the lack of a legal basis for such an order. Telenor nevertheless chose to continue to offer Wholesale Line Rental (WLR) and today the product is commercially available to Telenor’s competitors in the downstream market. 38. In January 2004, VoB was offered to residential customers for the first time. Today, VoB is offered both by providers with and without their own broadband network. As of 1 July 2005, 106,490 households and 3,495 businesses were using VoB8, most as a replacement for PSTN/ISDN. VoB is growing rapidly, and there is reason to believe that product improvement related to service quality and security in the near future will continue to drive growth.

8 The number refers to VoB facilitating end-to-end connectivity, cf. section 3.5.1. NPT does not have an overview of how many use other forms of VoB.

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2.2 Interconnection

39. Two or more networks are often involved in conveying telephone calls. Traffic conveyed between networks is described as interconnection, while the locations where traffic is transferred from one network to another are described as points of interconnection. Interconnection can occur in a number of variants depending on which provider end users are customers of. 40. Since most end users are still connected to Telenor’s network, other providers will be dependent on having interconnection with Telenor. Most calls within the fixed network in Norway will originate and/or terminate on Telenor’s network. Most providers of a certain size therefore choose to have interconnection directly with Telenor. Telenor’s standard interconnection agreement (the Interconnection Agreement) forms the basis for this exchange of traffic. Since Telenor has direct interconnection with most major providers in the Norwegian market, many providers also use Telenor to transfer traffic to a third provider. 41. Call conveyance to, between, or from the points of interconnection is central to the wholesale markets for call origination, call termination and transit services. The same is true of the localisation of the points of interconnection and the number of interconnection areas. The number of interconnection areas in Telenor’s fixed network was reduced from 23 to 12 in 2004. This can be viewed as a continuance of earlier developments since the number of the interconnection areas was previously even higher. 42. Interconnection can be offered at several levels, typically “local”, “regional” and “national”. A regional interconnection area covers a certain number of local interconnection areas while national interconnection covers the entire country. In 2004, local and regional interconnection areas were in practice merged, so that today Telenor only offers interconnection on two levels, local and national (described in the Interconnection Agreement as within and outside the interconnection area, respectively). Most other European countries offer interconnection on three levels. 43. Moreover, in Norway there are far fewer interconnection areas relative to the country’s area compared with the equivalent in other countries. This can be illustrated by the fact that in Norway, an interconnection area covers on average a geographic area equivalent to the size of more than half of Denmark. At the same time, in Denmark there are 140 local points of interconnection. To NPT’s knowledge, most other European countries have a density of the number of such points that largely resembles the case in Denmark. NPT is not aware of any country other than Iceland that has such a low density of points of interconnection as Norway. 44. Telenor offers three basic services in the Interconnection Agreement: call origination, call termination and transit. All three services are available in two variants: within or outside the interconnection area. Call origination may be purchased by providers who use carrier pre-selection or carrier selection to retrieve traffic from Telenor’s network as a basis for offering traffic services to end users. Call termination is purchased by providers that convey traffic terminating at the end users on Telenor’s network. Transit services are purchased by providers that convey traffic to a third provider to which the provider does not have direct interconnection. The relationship between Telenor’s interconnection services and Markets 8-10 is described in further detail in section 3.3.

14 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

2.3 Change in demand for fixed telephony

45. Figur 1 and Figur 2 illustrate the change in demand for the number of connections and traffic minutes, respectively, in the retail markets for access and traffic in fixed telephony.

Figur 1 Number of connections (in thousands as of 31 Dec. 2004) PSTN, ISDN 2B+D, fixed connections in all (including ISDN 30B+D, telephone connections over cable TV systems and other connection types) 1970-2004. Yearly, percentual change in the total number of connections. Source: NPT, The Norwegian Telecom Market 2004.

14 000

12 000

10 000

8 000

6 000

Million minutes Million 4 000

2 000

0 1st half 2001 1st half 2002 1st half 2003 1st half 2004 1st half 2005

Figur 2 Voice and Internet traffic originating from a fixed telephone. Millions of minutes. Source: NPT, the Norwegian Telecom Market first half of 2005

46. Up until 1997 there was steady growth in the demand for access to fixed telephony. The demand for traffic continued to grow up until 2001. The main reason

15 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

for the difference in the development between access and traffic is the sharp increase in dial-up Internet traffic from 1998 to 2001. Furthermore, voice traffic also increased per subscriber during this period in the wake of relatively large price reductions. However, since 2001 there has been a clear decline in both voice calls and calls to ISPs. NPT believes this is mainly due to competition from the broadband and mobile markets. 47. In the 1990s access to ISDN was introduced. With ISDN the end user could use two connections simultaneously, typically both dial-up Internet and voice calls. The demand for access to ISDN grew rapidly for the first few years while the demand for PSTN declined correspondingly. In the last 4-5 years the growth in ISDN first came to halt and then began declining, largely due to the transition to the use of broadband for Internet access. 48. At the start of 2004, VoB was introduced in the residential market, while the service was introduced somewhat earlier in the business market. While VoB saw rapid growth in 2004 and the first half of 2005, it has nevertheless not prevented the overall decline in traffic from becoming increasingly deeper. 49. In the residential market the trend in number and type of connections has been as shown in Figure 3:

Coverage of fixed telephony July 2001 July 2002 July 2003 July 2004 July 2005 PSTN/ISDN 91 88 86 82 76 Vo B 0 0 0 1 5 Cable TV 1 1 1 1 1 Subscriptions per 100 households 92 89 87 84 83

Figur 3 Coverage of number of subscribers in fixed telephony, residential market, measured per 100 households. Source: NPT

50. NPT deems it likely that VoB will continue to grow relatively rapidly at the expense of PSTN/ISDN. 51. Volume changes in the wholesale markets for call origination and call termination largely equal the volume changes in the retail markets for fixed telephony traffic, since these wholesale markets constitute a derived demand for such traffic. The volume of call termination on the fixed network is also influenced by the growth of mobile telephony, which is serving to offset the reduction in demand. 52. For the wholesale market for transit services, the ratio between retail market and wholesale market is not equally clear since factors other than volume changes in the retail market have a bearing here. In this connection, it can be mentioned that Telenor’s restructuring from 23 to 12 interconnection areas in 2004 led to the enlargement of the interconnection areas and for the total transit market to become smaller because more calls than before now originate and terminate in the same interconnection area9. On the other hand, the growth of mobile telephony, with its subsequent growth of interconnection between fixed telephony and mobile telephony, is contributing to volume growth in transit services.

9 The boundaries between call origination, call termination and transit services are stated in section 3.3.1.

16 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

2.4 Business models for fixed telephony

53. As of 1 July 2005, NPT had registered approximately 60 active providers of fixed telephony. They have based their operations on one or more of the following business models: Who Business model Who offers traffic to the end user orig. A “Telenor traditional” Telenor A B “Carrier pre-selection Tele2, Ventelo, TDC Song etc., who A operator (CPSO)” purchase call origination (carrier selection or carrier pre-selection) from Telenor C “Indirect ACN, PGOne etc., who have agreements A* interconnection” with undertakings in category B D “Leased access” Ventelo, TDC Song, Tele2 etc., who D lease access circuits from Telenor E “Alternative access, UPC, Priority etc., who use their own E traditional telephony” access network F “VoB with own/leased Telenor, Lyse, NextGenTel, Catch etc. F access” offer both broadband and VoB to the same end users G “VoB without Telio, TeleVoip, who neither own nor G own/leased access” lease infrastructure

Figur 4 Overview of the various business models in fixed telephony. *In some cases operators other than Telenor (A) may provide the origination, see below. Source: NPT.

54. Business model A uses only Telenor’s network for the call origination portion of the call, while a characteristic of model B is that the service is based on the purchase of call origination from Telenor according to terms and conditions stipulated in the interconnection agreement. C is a model in which the service in the retail market is not based on an interconnection agreement with Telenor, but on an agreement with a carrier pre-selection operator, who in turn has an interconnection agreement with Telenor. As a rule, Telenor provides call origination and call termination in such cases, but B can also do this depending on the business relationship between B and C. 55. Models D and E are different from B in that the provider controls the access line and conveyance up to the point of interconnection (or possibly the entire conveyance in those cases where the called party is also on its own network). Models F and G show that VoB is offered both by operators who own/lease broadband access networks and by operators who do not have such networks. 56. In addition to these models, a business model has existed based on traffic produced by Telenor that is purchased wholesale. The product was sought, inter alia, by Viken, which launched its resale product in 2001 under the brand name KanKan. Based on information NPT has obtained from the market, this business model is in very little use today.

17 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

57. Providers in the retail markets can use several business models at the same time. We refer, for example, to the fact that starting in March 2005, Telenor has been offering VoB and that Tele2, TDC Song, Ventelo etc. have customers based on carrier pre-selection (B) and based on leasing access lines (D).

18 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

3 Description and definition of the relevant product markets

58. Call origination, call termination and transit services on the fixed network are product markets that have interfaces and a certain amount of substitutability with a number of other product markets. Defining the boundaries of the markets is therefore an important part of these analyses. 59. NPT’s boundaries are based on the guidelines given in the Recommendation and the Commission’s Explanatory Memorandum. They are reproduced in section 3.1. In section 3.2, NPT has assessed the boundaries of the markets the Recommendation lists as 8-10 against adjacent markets with a certain amount of substitutability. The detailed boundaries for Markets 8-10 are clarified in section 3.3. In section 3.4, relevant services that were not sufficiently illuminated in the Recommendation are discussed to clarify the connection between them and the respective markets for call origination, call termination and transit services on the fixed network. The relationship to VoB is assessed in particular in section 3.5.

3.1 Overview of the predefined product markets in the Recommendation

3.1.1 The Recommendation’s approach to the division into relevant product markets 60. In Chapter 4 of the Recommendation’s Explanatory Memorandum, various markets are examined to clarify the markets that are relevant for ex ante regulation. In this review the markets are divided according to whether the service is provided to end users with access to a fixed access point or independently of this. In addition, broadcasting transmission is distinguished as a third main group of services. The discussion of services provided at fixed locations is further divided into public telephone services, access to data services and leased lines (transmission capacity). Beyond that, it emphasises that the characteristics of the various retail markets are to be the basis for identifying the relevant wholesale markets. 61. Furthermore, the Recommendation describes the retail market for public telephone service as consisting of access from fixed access points to public electronic communications networks (hereinafter referred to as fixed networks), for the purpose of making and/or receiving telephone calls and related services. This service is provided through the use of various technologies, of which copper wire is the most widespread. Furthermore, according to the Recommendation, the main elements required for providing retail telephone service are call origination, call conveyance or transit and call termination. In addition to these, production includes related elements such as signalling and ancillary services needed, for example, for billing purposes. 62. According to the Recommendation, the retail market for access to data and related services at fixed locations consists of the transmission to and from the fixed location on the one hand and Internet services on the other. Here, Internet services are defined as the provision of data exchange services with the aid of end-to-end connections between the end user on the one hand and other end users and/or Internet websites on the other. Furthermore, these services can be provided alone or along with

19 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network transmission. The Internet market is considered to be characterised by such a degree of effective competition that ESA has not found grounds to subject it to ex ante regulation. 63. The Recommendation further refers to the three common forms of Internet access in the retail market: Dial-up service (narrow-band), services with wider bandwidth such as DSL and cable TV technologies (coaxial cable) and dedicated access with capacity over 2 Mbit/s. According to the Recommendation, these access methods constitute different markets, where only dial-up service is deemed to be relevant as part of the basis of the associated wholesale Markets 8 - 10. 64. The Recommendation also states that the wholesale markets for call origination, call termination and transit services are to be defined internally so that these services all together constitute a single call and that the boundaries between the three markets may vary from country to country owing to differing network topology.

3.1.2 The Recommendation’s definition of Market 8 (call origination) 65. The Recommendation bases its discussion of the wholesale market for call origination on the public telephone network on the retail markets for access and (outgoing) calls from fixed locations. It emphasises that there are at the outset several ways for these services to be provided in the retail markets. The building, buying and leasing of electronic communication networks are mentioned as examples. However, sufficiently close substitutes for the origination of telephone service are not deemed to exist so as to facilitate effective competition in this market. Against this background, this market is deemed to be relevant for ex ante regulation. 66. Beyond that, the Recommendation otherwise states that call origination (and termination) is included in calls to Internet Service Providers – ISPs, as part of the provision of dial-up Internet access. The Recommendation further states that origination of calls as part of a telephone call and origination of calls to an ISP as part of an Internet connection are services that are not very substitutable on the demand side. On the other hand, it points out that end users who call ISPs from fixed locations as part of their demand for dial-up Internet service use the same provider who supplies voice call origination. In view of this, the Recommendation concludes that the relevant market for call origination consists of both voice call origination and origination of calls to ISPs.

3.1.3 The Recommendation’s definition of Market 9 (call termination) 67. The Recommendation bases its definition of the wholesale market for call termination on the public telephone network provided at a fixed location on the fact that call termination is a necessary part of the retail market for the transmission of (integrated) telephone calls. The Recommendation points out that although it is usually possible to choose access to various levels on the network to obtain call termination, it is the lowest interconnection level that it deems relevant for defining the call termination market. The reason for this is the possibilities for substitution on the demand side between the various interconnection levels on the network (a small non-transitory price increase on a high level is assumed to lead to significantly higher demand for access at a low level). Otherwise see section 3.3.1. 68. According to the Recommendation, the reason that there are few alternatives to termination of voice calls for providers in the retail market is that in most relevant locations there is only one access line. And where more than one such line exists, it is

20 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

not possible for the calling end user’s provider to choose the access line (and provider) to be used for call termination. A provider of call termination services has thus in practice a monopoly on the termination of calls (voice) to its end users. On this basis the Recommendation concludes that each provider of voice call termination in the wholesale market represents a separate relevant market. 69. However, according to the Recommendation, the competitive situation is completely different for the termination of calls to ISPs than for the origination of calls to ISPs. In the same way as providers of telephone service in the retail market, ISPs do indeed depend on call termination services, but in contrast to providers of telephone service in the retail market, the ISPs can choose among different providers of termination services on the public telephone network provided at a fixed location, including switching between different providers. At the same time, the ISPs have an incentive to choose a provider with the lowest call termination charge. On this basis the Recommendation claims that the market for terminating calls to ISPs is characterised by sustainable competition. It therefore concludes that aside from instances where ISPs have little opportunity to choose among various providers of termination services, the termination of calls to ISPs is not a relevant market for ex ante regulation.

3.1.4 The Recommendation’s definition of Market 10 (transit services) 70. According to the Recommendation, transit of public telephone services constitutes the third main element of the wholesale market for such services, and comprises the conveyance of traffic between tandem switches on a given network, conveyance between tandem switches on different networks and simple conveyance of traffic to a third network. 71. It is further maintained that purchasing transmission capacity (leased lines) is an alternative to the purchase of transit services, but that transmission capacity is a completely different service, which is neither switched nor shared with others. However, leased lines include dedicated upwardly limited capacity that is made available to the party demanding the service. 72. The Recommendation also states that the ability on one’s own to provide conveyance of calls between origination and termination that do not start or end on the same point of interconnection, constitutes an alternative for new providers, but that this is primarily relevant where traffic over the lines in question is heavy. In other respects the Recommendation expresses a certain expectation of relatively keen future competition in this market, with the exception of certain routes with light traffic. Despite these circumstances, the Recommendation states that transit of telephone services should be included in a relevant market for ex ante regulation. 73. Transit of calls to ISPs is not discussed in the Recommendation.

3.2 NPT’s assessment of delineations between Markets 8 – 10 and other product markets

74. As stated in section 3.1.1, the Recommendation makes a primary distinction between wholesale markets based on whether inputs are used for the production of services to end users with access to fixed location, production of services to end users

21 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

with mobile access, or broadcasting. NPT believes that this is a suitable starting point for circumstances in Norway as well. 75. The Recommendation’s division between voice and data is, in NPT’s opinion, somewhat imprecise with regard to Markets 8 – 10. NPT refers in this regard to the fact that, for example, calls to a fax machine have the same character as calls to a telephone, even though the former constitutes the conveyance of data and the latter the conveyance of voice. It seems that the Recommendation primarily has the Internet, i.e. calls to ISPs, in mind in its discussion of data related to Markets 8 – 10. In these analyses, NPT will regard fax calls in the same way as voice calls. 76. In other respects there are a number of issues related to Markets 8 – 10 that are barely elucidated in the Recommendation. NPT has found it necessary to assess these issues. In this regard NPT refers especially to section 3.4.

3.2.1 Assessment of the boundary between mobile telephony and fixed telephony 77. The Recommendation distinguishes between assessments of markets for public telephone networks provided at a fixed location and public mobile telephone networks. At the outset, this implies that mobile telephony is not to be deemed part of the predefined markets for call origination, call termination and transit services on the fixed network. NPT has found grounds to assess whether market conditions in Norway warrant another delineation. 78. Increasing numbers of telephony customers appear to be abandoning access to public telephone services via the fixed network in favour of access via mobile networks. In particular, this seems to be a trend among young telephony customers in the residential market. As shown in Figur 5 below, traffic originating on the fixed network has dropped sharply in the past few years while corresponding traffic originating on mobile networks has seen a pronounced increase during the same period.

22 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

16 000 30 %

14 000 25 %

12 000

20 % 10 000

8 000 15 %

6 000 Traffic from mobile networks 10 % Millions of traffic minutes 4 000 Traffic from fixed network

Share of traffic from mobile 5 % Share of traffic from mobile telephones mobile from traffic of Share 2 000 networks

0 0 % First half of 2001First half of 2002 First half of 2003First half of 2004First half of 2005

Figur 5 Traffic from fixed line and mobile networks in millions of minutes (originating traffic) and share of traffic originated on mobile networks. Source: NPT, the Norwegian Telecom Market first half of 2005

79. The market boundaries between mobile telephony and fixed telephony (PSTN/ISDN) have become less clear in recent years. One reason for this is that the price difference has become increasingly smaller as a result of reduced mobile prices. One example of this that can be mentioned is that as of 1 September 2005, a customer with a usage pattern consisting of about three calls per day lasting all together approximately 15 minutes, will pay about the same as a user of fixed telephony. In most cases, it will pay customers who use a fixed telephone less than this to stop using it and base themselves only on using mobile phones instead. On 10 June 2004, the corresponding point of intersection was about two calls per day lasting all together 10 minutes10. The point of intersection mentioned is expected to move with increasingly higher use of fixed telephony, provided the prices for fixed telephony do not change too much. 80. Today, providers of mobile telephony seem to a certain degree to view providers of fixed telephony as competitors, and view parts of the fixed network market as a possible area for further growth. For example, part of NetCom’s expressed strategy is to compete with Telenor’s fixed telephony service. 81. Furthermore, technological developments are serving to make the boundaries between mobile telephony and fixed telephony less clear. Examples of these are the growing popularity of wireless handsets, wireless local area networks (WLANs), wireless PBX solutions and connected services (for example, Telenor’s “InTouch” and VIP Network). 82. However, most mobile users still view mobile telephony as more of a supplement than a substitute for fixed telephony. Figures from third quarter 2004

10Source:http://www.telepriser.no/ 10 June 2004 and 1 September 2005. Based on an average of the three least expensive services to which no special conditions were attached. In both cases, the assumption is a 50/50 day/night division and that 70 % of the calls are to mobile phones (no international calls).

23 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

showed that only about 15 % of end users in the residential market have only a mobile phone11. This is probably due to the fact that fixed telephony is connected with a certain location with many potential users, while mobile telephony is connected to a person. Moreover, as previously pointed out, the price difference between the two forms of access is still relatively large for most users. A survey of households conducted by NPT in third quarter 2004 showed that fully 72 % of users of fixed telephony over the age of 15 use a fixed instead of a mobile phone due to the price difference.12 83. The importance of the above-mentioned factors is so great that it is doubtful that a small but significant non-transitory price increase for fixed network access today would lead to a substantial number of phone customers replacing fixed telephony with mobile telephony. 84. An assessment of supply-side substitution points to the same conclusion. Relatively big differences still exist in the production of mobile and fixed telephony. Excluding VoB services based on the access networks of other providers, and WLR, high investment costs in access networks for fixed public telephone services represent a substantial entry barrier to mobile operators who may be considering to start offering fixed telephony. This indicates that a small but significant non-transitory price increase for fixed telephony is unlikely to prompt mobile operators to enter the market for fixed telephony by building their own alternative fixed access network. On the other hand, it is possible for mobile operators to offer access to the fixed network in the form of “hotspots” / WLAN zones. This is serving to make the assessment of supply-side substitution less plain. 85. The boundary between fixed line and mobile telephony is expected to continue to blur, in terms of price, quality, function and the manner in which services are produced. Nevertheless, NPT believes that within the period that this market analysis is meant to cover, substitutability will not be high enough for the services to be part of the same market. The main reason for this is that substitutability is considered to be low on the supply side, and that differences in functionality and prices (including price structure) are still deemed to be relatively substantial. 86. The discussion above has been prepared with the retail markets for fixed and mobile telephony as its point of departure. However, the same conditions are also considered to obtain among the related wholesale markets, which constitute derived demand for the retail markets mentioned.

3.2.2 Assessment of the boundary between telephony and Internet services 87. Internet services, i.e. the exchange of data with the aid of end-to-end connections between the end user on the one hand and other end users and/or Internet websites on the other, are not included in any of the 18 markets that are candidates for ex ante regulation. This is primarily because this market is considered to be characterised by sustainable competition. 88. In Norway, Internet service providers (ISPs) were not subject to ex ante regulation under the previous regulatory regime. Nor does NPT see any indications

11 The number was obtained from Norwegian Telecom Index (NTI), third quarter 2004. 12 The figures were obtained by TNS Gallup in third quarter 2004 on behalf of NPT.

24 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

that the competition in this market will not function well enough that ex ante regulation of the ISP business would be necessary in the future. 89. Seen from the demand side in the retail market, Internet and telephony have been viewed as relatively dissimilar services. However, the development of VoB has resulted in the Internet and telephony no longer necessarily being clearly distinct from each other. This is discussed in section 3.5. As will be seen, NPT believes that what is crucial regarding Markets 8 – 10 is whether or not VoB is included as end-to-end communication based on interconnection. 90. On this basis, Internet services are regarded to be a different market from telephony on both the retail and wholesale level (cf. derived demand). 91. However, calls from end users to ISPs (dial-up Internet) is a different service than the actual conveyance on the Internet. The relationship between calls to ISPs and the definitions of Markets 8, 9 and 10 is discussed in detail in sections 3.3.2, 3.3.3 and 3.3.4.

3.2.3 Assessment of the boundary between dial-up Internet and access to the Internet based on broadband/dedicated access 92. The Internet may be accessed via dial-up service, broadband access (xDSL/cable TV/fibre/radio) or dedicated access (leased lines). In the Recommendation, dial-up Internet is not deemed to be part of the same market as broadband services, primarily because dial-up Internet is not a substitute for end users in need of a broadband connection. 93. In NPT’s view, the conveyance of data over a dial-up Internet connection cannot be regarded as part of the same market as forms of access based on broadband and dedicated access (leased lines) in Norway, either. The reason for this is that the alternatives are based on different technologies that make the supply side substitutability relatively low. As a consequence of differences in quality, differences in pricing structure (time-charged versus a flat rate) and different availability, NPT believes that end users as a whole do not regard the substitutability as high enough for these forms of access to constitute the same market. 94. Even though NPT agrees that these services constitute different markets, NPT finds reason to present a more nuanced picture of the substitutability between these services. Many end users are assumed to have a pattern of use where bandwidth is of little importance and where the price differences between the various services are small. These end users will perceive the substitutability as high. 95. As NPT’s telecom statistics for 2003 and 2004 show, cf. the discussion in section 3.2.1, many end users are switching from dial-up Internet to broadband solutions (primarily xDSL). This means high substitutability from dial-up Internet to broadband services. Switching from broadband to dial-up is virtually unheard of. 96. Therefore, all in all, the substitutability is regarded as insufficient for dial-up Internet to be viewed as being part of the same market as Internet based on xDSL, cable TV with a broadband connection or dedicated access.

3.2.4 Assessment of any boundary between internal use and external services 97. In its market analyses, NPT assumes that all originating traffic is to be treated equally, regardless of whether the traffic elements are used internally or are offered

25 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network externally. This means that the various traffic elements (call origination, call termination and transit) are included in Markets 8, 9 and 10, respectively, regardless of whether the elements are obtained through internal production or by purchase from another provider through an interconnection agreement. 98. This approach is based on the services in the retail market consisting of the sum of call origination, call termination and transit services. Neither Telenor nor any competitive operators can provide calls in the retail market without these elements, or perhaps only call origination and termination, being included. Since call origination, call termination and transit services are inputs in the retail market, purchasing these elements constitutes the demand in the wholesale market, regardless of whether the purchasing takes place through internal production or through purchases in the wholesale market through an interconnection agreement. 99. The same conclusion does not appear as clearly in the Recommendation. However, NPT has noted that according to the Recommendation, the wholesale markets are characterised by the fact that their services are demanded by the providers in the retail market. Even though it is unclear how vertically integrated operators’ services in the retail market are to be handled in defining the related wholesale markets, it is stated that conveyance between points of interconnection on a given network is to be included as part of the transit market. This kind of transit is normally part of a separate retail business. From this statement it may be indirectly concluded that the Recommendation assumes that the transit element used in a separate retail business is included in the wholesale market for transit services. It is natural to assume that this view also applies to call origination and termination used in a separate retail business. 100. On the basis of the above-mentioned, in these analyses NPT likens the demand for call origination, call termination and transit services from a company’s own activities with demand for equivalent external services. This applies to Telenor as well as to the other vertically integrated providers. Moreover, a corresponding inclusion of demand for a company’s own services has also been an underlying principle of comparable market analyses prepared by NPT. In the markets for call termination, the inclusion of internal traffic is of little practical importance to the analysis, since every single network is defined as a separate market. Each provider thus has 100 % market share, regardless of whether or not internal call termination is counted. 101. In addition, it can be pointed out here that providers other than Telenor with access networks and their own end users do not provide call origination externally. These providers have, in practice, been exempted from the obligation to provide carrier pre-selection and carrier selection with the use of a prefix.

3.2.5 Assessment of the boundary between Markets 8 – 10 and transmission capacity 102. Markets 8 – 10 as well as the wholesale markets for transmission capacity (leased lines) consist of the conveyance of voice/data between various points on the fixed network. Unlike Markets 8 – 10, which are characterised by being elements of end-to-end connectivity, a leased line is a fixed dedicated two-way connection between two points on the network with a certain capacity available to the customer at any time. Even though there is, from a product point of view, a clear distinction, there are several aspects of the demand that indicate a certain substitutability.

26 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

103. The use of leased lines for establishing private networks, such as in-house networks that connect different terminals at a certain location and/or between locations, constitutes for many users an alternative to Markets 8 – 10 as well as fixed telephony on the retail level. Additionally, the use of leased lines for routing calls oneself between interconnection areas is an alternative to purchasing transit services primarily for providers in the retail markets for telephony. Particularly relevant here is Telenor’s emulated leased lines for interconnection, which are delivered only between points of interconnection in the fixed network. 104. In all these cases, a small but non-transitory price increase in the area of leased lines could affect a certain part of the demand in Markets 8 – 10. The same could obtain in the converse situation. However, since transmission capacity is primarily priced independently of usage, and Markets 8 – 10 are chiefly based on the extent of use, the substitutability between these services is assumed to apply only to a relatively small share of customers. 105. The substitutability is therefore not deemed sufficient so that transit services and leased lines may be deemed as constituting the same product market.

3.3 Assessment of delineations in Markets 8, 9 and 10

3.3.1 Assessment of the boundary separating Markets 8 – 10 106. NPT endorses the Recommendation’s view that Markets 8 through 10 constitute subactivities in an overall chain of communication in which the products are complementary and not substitutable. It is therefore not relevant in the Norwegian market either to consider these markets as one relevant market. It is nevertheless worth noting that many calls do not include a transit element. This is the case if the call originates and terminates within the same interconnection area, e.g. in the same local exchange. 107. With regard to the internal delineations among Markets 8, 9 and 10, NPT deems it appropriate to begin with the interconnection services provided by Telenor at any given time. NPT refers here to the fact that in the Interconnection Agreement, Telenor offers its interconnection products at both the local and national level. A price increase for “national call origination/termination” may result in increased demand for connection on a local/regional level and vice versa. There is therefore a high level of substitution on the demand side between the alternatives. 108. However, there will not be alternatives with sufficient substitution regarding the lowest possible level of interconnection, i.e. within the same interconnection area. On this basis, the boundary between the call origination and termination market and the transit market should be set at the lowest level at all times for interconnection on the fixed network, i.e. in the (local) interconnection area. The transit market, which constitutes the remaining element of the whole, thus consists of the conveyance between the interconnection areas. 109. The need to define the market at the lowest level applies regardless of whether the demand for what is referred to as call origination/termination in the Interconnection Agreement, takes place on this or at the national level. 110. These delineations imply, inter alia, that the relevant markets for call origination and termination constitute only what according to the Interconnection

27 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

Agreement is described as “call origination/termination within the interconnection area”. The conveyance taking place by “call origination/termination outside interconnection area” is deemed in this analysis to consist of both call origination/termination and transit services. The markets for call origination and termination are thus reduced in scope from what they would be if the Interconnection Agreement’s division and service descriptions were applied. Correspondingly, it follows from this that the market for transit services is more extensive than it would be if the Interconnection Agreement’s designations were applied. 111. Owing to the low density in points of interconnection (cf. section 2.2), the elements of call origination and termination constitute in Norway a relatively large share of each call, at the expense of the transit element. In addition, a relatively high percentage of individual calls in Norway will not contain a transit element. Besides, the average distance from the local exchanges to the closest point of interconnection will, as a rule, be far greater in Norway than in most other European countries. 112. The low density of interconnection points in Norway may be explained to a certain extent by the relatively low population density and by Norway’s unique topography, but also other factors such as network optimisation and fewer exchanges with major processing capacity can help to explain the low density of access points. 113. As stated in section 3.2.4, NPT assumes that internal traffic is included in the relevant markets. For a call taking place solely within Telenor’s network, the points of interconnection in the network will normally not be involved in the conveyance of the call. Nevertheless, such a call will consist of an origination and a termination element and possibly a transit element. If the call originates and terminates within the same interconnection area (same local exchange or different local exchanges within the same area), the call will consist only of an origination and a termination element. If the call originates and terminates in different interconnection areas, the call will also contain a transit element. 114. Similarly, a call that is subject to carrier selection and originates and terminates in the same interconnection area in Telenor’s network will consist only of an origination and a termination element, both supplied by Telenor13. On the other hand, if such a call originates and terminates in different interconnection areas in Telenor’s network and is carried between these interconnection areas by the pre-selected provider, the call will also contain a transit element. The origination and termination are then supplied by Telenor, while the transit is supplied by the pre-selected provider.

3.3.2 Assessment of the definition of Market 8 (call origination) 115. From the end user’s standpoint, voice call origination is perceived as an essentially different service from origination of calls to an ISP. Consequently, these services have low substitutability, since a small but non-transitory increase in the price of the telephone service is assumed to have little impact on the demand for Internet services. The same will obtain in the converse situation. Seen in isolation, this indicates that voice call origination and origination of calls to an ISP constitute two separate markets. 116. On the other hand, an assessment of substitutability on the supply side indicates that the two markets constitute the same relevant market. By and large, all

13 For practical reasons, NPT has chosen to exclude transit in the form of conveyance between points of interconnection in different networks, see more about this in section 3.3.4.

28 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

voice calls and calls to an ISP from a given end user originate on the same network for that end user. 117. In view of this, NPT shares the view of the Recommendation that voice call origination and the origination of calls to ISPs are considered to be one market.

3.3.3 Assessment of the definition of Market 9 (call termination) 118. The Recommendation concludes that each operator’s services for voice call termination on the fixed network constitute a separate relevant market. 119. NPT refers to the fact that the same market mechanisms for the termination of voice calls on mobile networks apply to the termination of voice calls on fixed networks in that the starting point is that the party making the call (the calling party) pays for the call (the Calling Party Pays principle). The definition of the market for termination on mobile networks (Market 16) is discussed in Chapter 2 of NPT’s analysis of this market. Here NPT did not find it likely that the calling party would change his behaviour in the event of a small but non-transitory increase in the call termination charge. At the same time, NPT concludes that substitutability on the supply side does not exist. 120. Similar conclusions may be drawn for Market 9, with the exception of those points on the fixed network (called parties) where large volumes of traffic terminate. For this type of called party, the market mechanism may work by enabling them to choose to connect to different providers. This is highly relevant to ISPs. 121. The claim that the market mechanism works for this market can be supported by examining more closely the payment streams connected with calls to ISPs. The prices Telenor charges for terminating calls to various ISPs connected to Telenor’s network via, for example, ISDN interface, are basically identical to the prices for voice call termination. However, a large percentage of the revenue Telenor collects from the various originating providers that demand termination of calls to ISPs connected to Telenor’s network is paid by Telenor to the respective ISPs on the basis of special agreements. The effect of this is that Telenor receives far less revenue per minute for termination to an ISP than for terminating voice calls. The ISPs will also be able to negotiate with different providers for connection to their networks, with the aim of achieving the most favourable agreement for dividing termination revenue. 122. In addition, ISPs will be able to terminate such traffic themselves, which is common in the Norwegian market. This is connected with the current interconnection regime’s widespread practice of reciprocal prices which, in practice, means that termination of calls to ISPs is relatively lucrative. By connecting with a leased line close to Telenor’s points of interconnection, an ISP may achieve relatively high revenues at relatively low cost by performing the termination itself, provided that the ISP is able to attract a lot of traffic. Some ISPs have refined this business model by purchasing call origination (and transit, if necessary), and therefore have their own customers in the retail market. 123. In view of this, NPT regards that the termination of calls to ISPs does not constitute a part of the relevant market for call termination. This conforms with the Recommendation. In what follows, termination of voice calls on fixed networks is

29 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

used as a term for the relevant market14. See further details about call termination to value added services (VAS) in section 3.4.3.

3.3.4 Assessment of the definition of Market 10 (transit) 124. The Recommendation does not contain any guidelines for whether or not to include the transit element of a call to an ISP in the relevant market for transit services. However, NPT believes that the competitive situation connected with transit services of this type is identical to the competitive situation for transit services for voice calls, and consequently NPT believes that the relevant market for transit services includes both the conveyance of voice calls and the conveyance of calls to ISPs. 125. The Recommendation points out that Market 10 includes three types of conveyance: (1) simple conveyance of traffic from one network, through another network (transit) to a third network, (2) conveyance between “tandem switches” on a single network (3) conveyance of traffic between points of interconnection on different networks. 126. Simple conveyance of traffic from one network, through another network (transit), to a third network, corresponds with what is called transit services in the Interconnection Agreement. This form of transit may also be offered by providers other than Telenor. 127. Conveyance between “tandem switches” on a given network is not treated as transit services in the Interconnection Agreement. However, NPT agrees that such conveyance is included in the relevant market for transit services, cf. discussion in sections 3.2.4 and 3.3.1. NPT finds that traffic transported between different interconnection areas makes up this form of transit. 128. Conveyance of traffic between points of interconnection on different networks, which pursuant to the Recommendation constitutes the last of the various types of transit services, is deemed to have little practical importance in the Norwegian market. One of the reasons for this is that the providers are normally co-located with Telenor. Conveyance between points of interconnection on different networks is furthermore considered an integral part of the demand for external call origination/termination, which indicates that it is hard to view conveyance between points of interconnection on different networks unbundled from call origination and termination. 129. In terms of amount, conveyance between points of interconnection on different networks is of relatively marginal importance, particularly in a situation where mutual payment for connection etc. that is necessary for such conveyance is relatively widespread. NPT has therefore decided not to include conveyance of traffic between points of interconnection on different networks in the calculation of market share in the transit market. We refer otherwise to section 3.4.1. 130. 128. In view of this, NPT agrees with the Recommendation’s definitions. The relevant market for transit services thus consists primarily of simple conveyance of traffic between two networks and conveyance between interconnection areas within a given fixed network. Conveyance between points of interconnection on different networks is of little practical importance in the Norwegian market.

14 However, calls to a fax, which in principle is a data service (cf. the introduction in section 3.2), are included in the relevant market.

30 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

3.4 NPT’s assessment of definitions of Markets 8 – 10 related to special issues little discussed in the Recommendation

3.4.1 Assessment of the definitions of Markets 8 – 10 in relation to functions in telephone exchanges that are necessary for interconnection

131. According to the Interconnection Agreement there are a number of services other than call origination, call termination and transit services that Telenor charges for. These are, inter alia, carrier pre-selection, general access in the interconnection area, primary system access (PSA), traffic capacity, transmission-related access, signalling, circuit bundle, gateway bundle, and implementation of network carrier selection codes. These services are deemed largely to constitute the necessary prerequisites for entering into an interconnection agreement with Telenor. The prices for these services are related to a small degree to traffic volume. 132. Previously, other providers in these wholesale markets took payment to a limited degree for similar services. In recent years, however, Telenor has increasingly accepted payment reciprocity for such services. 133. These types of interconnection-related services are not covered in the Recommendation. Most of these services cannot be related directly to the market for call origination, call termination or transit services. Instead, they appear to be related to Telenor’s package service for interconnection, i.e. the external service in these markets. In view of this, the revenues from these services should in principle be allocated proportionately to the respective markets when calculating market share. However, these revenues are relatively small and do not have a substantial impact on the relevant market share. A higher degree of payment reciprocity also means that the revenues are less relevant. NPT has therefore chosen to disregard these revenues when calculating market share. 134. Since these interconnection-related services will be a prerequisite for establishing the desired interconnection, they will nevertheless be considered part of the relevant markets. This means that they may also be subject to special regulation.

3.4.2 Assessment of the definitions of Markets 8 – 10 in relation to indirect interconnection and resale traffic 135. A number of providers in the retail markets for fixed telephony traffic have chosen not to sign an interconnection agreement with Telenor. Instead, they have signed an agreement with another provider, who in turn provides interconnection with Telenor and others through an interconnection agreement with Telenor. 136. The main purpose of such indirect interconnection appears to be to avoid fixed costs pertaining to connection, PSA etc. (cf. section 3.4.1) that take place by direct interconnection with Telenor. Providers of VoB and providers of circuit-switched telephony include operators that have chosen such a form of connection for all or part of their services in the retail markets. 137. Services based on indirect interconnection may have different content, all according to the relationship between the provider without an interconnection agreement with Telenor (Provider A) and the provider with an interconnection agreement with Telenor (Provider B).

31 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

138. Where Provider A’s services in the retail market are based on call origination on their own/leased network or on broadband networks, Provider A’s conveyance to Provider B will be included in the origination market. The further conveyance Provider B undertakes up to Telenor’s (or another provider’s) point of interconnection will be included in the transit market. 139. With traffic in the opposite direction, Provider B will apparently once again be responsible for transit while Provider A will be responsible for the termination to his end user. In many cases, however, the relationship between Provider A and B will not be visible to other providers. For example, Provider A will be able to use number series and provider codes originally assigned to Provider B, and there may be a joint price for terminating calls to both Provider A and B. If in reality Provider B sets the termination charge for Provider A, both B’s “transit services” and A’s “call termination” are deemed to be included together as part of B’s call termination service. On the other hand, if Provider A has influence over his own termination charge, B’s transit service will be included in the transit market and A’s call termination will be included in a separate market for call termination in A’s network. 140. The relationship between Provider A and Provider B may also be based on Provider B obtaining all of the traffic, based on own production and/or purchase of inputs, and then selling it wholesale to Provider A. In such cases, Provider A functions as a simple reseller in B’s network. Provider B’s production of the traffic elements will then be included in the respective wholesale markets for call origination, call termination and transit services. The same will be the case in the event of a resale traffic offer from Telenor corresponding to the offer on which KanKan was based, cf. section 2.4. 141. Traffic flows covered in this section complicate the calculation of market share in the respective wholesale markets, but the uncertainty factors they create have no major bearing on the assessment of significant market power since the extent of such traffic is relatively limited.

3.4.3 Assessment of the definitions of Markets 8 – 10 in relation to calls to value added services (VASs) 142. Calls to VASs, which have been assigned either an 8xx-number, 5-digit number or a number in the 1xx-series, come primarily in two variants. The first consists of traffic between end users, where the addition of value takes place through an extra processing of the call, routing and debiting. Here the addition of value takes place in the VAS provider’s own equipment, and the call is routed from there on to the receiver. Examples of this are calls to taxi companies, travel agencies, banks and some government agencies. The second variant consists of traffic between the caller and the VAS provider’s call termination equipment. This equipment is usually located on the VAS provider’s premises. Using this call termination equipment, special content services are offered and billed on the customer’s phone bill. Examples of this are chat lines and other premium rate services realised with the use of speech engines. 143. An end user will generally perceive a call to a voice-based VAS as the same service as an ordinary voice call. Nearly any service that is currently realised using various VAS numbers can also be realised using ordinary geographic (or mobile) numbers. For example, a taxi dispatcher will just as easily be able to operate with a geographic number as with a 5-digit number. Besides, the end user will normally use the same provider for calls to a geographic number as for calls to a VAS. There is

32 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

therefore a high degree of substitutability between ordinary and value added voice services. 144. For a number of VASs, payment is also made for the content of the service (premium rate). Such services may have a substantially higher rate than ordinary voice calls and are thus less substitutable with such calls. For premium rate services, however, the end user will normally also use the same provider as for other calls. 145. VASs are usually realised using so-called IN (intelligent network) equipment. The IN equipment may be integrated into a network operator’s network (for example, with Telenor) or may be connected to the network using Signalling System 7 (SS7) or other type of interface. Most VAS providers are providers that also produce ordinary voice services and have entered into a standard interconnection agreement with Telenor. There are also pure-play VAS providers that are usually connected to Telenor’s network pursuant to a so-called VAS agreement. Such a pure-play VAS provider will also be able to connect to the networks of other providers. 146. Calls to VASs will, technically speaking, be originated in the same way as ordinary voice calls. With a few exceptions, calls to VAS numbers are also included in carrier pre-selection, and when carrier pre-selection is used, Telenor will not see the difference between a call to a VAS and an ordinary voice call. Both types of call will be routed and settled in the same manner. On this basis and the high degree of substitutability between ordinary voice and most VAS calls, NPT believes that the origination of calls from fixed networks to VASs should be included in Market 8. 147. Calls to VASs can also contain one or more transit elements. For example, a call from an end user on Telenor’s fixed network that is routed to a VAS provider connected to a point on Telenor’s fixed network will contain an origination element and a transit element. Likewise, a call from, for example, NetCom’s network to a VAS provider in Tele2’s network (typically Tele2 itself) will usually be conveyed via Telenor’s network if NetCom and Tele2 do not have direct interconnection. NPT believes that the competitive situation relating to transit services for VAS traffic is identical with the competitive situation for transit services for voice calls. Consequently, NPT believes that the relevant market for transit services also includes the conveyance of calls to VASs. 148. As mentioned, a VAS call can be terminated in two different ways. In the first instance, the call will, after the value added service is provided, be routed from the VAS provider’s IN equipment to the recipient. This portion of the call will technically proceed in the same way as with termination of an ordinary voice call. If this portion of the call involves the conveyance between two or more providers’ networks, routing and settlement will take place in the same way as with an ordinary voice call. This type of termination of VAS calls may thus contain both a transit element or elements and a termination element, which in NPT’s opinion will be part of markets 10 and 9, respectively, assuming that the termination takes place on a fixed network. 149. In the second instance of termination of VAS calls, after the value added service is provided, the call will terminate in equipment on the VAS provider’s premises, which is normally co-located with the IN equipment. Such call termination will have much in common with call termination to an ISP. In the same manner as for ISPs, a VAS provider will be able to connect to the networks of different providers, or be responsible itself for call termination through an ordinary interconnection agreement with Telenor (or others). On this basis, NPT believes that termination of

33 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

VAS calls in equipment located at the VAS provider’s premises is not included in Market 9. 150. In many cases, a VAS call will take place exclusively within Telenor’s fixed network, typically in those instances when the call originates from an end user who uses Telenor for his traffic, Telenor is responsible for the VAS production and call termination takes place to an end user connected to Telenor’s network. In such cases, a call will contain an origination element and a transit element within Telenor’s network up to Telenor’s IN equipment. They will be included in Markets 8 and 10, respectively. After the value added service is provided the call will consist of a transit element and a termination element in Telenor’s network. They will be included in Markets 10 and 9, respectively. 151. In NPT’s opinion the actual VAS production is not a part of the relevant markets that are discussed in this analysis. In the first place, VAS production will be a service provided from the VAS provider to an end user (for example a content provider for a premium rate service or a taxi dispatcher with a 5-digit number) and therefore not part of a wholesale market. Second, there is in NPT’s assessment a high degree of competition among VAS providers in the Norwegian market. There are a large number of such providers, and they can freely choose to establish themselves with access to Telenor’s network, to the networks of other established providers or on the basis of their own network. NPT has not found grounds to define a separate relevant market for VASs.

3.4.4 Assessment of the definitions of Markets 8 – 10 in relation to calls to/from other types of network 152. For calls to/from other types of network, such as mobile networks and foreign networks, the originating segment will either be a part of Market 8 (for calls to other types of network) and the termination will not be part of Market 9, or the termination will take place in Market 9 (for calls from other types of network) and the origination will take place outside of Market 8. 153. The conveyance from the originating segment on the fixed network to the mobile network and from the mobile network to the terminating segment on the fixed network will be included as part of the transit market. Many providers of telephone services on mobile networks will, for example, use Telenor for transiting traffic to and from the mobile networks. 154. Traffic to and from abroad will be conveyed through a specific point on the network (international exchange). The domestic conveyance of traffic to and from this point will be considered part of the transit market (Market 10) in line with analogous other transit services between interconnection areas. In principle, the conveyance from the international exchange to the corresponding point in another country is also to be regarded as a transit service, but this is not included in the national transit market given the way in which this is geographically defined, cf. Chapter 10.

34 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

3.5 Assessments of the definitions of Markets 8 – 10 in relation to calls based on VoB

155. On the basis of the increasing use of VoB, NPT has found it necessary to assess whether VoB should be included in Markets 8-1015. 156. VoB means voice transmission using Internet Protocol (IP). VoB is also often referred to as IP telephony, VoIP (Voice over IP), VoPI (Voice over Public Internet), and VoBB (another abbreviation for Voice over Broadband). In these analyses, the term VoB will be used.

3.5.1 Different categories of VoB 157. NPT has found it appropriate to divide VoB into three main categories. • VoB not adapted for any-to-any connectivity • VoB partly adapted for any-to-any connectivity • VoB adapted for any-to-any connectivity

VoB not adapted for any-to-any connectivity 158. Typically, this is so-called peer-to-peer-based VoB, i.e. solutions where voice communication (generally) takes place via suitable software in PCs equipped with headphones/speakers and microphone, so that the user can talk to other users with similar software and equipment over the Internet. Use of the service is generally free, but it cannot be used to call or receive calls from the PSTN/ISDN network. 159. Since it is possible to communicate only with a limited user group in this manner, it is not likely that a price increase in fixed telephony will lead to a large number of end users switching to VoB of this category. There is reason to believe that such VoB solutions are mainly used as a supplement to traditional fixed telephony, and not as a substitute. However, the degree of substitutability could be larger with respect to international telephone calls. For example, it is conceivable that some end users have little need to reach and be reached by all telephone numbers abroad via their fixed telephone, and that a solution that makes it possible to communicate with a closed group of users (without use of number) is satisfactory. However, it is considered doubtful that such use of VoB will result in many residential customers cancelling their subscriptions for traditional fixed telephones. Thus, VoB of this type is not regarded to be a real substitute for traditional fixed telephony.

VoB partly adapted for any-to-any connectivity 160. While VoB partly adapted for any-to-any connectivity will typically be peer- to-peer-based VoB, the end user also has the possibility either to call telephones in the PSTN/ISDN network, or to receive calls from telephones connected to such networks. However, the solution does not permit calling out or receiving calls from the PSTN/ISDN network and therefore does not completely support any-to-any connectivity. The assessment is therefore similar to the one for VoB not adapted for

15 As a matter of form, NPT will point out that the question of whether a VoB solution can be considered a substitute for traditional fixed telephony does not have a bearing on the question of whether a VoB solution can be considered a public telephone service. The latter question depends solely on whether the service that is assessed has the type of characteristics by which it falls within the definition of public telephone services, and not whether the service is substitutable to a sufficient degree.

35 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

any-to-any connectivity. The limitation probably means that only a minority will regard such a solution as a satisfactory substitute for traditional fixed telephony, and this form of VoB will thus also mainly be a supplement.

VoB adapted for any-to-any connectivity 161. VoB in this category normally has an interconnection interface for the PSTN/ISDN network and uses telephone numbers according to the numbering plan for the telephone service to set up a connection between users. Providers of such VoB supply either both broadband connection and VoB to the end user, or offer only VoB based on another provider’s broadband access. 162. The functionality of this form of VoB is largely comparable to normal PSTN/ISDN telephony. Most end users using this form of VoB will do this as a substitute for traditional fixed telephony. This suggests that the services can be deemed as being part of the same relevant market. 163. However, many VoB solutions will have unsatisfactory quality during periods where the broadband access that is utilised is burdened with a lot of traffic. Furthermore, the possibility of correct routing and localisation of calls to emergency services is problematic with nomadic use. VoB may also have more security problems than traditional fixed telephony. Besides, the product is relatively new in the market, which may limit the number of people willing to replace their traditional fixed telephone with a VoB solution. 164. Different price models are in use in the market today. Some undertakings operate without a fixed monthly charge, but charge for calls; others have a fixed monthly charge and free calls. A common denominator of all price models is that the prices are substantially lower than for ordinary PSTN/ISDN telephony. For end users who are considering replacing their fixed telephone with VoB, this may be a factor outweighing any inconveniences relating to quality differences. Furthermore, in recent months the market operators have been working to fix the problems relating to quality, routing of calls to emergency services and security, giving reason to believe that these factors will have less bearing on how the demand side will assess switching to VoB in the future. 165. In the following, NPT will assess whether VoB adapted for any-to-any connectivity is sufficiently substitutable with traditional fixed telephony for it to be included in Markets 8-10.

3.5.2 VoB adapted for the residential market 166. The first residential VoB service adapted for any-to-any connectivity was launched in the first quarter of 2004. NPT’s statistics for 2004 show that 47,327 residential customers had begun using VoB as of 31 December 2004, most as a replacement for PSTN/ISDN. None of the initial providers of VoB had an existing customer base when they launched VoB in the market. Moreover, these operators did not spend much money on marketing. Taking this into consideration, the number of residential customers switching to VoB in 2004 was not insignificant. The fact that nearly 50,000 residential customers replaced their fixed telephones with VoB during the first year this service was available may indicate that the services are to be regarded as substitutable.

36 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

167. The pace of growth for VoB in the residential markets quickened during the first half of 2005, and 106,490 residential customers had adopted VoB by 1 July 2005. This pace is expected to speed up even further in the years ahead. 168. The largest providers of broadband access appear to be marketing VoB increasingly aggressively, which is expected to boost the growth in the number of VoB customers in 2006 and 2007. 169. The spread of VoB depends on the availability of broadband. NPT’s statistics for the first half of 2005 show that 37 % of Norwegian households had broadband access on 1 July 2005. The comparable figure at the end of 2004 was 30 %, while just 18 % had such access at the start of 2004. The rapid increase in the availability of broadband in the residential market is expected to continue. Furthermore, in the near term the capacity for “triple-play” solutions is expected to take on greater importance. Such solutions involve offering Internet access, VoB and TV/video on demand in a single package, where as a rule it would be the most economical for the customer to choose all three products together. This trend is expected to increase the spread of VoB. 170. VoB normally permits nomadic use, i.e. a broadband telephone or adaptor for broadband telephone can be moved and used from addresses other than where the user has his primary connection to the Internet. This distinguishes VoB from traditional fixed telephony. However, several providers of VoB do not market the nomadic use option, inter alia due to problems relating to caller location information during emergency calls. Some providers have also blocked nomadic use. NPT finds that the extent of nomadic use is unlikely to become large enough in the near future to indicate that the services are not substitutable. 171. Those who want to replace traditional fixed telephony with VoB can as a rule choose to keep their old phone. The equipment they need, such as an adaptor should they wish to keep their PSTN/ISDN phone, is usually included in the start-up package from the provider. Furthermore, it is possible to port the existing geographic phone number from a provider of PSTN/ISDN to a provider of VoB. This option is much used by VoB providers, who also market VoB as a service that completely replaces ordinary fixed telephony. For residential customers, the cost of switching to VoB will normally be viewed as relatively small. 172. 169. In April 2005, TNS Gallup surveyed users of VoB for NPT. The results of the survey show, inter alia, that 89 % had a fixed telephone prior to getting VoB. Of these, 89 % had cancelled their fixed telephone when they installed VoB. Furthermore, the survey showed that 81 % of the customers had ported their old geographic number and use this number for their VoB service. The majority also appear to have kept their old phone, with 81 % responding that they use an ordinary phone with an adaptor. These figures show that majority of customers install VoB as a replacement for PSTN/ISDN, and the services are therefore substitutable. 173. Furthermore, the survey shows that end users are relatively satisfied with the VoB service and the supplier of the service. 82 % said that they would recommend VoB to others. Furthermore, 28 % said that they were very satisfied with their supplier, 48 % pretty satisfied, while just 4 % said that they were very unsatisfied with their supplier. On the whole, customers are the least satisfied with customer support. The relatively high rate of customer satisfaction indicates favourable conditions for further growth in the number of VoB customers.

37 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

174. The price level of VoB is substantially lower than for PSTN/ISDN telephony, and the survey done by TNS Gallup also shows that lower price is clearly the most important reason why customers are switching to VoB. 53 % said that they ordered VoB because it was cheaper than their old telephone service. The fact that Telenor, the biggest provider of PSTN/ISDN by far, nevertheless decided to launch a VoB service at a substantially lower price can therefore be viewed as a strong indicator that Telenor assumes that PSTN/ISDN and VoB are largely perceived as substitutable products by the demand side in the market. 175. On this basis, NPT finds that VoB can be deemed substitutable with fixed telephony in the residential market.

3.5.3 VoB adapted for the business market 176. According to NPT’s statistics for the first half of 2005, 3,495 businesses had begun using VoB as of 1 July 2005. This is a sharp increase from the beginning of the year, when the comparable figure was 530. The increase notwithstanding, the numbers indicate relatively low use of VoB among businesses at this time. 177. Many businesses have higher quality standards than residential customers for phone services. This applies both to voice quality and availability/up time of the service. Business customers’ broadband accesses are often used by several users simultaneously, and for several services at once. This can create capacity problems and lead to deterioration of quality or connection breaks. 178. Furthermore, businesses are generally more concerned than most residential customers about the security aspects of their telephony solution. Because of risks relating to virus attacks, spam and wiretapping, demand for VoB in the business market has been limited so far. 179. To reduce the risk of quality deterioration and increase VoB security, it is NPT’s impression that many businesses are finding it necessary to increase broadband access capacity and/or invest in solutions facilitating the prioritisation of the voice traffic conveyed via the broadband access (so-called Quality of Service – QoS). This increases the cost of switching to a VoB solution and is an important reason why relatively few businesses so far have replaced PSTN/ISDN with VoB. 180. Providers of this form of telephone service are, however, working continually to improve the quality and security of VoB. It is NPT’s impression that the threshold for adopting VoB in the business market is consequently becoming increasingly lower. 181. For most businesses, a switch to VoB will provide more efficient work processes, lower operating costs relating to the telephony solution and lower use costs. All in all, the potential savings for switching to VoB will probably be larger for businesses than for most residential customers. 182. As a rule, the process of deciding to switch to VoB will be more extensive and time-consuming for businesses than for residential customers since businesses often have larger and more long-term investments than residential customers in relation to PSTN/ISDN solutions. On the other hand, the skills to assess new technology are often more widely available in businesses, indicating that once the “childhood diseases” relating to VoB have been cleared out of the way, growth could be just as fast in the business market as it is in the residential market.

38 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

183. Furthermore, many businesses are already using IP-based solutions in their internal networks. This could act as a driving force in the business market, prompting more businesses to begin using VoB as external voice telephony. 184. Telenor relaunched its VoB service in the business market in December 2004. This will likely lead to greater interest, spurring more businesses to replace PSTN/ISDN solutions with VoB. 185. On this basis, NPT finds that VoB can be deemed substitutable with fixed telephony in the business market, too.

3.5.4 Supply-side substitution 186. It must also be assessed whether VoB is substitutable on the supply side in relation to telephony over the PSTN/ISDN network. The existing wholesale products, Wholesale Line Rental and carrier pre-selection, imply that providers who wish to offer phone service via the PSTN/ISDN network do not need to make large investments in infrastructure (access network or trunk network). Such a provider mainly has to have an administrative support system to handle a customer base and establish direct or indirect interconnection with other providers. The same will be necessary for a provider of VoB. It will generally not be a big problem or be very costly for a provider of VoB to supply telephone service via the PSTN/ISDN network as well. 187. VoB can be network-independent in the sense that the service can be provided via broadband supplied by other providers. Providers who wish to supply VoB must have a technical service platform consisting of network components (routers, gateways etc.) included in the production of VoB, and they must sign an agreement on direct or indirect interconnection. Beyond this, such providers must primarily have administrative support systems capable of handling a customer base. It will therefore be possible for a provider of telephone services via the PSTN/ISDN network to also supply VoB without requiring a large investment. This is supported by the fact that the two largest providers of traditional fixed network telephony in the Norwegian market, Telenor and Tele 2, have in the space of a short period established VoB services. 188. This means that a small but significant non-transitory price change can get providers that either supply only VoB or only PSTN/ISDN telephony to supply both forms of telephone service. NPT therefore finds that VoB and telephony in the PSTN/ISDN network are substitutable, seen also from the supply side.

3.5.5 Is VoB an emerging market? 189. NPT has furthermore assessed whether VoB must be deemed an emerging market. The term emerging markets was introduced in Recital 27 of the Framework Directive, which states that even though a de facto market leader in an emerging market is likely to have a substantial market share, it should not be subjected to inappropriate obligations. 190. NPT’s remedies document establishes that the three cumulative criteria for sector-specific regulation also apply to emerging markets. An emerging market must thus be different from the markets already identified in the Recommendation, and this must be based on assessments of demand- and supply-side substitution. 191. The market for VoB is not a market where there are grounds to regulate it in a substantially different manner than the PSTN/ISDN market. In NPT’s view, the main

39 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network difference between VoB and PSTN/ISDN is its technological production platform. It is the services produced via this technological platform that, if applicable, will be regarded as being emerging markets. Fixed telephony with appurtenant additional services is a product that has existed for a long time. The fact that the service is now offered via another technological production platform in addition to the traditional one does not, however, make the phone service a “new” service. Thus, VoB cannot be seen as a kind of emerging market that needs to be kept outside the markets for fixed telephony.

3.5.6 VoB as a basis for interconnection 192. Providers of VoB have established interconnection with Telenor and other national and international networks to achieve the capability of any-to-any connectivity. Some providers of VoB have established direct interconnection with Telenor, while others have signed an agreement with another provider who already has established interconnection with Telenor. In the view of Telenor (or other national providers) a call coming from or going to the relevant provider of VoB will not be different from other interconnection traffic, either technically or for settlement purposes. This traffic will therefore be included in the traffic that Telenor reports to NPT as its interconnection traffic, for example. 193. A call originating from a provider of VoB (Provider A), routed (in transit) via another provider with an interconnection agreement with Telenor (Provider B) and then terminated on Telenor’s network, will, like other calls, consist of call origination, transit and call termination. In this example, the origination will be from the end user’s broadband access to the point of interconnection between Provider A and Provider B, the transit service will be the conveyance that Provider B does from Provider A to Telenor, while the termination will be the conveyance on Telenor’s network (assuming that Provider B is connecting to the lowest point of interconnection on Telenor’s network). Similarly, a call in the opposite direction consists of an origination on Telenor’s network, transit by Provider B and termination by Provider A, provided that Provider A has influence over its own termination charge (see section 3.4.2). 194. Given the fact that it will be technically possible for an end user to connect to a broadband telephone service from any broadband access, providers of such services may, in principle, have the entire Internet as their “access network”. This means a call origination or termination with such providers may involve conveyance over very long distances. At the same time, such providers will assumedly only establish a single physical point of interconnection with other networks, in any case in a start-up phase. As NPT sees it, the portion of the call conveyed on these providers’ “networks” will only comprise call origination and termination, and not transit. A call between two end users who are both connected to the same provider of VoB will in that case consist of an origination and a termination.

3.5.7 Conclusion in relation to VoB 195. NPT finds that traffic with a basis in VoB adapted for any-to-any connectivity is included in Markets 8-10. Henceforth in the analyses the term VoB will be used to mean VoB adapted for any-to-any connectivity.

40 Analysis of the markets for call origination, call termination and transit services on the fixed public telephone network

3.6 Conclusion

196. NPT has, in view of Norwegian conditions, found that the market definitions appearing in the Recommendation for Markets 8-10 also fit the Norwegian markets. 197. NPT likens the demand for call origination, call termination and transit services from a company’s own activities with demand for equivalent external services. In the markets for call termination, the inclusion of internal traffic is of little practical importance to the analysis. 198. In these analyses, NPT will regard fax calls in the same way as voice calls. 199. Interconnection-related services are considered part of Markets 8-10. 200. Traffic with a basis in VoB adapted for any-to-any connectivity is included in Markets 8-10. 201. NPT will use the following product definitions: 202. The product market for call origination (Market 8) consists of the conveyance of all types of calls (voice calls to fixed and mobile networks and to abroad, calls to ISPs and calls to VASs) from an end user who is connected to a fixed electronic communications network to the lowest point for the exchange of interconnection traffic. For calls taking place solely within a single provider’s network, the originating part of the call within an interconnection area will be included in Market 816. 203. The product market for call termination (Market 9) consists of the conveyance of voice calls from the lowest point for the exchange of interconnection traffic to an end user who is connected to a fixed electronic communications network. For calls taking place solely within a single provider’s network, the terminating part of the call within an interconnection area will be included in Market 9. However, this is of little practical importance for the analysis. Termination of voice calls by operators offering such a service on their own network and who have influence over their own termination charge, constitutes separate markets. 204. The product market for transit services (Market 10) consists of conveyance of all types of calls (voice calls to and from fixed and mobile networks and to and from abroad, calls to ISPs and calls to VASs) from another network to a third network and conveyance of all types of calls between interconnection areas on an operator’s own network. Conveyance of calls between points of interconnection on different networks is deemed to have little practical importance in the Norwegian market. 205. The following services17 are not included in the markets: • Mobile telephony • Internet services • Access to the Internet based on broadband or dedicated access • Leased lines • VASs

16 With conveyance of calls on an operator’s own network, origination can end at a lower level than the point of interconnection in the network, e.g. if both the calling and called party are connected to the same local exchange. 17 Traffic to mobile networks, ISPs and VASs is included in Markets 8 and 10 as specified above.

41 Analysis of the market for call origination on the public telephone network provided at a fixed location

I. Analysis of the market for call origination on the public telephone network provided at a fixed location (Market 8) Analysis of the market for call origination on the public telephone network provided at a fixed location

4 Definition of the relevant geographic market for call origination

206. In accordance with the Guidelines, paragraph 57, the geographic market may be defined as that area in which the relevant product is offered on approximately similar and sufficiently homogeneous conditions of competition. The degree of substitutability both on the supply and the demand side may be taken into consideration in the assessment of the geographic market and, as a part of such a substitutability assessment on the demand side, preferences and geographic purchase patterns should be taken into account. However, the Guidelines, paragraph 60, point out that geographic markets in the electronic communication sector have traditionally been determined by reference to the relevant network’s area of coverage as well as the effective boundaries (jurisdiction) of the legal regulation of the market. 207. Further reference to Norway as a jurisdiction should be taken to mean mainland Norway/Norwegian land territory, cf. the description of the applicability of the Electronic Communications Act in section 1.3. 208. To originate calls at a wholesale level, there is, at the outset, an assumption that an undertaking has at its disposal the physical access to a fixed electronic communications network. 209. Telenor has a nationwide telephony network and offers call origination throughout the country based on this network. The price Telenor charges for local call origination is the same in all interconnection areas. Furthermore, the price for Telenor’s call origination outside interconnection area18 product does not depend on where the relevant provider is connected and where in the country the call origination takes place from. In other words, geographic location is not a criterion used by Telenor to differentiate prices in the market. This gives a strong indication that the geographic market for call origination should cover the entire country. Furthermore, VoB can be offered in most parts of the country, a factor that also suggests that the geographic market is the entire country. 210. Alternative providers with their own access network (e.g. cable TV companies and local/regional broadband operators) offer the relevant product in geographically limited areas since they do not have nationwide networks. This could be an indication that local/regional geographic markets should be defined. However, the number of end users using alternative providers of access at the local level is limited at this time. For this reason, this factor is not weighty enough to provide grounds for a more narrow definition of the geographic market for call origination. 211. On this basis, the geographic market for call origination is deemed to be the entire country. NPT has attached decisive importance to the fact that the relevant product is offered by Telenor at equal prices and terms throughout the country.

18 Based on the definitions of the product markets in Chapter 3, call origination outside interconnection area is a bundle consisting of call origination and transit.

43 Analysis of the market for call origination on the public telephone network provided at a fixed location

5 Assessment of criteria for significant market power in the market for call origination

5.1 Market share19

212. Assessment of market share is a natural starting point for analyses of significant market power (dominance), cf. the Guidelines, paragraph 76. A provider’s market share should exceed 40 % before this factor indicates significant market power. If the market share is over 50 %, it would be exceptional were the provider not to be considered to have significant market power. As a rule providers with less than 25 % market share are not considered to have significant market power. 213. As stated in section 3.2.4, call origination on an operator’s own network is included in the origination market on an equal footing with external call origination services. Because there is little pricing of internal call origination services, calculation of market share in the call origination market based on revenues is therefore inappropriate. 214. Some of Telenor’s competitors offer some of their traffic services in the retail market based partly on purchase of call origination/carrier pre-selection from Telenor and partly on call origination on their own network. NPT does not have an accurate overview of the breakdown for these two variations of services from these providers. As stated in section 3.4.1, although a proportional share of the various connection services etc. is also included in the call origination market this has not been taken into consideration in calculating market share. These factors imply a certain amount of uncertainty regarding estimated market share. However, NPT believes this uncertainty is of little significance in assessing whether or not Telenor has significant market power. 215. From the first half of 2002 to the first half of 2005, Telenor’s market share in retail market for fixed telephony developed as shown in Figur 6.

19 Cf. the Guidelines, paragraphs 76 and 77.

44 Analysis of the market for call origination on the public telephone network provided at a fixed location

100 % 90 % 80 % 70 % 60 % 50 % 40 % 1st half 2002 1st half 2003 30 % 20 % 1st half 2004 1st half 2005 10 % 0 % Traffic minutes Traffic revenue Total revenue

Figur 6 Telenor’s market share in the retail market for traffic on the fixed network, measured by traffic and revenues. Source: NPT, the Norwegian Telecom Market first half of 2005

216. As can be seen, Telenor’s market share in the retail markets for traffic was slightly reduced during the period, though it still constitutes about 65 % of the total market. In addition to traffic, total revenues also include connection (subscription) and are in this context of lesser interest. 217. Both Telenor’s traffic and most of the traffic from the largest competitors, (Tele2, TDC Song and Ventelo) are based on Telenor’s call origination service. A large part of the remaining services in the market for calls is also based on Telenor’s call origination service. In the first consultation on the analyses NPT assumed that the share of traffic minutes originated on the fixed network by Telenor in 2003 was between 95 % and 99 %. NPT believes this share in traditional fixed telephony traffic was about the same in 2004. Nor in 2005 has Telenor’s market share in origination of PSTN/ISDN changed. 218. VoB services were very marginal in 2003, but grew rapidly in 2004 thanks, among others, to Telio’s services. In consequence of this NPT estimated that Telenor’s market share at the end of 2004 had sunk to about 93 % - 97 %. The further growth in VoB in the first half of 2005 has probably led to further reduction of Telenor’s market share, but not more than that NPT estimates Telenor’s market share is still over 90 %. 219. The growth in VoB in 2005 and the expected future growth in VoB may lead to an increasingly lower market share for Telenor in call origination. However, this reduction could be outweighed by Telenor’s VoB service. Despite the likely decline in Telenor’s market share during the period this market analysis is meant to cover, NPT finds it improbable that developments in VoB will lower Telenor’s market share to under 50 % by the end of this period. Telenor’s high market share therefore clearly indicates that the company has significant market power. 220. However, market share alone is insufficient to determine whether a provider has significant market power, but must be viewed in context with the other relevant assessment criteria, cf. the Guidelines, paragraph 79.

45 Analysis of the market for call origination on the public telephone network provided at a fixed location

5.2 Profitability and price developments

221. If over a period of time an operator operates with a price that is substantially higher than the underlying costs and thereby achieves high profitability (compared with alternative investments), this may be an indicator of significant market power. 222. However, allowance must be made for the possibility that high profitability over a given period of time may be the result of other factors than market power, for example the benefits of efficiencies, innovation or accounting write-offs that do not necessarily correspond to the actual value reduction in invested capital. 223. Similarly, low profitability is not necessarily an argument against the operator being assessed as having significant market power, but may be a result of inefficient production. 224. The development of prices over time may likewise at the outset indicate something about the degree of competition, possibly the degree of potential competition, and can thereby provide a pointer to whether a provider has market power. 225. The external call origination services from Telenor have been subject to the cost orientation obligation. Services that the company uses as inputs in its own services in the retail market are not priced, nor is it possible to determine the profitability of these services. The historical profitability of Telenor’s call origination services thus provides no indication of the company’s market power in this market. 226. The price developments for Telenor’s external call origination services have been as shown in Figur 7 (cf. rates for call origination within a local interconnection area).

0,140 0,120 Price per call Price per minute daytime Price per minute evening 0,100 0,080 0,060 0,040 0,020 0,000

9 9 0 0 1 2 5 9 0 .98 i.00 .0 i. .01 i.0 .02 .03 i.03 .04 n n.9 p a p n a n n.0 ja ja jan.0 ep jan.01 jan.02 ja ja ja mai.98sep.98 mai.99sep. ma s ma se m se m sep.03 mai.04sep.04 mai.05 Figur 7 Price developments in Telenor’s call origination (and termination) service within a local interconnection area measured in NOK. Source: NPT.

227. As can be seen by the figure, Telenor’s call origination service within a local interconnection area has two rate elements, fixed (per call) and variable (per minute). The rate per minute is higher during the day (peak) than at night/weekend (off-peak). From January 1998 to August 1999 the rates for all these elements fell and were then stable until 1 October 2004, when Telenor reduced its minute rate by 0.3 øre both day and night, equivalent to about 7 % and 10 %, respectively. Several of the rate reductions came as the result of NPT’s monitoring of interconnection prices. At the outset this could indicate that Telenor could have had the opportunity to maintain a

46 Analysis of the market for call origination on the public telephone network provided at a fixed location

relatively high rate that could provide correspondingly high profitability with no monitoring of prices. As of 1 February 2006 Telenor’s charges for origination within a local interconnection area are 5.4 øre per call, 3.8 øre per minute peak and 2.6 øre per minute off-peak, respectively (all prices unchanged since 1 October 2004). 228. In recent years, Telenor’s regulatory accounts have shown that the return on interconnection products overall has been in accordance with the cost orientation obligation. 229. The strict practising of cost orientation means that historic price developments and profitability are not very relevant indicators for whether or not Telenor has significant market power.

5.3 Entry barriers20

230. Potential competition from new operators will normally affect a dominant operator’s behaviour in the market, including pricing. Various forms of entry barriers may, however, weaken or remove the basis for potential competition. Possible entry barriers related to this relevant market are discussed below.21

5.3.1 Control of infrastructure not easily duplicated22 231. If an operator controls infrastructure that is difficult to duplicate, and this infrastructure represents an important input in the relevant market, this could represent a substantial entry barrier for potential competitors. 232. Without taking a view on whether the relevant infrastructure in this market may be seen as an “essential facility” in relation to competition law, NPT has assessed whether control of infrastructure not easily duplicated can be seen as an entry barrier in this relevant market. 233. It is necessary to have both access networks and switched networks (transmission capacity) to offer call origination. Such infrastructure (particularly the access network) is very capital-intensive to duplicate. 234. Up until recently, with few exceptions, it has not been viewed as economically profitable to establish competing infrastructure (access networks) for fixed telephony, inter alia due to substantial economies of scale and not inconsequential sunk costs, cf. discussions below. However, in the last couple of years local and regional initiatives in several locations in the country have started to roll out alternative access networks, primarily fibre access networks. These rollouts are taking place under the direction of different companies and constellations, with local electric utilities or local or county government often playing a central role in the venture. These new access networks are not being built primarily to offer telephony. Faster Internet access and new TV/content services are as a rule marketed more than telephony by developers of such fibre access networks, but the fibre access networks nevertheless represent an alternative infrastructure for access to the fixed public telephone service. For the time

20 Cf. the Guidelines, paragraph 81. 21 ESA writes about entry barriers in, inter alia, the Guidelines, paragraph 81: “In fact, the absence of barriers to entry deters, in principle, independent anti-competitive behaviour by an undertaking with a significant market share.” 22 The criterion corresponds to “control of infrastructure not easily duplicated” in the Guidelines, paragraph 79.

47 Analysis of the market for call origination on the public telephone network provided at a fixed location

being the extent of such alternative access networks is relatively limited, and as mentioned it is primarily local operators who can base their operations on existing infrastructure from other activities who are behind the rollout. 235. Even though Telenor’s control of the nationwide, copper-based access network appears now to constitute a somewhat smaller entry barrier in this relevant market compared to a few years ago, NPT nevertheless believes that Telenor’s nationwide infrastructure still has to some extent an entry-deterring effect in this market. 236. Another factor supporting the view that control of infrastructure not easily duplicated does not represent as high an entry barrier in this market today as a few years ago is that providers of broadband that base their operations on Telenor’s copper access network (xDSL) have also begun to offer VoB. This is further reinforced by the ability to offer VoB via broadband provided by other undertakings.

5.3.2 Sunk costs23 237. Unrecoverable fixed costs (“sunk costs”) are fixed costs attributable to an irreversible investment, i.e. a provider cannot expect to recover the investment once it is made, for example through the sale of the investment item, if the provider wishes to exit the market. Unrecoverable fixed costs mean that a potential newcomer faces higher decision-relevant costs than the (or those) operator(s) already established. This cost difference comprises an entry barrier to the potential entrant. 238. In this market sunk costs may represent considerable amounts for new undertakings considering establishing alternative physical infrastructure all the way up to the individual end user. This is a factor that may serve to limit the extent of alternative infrastructure, or at least slow down the pace of rollout. 239. The extent of sunk costs can be reduced by signing customer agreements with a lock-in period before the construction of a new access network takes place. It is furthermore a point that it is no longer necessary to build alternative access networks to offer fixed telephony. Compared to a few years ago, VoB via broadband supplied by other providers is serving today to lessen the importance of sunk costs as an entry barrier in this market.

5.3.3 Economies of scale24 and scope25 240. Economies of scale exist when an increase in production brings a fall in average unit cost. This is characteristic of production based on technology with relatively high fixed costs and low variable costs. 241. Economies of scope are reductions in average unit cost when more than one service is produced using common means of production, for example common infrastructure or common administrative systems.

23 ESA describes “sunk costs” particularly in Footnote 86 to the Guidelines: “One of the most important types of entry barriers is sunk costs. Sunk costs are particularly relevant to the electronic communications sector in view of the fact that large investments are necessary to create, for instance, an efficient electronic communications network for the provision of access services and it is likely that little could be recovered if a new entrant decides to exit the market.” 24 The criterion corresponds to “economies of scale” in the Guidelines, paragraph 79. 25 The criterion corresponds to “economies of scope” in the Guidelines, paragraph 79.

48 Analysis of the market for call origination on the public telephone network provided at a fixed location

242. Economies of scale and scope can both work as entry barriers in relation to new potential operators and as a competitive advantage in regard to established competitors in the market. 243. NPT finds that Telenor has substantial economies of scale in the call origination market in consequence of its nationwide services and considerable number of customers. None of the other operators in this market is expected to achieve sufficient “critical mass” to exploit economies of scale in a comparable manner. 244. Parts of a telecom operator’s infrastructure and support systems can be used for production and delivery of various services. NPT finds that Telenor, owing to its broad product portfolio and large customer base in several electronic communications markets, has greater economies of scope in this market than in any of its competitors. 245. In the long term, regionally based developers of new access networks can probably also achieve economies of scale and scope, particularly since most of these operators have based their business models on producing and delivering more than one service (Internet, TV/video on demand and telephony) via the same access network. Nevertheless, it is not deemed probable that any other providers of fixed telephony will attain economies of scale and scope as large as Telenor’s in the near term, since this requires that the individual local/regional provider achieve production volumes far in excess of current estimates in respect of market developments.

5.3.4 Access to financial resources26 246. Access to financial resources is important to an operator’s opportunity to enter a market. This is of particular significance in markets that require major initial investment (high entry costs). Differences between operators relating to access to financial resources may comprise an entry barrier. In addition, everything else being equal, it will be expected that an operator with market power and good financial standing will be less exposed to competition than an operator with market power without good access to financial resources. Besides, an operator with market power and good access to financial resources will be better able to defend his market share if new competitors enter the market than an operator with market power without good access to financial resources. 247. Both call origination and the access network that the circuit-switched service is based on are capital-intensive, which requires financial strength for potential new services in this market. This is a factor that can act as an entry barrier in this relevant market. 248. In general there are no grounds for claiming that Telenor has better access to financial resources than its potential competitors. Even if Telenor is assumed to enjoy a more favourable financial position than most of its competitors in this relevant market, there are well-capitalised potential challengers to Telenor, including several of the local/regional “triple play” providers. 249. As in the assessment of sunk costs above, it should be noted also with regard to financial resources that it is no longer necessary to build an alternative access network to originate calls in the fixed network. Compared to a few years ago, VoB services in which the provider does not offer broadband access at the same time are serving to

26 The criterion corresponds to “easy or privileged access to capital markets/financial resources” in the Guidelines, paragraph 79.

49 Analysis of the market for call origination on the public telephone network provided at a fixed location

lessen the importance of access to financial resources as an entry barrier in this market.

5.3.5 Access to distribution and sales channels27 250. In markets in which the established operators have a well-developed distribution and sales network this may function as an entry barrier for potential new operators. This applies in particular in markets in which there are major costs associated with establishing distribution and sales channels, or where the established operators have concluded exclusive agreements with the largest/most important distribution channels in the market. 251. In principle, distribution and sales channels are not relevant as a criterion for entry barriers in the wholesale origination market since the external services have been available only from Telenor and have been strictly regulated. At the same time, the internal provision is neither sold nor distributed. On the other hand, call origination services constitute a derived demand for telephony in the retail market, and since sales and distribution channels have a certain relevance for entry barriers in the retail markets for telephony, these channels also have a certain relevance for Market 8. 252. Most end users can choose among many providers, but these services have basically been based on Telenor’s call origination service at a wholesale level. Only a tiny percentage of end users have been able to choose among alternatives based on call origination from various providers, in practice Telenor and one other (some businesses are able to choose among more than two). It is primarily for these relatively few end users that access to distribution and sales channels has been of significance. This too has changed with the growth of VoB, which means that the relevance of distribution and sales channels as an entry barrier criterion has increased. 253. NPT deems that, generally, high costs are not connected with establishing distribution and sales channels, and refers to the fact that the growth of providers of VoB has largely taken place by their facilitation of direct ordering via their respective websites. While the services are usually marketed by Internet-based advertising, other media are also used. Other relevant sales channels are visits from sales representatives, telemarketing and direct mail. Housing associations and other amalgamations of end users are also relevant channels. In connection with any local developments of broadband networks, cf. “triple play”, public meetings are also often used. Such channels are generally available and not very investment-intensive. 254. Therefore, in view of the above, sales and distribution channels are not deemed to be of great significance as barriers to entry.

5.3.6 Barriers to expansion28 255. A market with large growth potential is as a rule more attractive to potential new operators than markets in which the total units sold and/or the number of customers has stagnated or is on the way down (known as “mature” markets). Operators considering entry into a “mature” market must generally aim to capture

27 The criterion corresponds to “a highly developed distribution and sales network” in the Guidelines, paragraph 79. 28 The criterion corresponds to “barriers to expansion” in the Guidelines, paragraph 79.

50 Analysis of the market for call origination on the public telephone network provided at a fixed location

customers from the established operators. If there are barriers to growth in a market, these may therefore be looked upon as a possible entry barrier. 256. NPT’s assessments of barriers to expansion in the call origination market begins with the fact that call origination is an input for the provision of fixed telephony traffic (Markets 3 – 6). Since the number of origination minutes is equal to the number of call minutes, the developments in the call origination market coincide with the developments in these retail markets. As stated in section 2.3, the demand in the retail markets for fixed telephony traffic, and consequently also the derived demand for call origination in wholesale market, is trending downwards. 257. This stagnation is primarily deemed to be due to the fact that the chief driver of demand in this market – the need to convey voice and obtain Internet access – is being increasingly met by competing services. In this regard NPT is primarily referring to the growth of voice conveyance on mobile networks and the increase in broadband connections to the Internet. The rapid growth of relatively new communications services such as e-mail, SMS and VoB not adapted for any-to-any connectivity is also deemed to have contributed to falling demand for fixed telephony. A consequence of this is that it is becoming increasingly common to cut out fixed telephony altogether, cf. section 2.3. 258. There is reason to believe that the growth of services in these closely related markets will be able to continue and that at the same time this will mean further stagnation in Market 8. 259. The market for call origination can therefore be viewed as a “mature” market, in which the number of connections cannot be expected to grow in the near future. This means that any new providers in this market, including providers of VoB, must base their operations on capturing customers from Telenor. By itself, this is a factor that makes it more difficult for new undertakings to enter the market, and can therefore be viewed as an entry barrier. The capacity to offer “triple-play” solutions, in which Internet access, VoB and TV/video on demand are offered in a single package, is likely to weaken this entry barrier, since new providers can attract customers with broadband services or TV/video on demand, where VoB is included as part of an economical package offering.

5.3.7 Regulatory entry barriers 260. Regulatory entry barriers exist when market access is limited by regulatory conditions, for example official licences, resource restrictions or restrictions in regard to health, environment or safety (direct regulatory restrictions). Furthermore, various forms of price control may also have entry-deterring effects, cf. the Recommendation, paragraph 15. 261. At the outset, access to Market 8 is not limited by regulatory conditions. In many ways the opposite is true, in that it is regulatory requirements that have brought about the existence of the external services in the market29. Furthermore, the authorities in general have an objective of increased competition in this sector and are attempting to facilitate this through regulatory drafting. 262. Telenor’s prices for external call origination have been stringently regulated with regard to cost orientation obligations, i.e. a ceiling has been set for the return on

29Presumably, call origination would be a separately produced part of a retail service only if the regulatory mandate did not exist.

51 Analysis of the market for call origination on the public telephone network provided at a fixed location

this service which in practice has led to prices probably being lower than they would be without such a requirement. In other words, the authorities’ requirements mean that the leading price in the market is set relatively low, which in turn may imply a barrier to entry for new operators. 263. This too is changing somewhat with the introduction of VoB. NPT refers here to the fact that costs of producing VoB are lower than with traditional fixed telephony. Consequently, the conditions are conducive for fixed telephony services based on broadband, which in turn imply own production of call origination. 264. NPT deems that relevant regulatory factors do not imply entry barriers in this market.

5.4 Potential competition and innovation

265. As a rule, in markets with a high degree of innovation the opportunity to exercise market power will be more limited than in markets with little innovation. Technological development may therefore be of significance for potential competition in the market. Innovation resulting from technological development can therefore contribute to weakening an operator’s position in the market in relation to potential competitors. 266. Even though this relevant market can be viewed as a “mature” market where there is not expected to be any growth in the number of connections in the near future, technological developments can serve to weaken Telenor’s position in the market. 267. NPT believes that in the coming years, convergence at both the network and service levels will characterise development of the fixed network market. Convergence, particularly the use of IP as a carrier service for different electronic communications and information services, is now making it more attractive for new operators to offer access to the fixed public telephone service, and thereby call origination, than the case has been until now. 268. Over the course of the first year VoB was offered in the residential market, these operators attracted most of the more than 100,000 customers of this new form of fixed telephony. 269. Moreover, offerings of “triple-play” solutions are expected to increase from now on. Such solutions involve offering Internet access, VoB and TV/video on demand in a single package, where as a rule it would be the most economical for the customer to choose all three products together. In the last couple of years a number of local broadband operators have been established. Many of them intend to build fibre- based broadband access networks and offer “triple play” solutions in limited geographic areas. The extent of such networks has, however, been relatively limited up to now. It is still too early to say anything for certain about the speed of rollout and extent of fibre-based broadband access networks in the near future, but it is assumed that the rollout of such new access networks may eventually weaken Telenor’s position in the call origination market. 270. More and more telephony customers are otherwise choosing to replace their fixed telephone with a mobile telephone. In particular, this seems to be a trend among young telephony customers. The division between mobile telephony and fixed telephony has become less clear in recent years, inter alia due to the price gap

52 Analysis of the market for call origination on the public telephone network provided at a fixed location

becoming steadily smaller due to reduced mobile rates. Furthermore, technological developments are serving to erase the boundaries between mobile telephony and fixed telephony. Examples of these are the growing popularity of wireless handsets, wireless local area networks (WLANs), and bundled services (for example, Telenor’s “InTouch”). However, it is not a given that these developments will weaken Telenor’s position in this market since Telenor is also the market leader in the mobile market. 271. Similarly, it is not a given that higher demand for VoB will weaken Telenor’s position in this market. Telenor launched its VoB service in the residential market at the end of March 2005. As the market leader in the broadband market, it already has existing customer relations with most potential VoB customers. This will be a competitive advantage for Telenor in relation to providers of VoB without similar customer relations. 272. In NPT’s view, potential competition and innovation are serving to reduce Telenor’s market power somewhat in the market for call origination.

5.5 Provider behaviour

5.5.1 Bundling of products/product differentiation30 273. A high degree of product differentiation, or heterogeneous products, can create customer loyalty, and make it difficult for competitors to enter the market, as opposed to where products are more homogeneous. Strong brand names will have a corresponding effect. 274. Bundling of products is a variation of product differentiation. An operator with market power in a relevant market can link (tie together) services or products in this market with services or products in another market, so that the operator can provide a bundle of services/products that are differentiated from the competitors’ offering and that the competitors have a limited opportunity to copy. In this way bundling of services/products can contribute to market power in one market creating competitive advantage in another market. Such competitive advantage may be relevant to the assessment of significant market power in the latter market. 275. There are few examples of bundling of call origination with other products. However, this may be because telecom regulation has prevented this. Call origination (and termination) taking place outside the lowest level on the fixed network, i.e. on a “point of interconnection outside the interconnection area” may be regarded as an exception to this. According to the market definition in this analysis, these services are to be regarded as a bundling of call origination (or call termination) with transit. This form of bundling seems to exist in most comparable countries. The bundling is, however, not absolute. Providers who purchase call origination (or call termination) choose whether or not they would like to purchase interconnection at the lowest level in Telenor’s network. 276. The reduction of the number of points of interconnection and related expansion of the interconnection areas’ geographic coverage can nevertheless be deemed a bundling of (local) call origination and call conveyance (transit services). In this manner, call origination has become more extensive than before. This development

30 The criterion corresponds to “product/services diversification (e.g. bundled products or services)” in the Guidelines, paragraph 79.

53 Analysis of the market for call origination on the public telephone network provided at a fixed location

can also limit the opportunities of other operators to compete. Since the number of points of interconnection offered also reflects, however, the demand for Telenor’s interconnection products, this reduction in the number of points of interconnection must also be regarded as a result of demand-side conditions. NPT has not received any indications of buyers of interconnection services from Telenor being dissatisfied with the reduction in the number of points of interconnection. 277. As a vertically integrated provider where most of Telenor’s services in the call origination market are used by the company itself in the retail market, Telenor’s provider behaviour in the retail market could mean competitive problems for competitors of Telenor in the wholesale market for call origination. 278. A significant factor for the competitive situation in the retail market is the possibility of bundling telephony subscription and access to other fixed and mobile electronic communication services. Telenor has a broader product range than most of its competitors, and offers fixed telephony, Internet via broadband, mobile communication and TV. On the other hand, some of Telenor’s competitors also offer several services. This applies, for example, to Tele2, which in addition to telephony, offers mobile communication and Internet via broadband, and the “triple play” operators who offer telephony, Internet via broadband and TV. 279. Since Telenor is dominant in the retail market for fixed telephony, broadband, cable TV, satellite TV and mobile telephony, Telenor is nonetheless regarded to be better able than its competitors to put together attractive bundled services in the residential market, and to package and price these products in new ways in the future. This represents a competitive advantage for Telenor in the call origination market and has a bearing on the assessment of significant market power. 280. Telenor’s different areas of operation have historically been organised into divisions/business areas. The organisational divisions between the different areas of operation have become less clear in recent years, however. Moreover, there have been examples in recent years of price/discount structures on Telenor’s part that take advantage of the fact that the company has significant market power in both the mobile and fixed network market (for example the forwarding service “InTouch”). Furthermore, it can be mentioned that customers who buy both mobile telephony and fixed telephony from Telenor, can choose to receive a single bill. 281. On the basis of the above-mentioned, bundling of products is deemed to imply a certain competitive problem that probably would have been far larger in the absence of ex ante regulation.

5.5.2 Leverage of significant market power to closely related markets31 282. Significant market power in one market may help to strengthen a provider’s market power in a closely related market. Such leverage of market power may be vertical, i.e. between a wholesale market and a retail market, or horizontal, i.e. between various product markets at the same level in the value chain.

Vertical integration32 283. A vertically integrated provider is characterised by the provider’s activities comprising more than one link in the relevant value chain. Typically a vertically

31 Cf. the Guidelines, paragraph 85. 32 The criterion corresponds to “vertical integration” in the Guidelines, paragraph 79.

54 Analysis of the market for call origination on the public telephone network provided at a fixed location

integrated provider will be present both in infrastructure markets (“upstream markets”) and retail markets (“downstream markets”). Through a strong position in the “upstream market” vertically integrated providers can try to keep competitors in the “downstream market” out of this market, for example through the pricing of products in the “upstream market” or by not offering products in the “upstream market” to competing providers in the “downstream market” at all. In this way a vertically integrated provider with a strong position in the “upstream market” can strengthen his position in the “downstream market”. 284. Telenor is a vertically integrated provider that is able to shut out other operators in the retail market through its strong position in the wholesale market. However, since call origination is a wholesale market, this circumstance may in principle seem to have little significance for the company’s position in this market. 285. However, Telenor’s strong position in the retail market has in practice meant that alternative wholesale providers have in principle only been able to provide call origination as an input to what constitutes a relatively marginal portion of the services in the retail market. To expand in the wholesale market, these providers are largely dependent on obtaining customers from Telenor in the retail market. Alternatively, or as a supplement, these operators can grow by offering call origination to providers in the retail market that manage to win customers from Telenor. In this way, Telenor’s strong position in the retail market for fixed telephony has helped maintain the company’s significant market power in the market for call origination. 286. The growth of VoB may change the market situation somewhat. In principle, all operators with sufficient competence can offer VoB based on own call origination to any end user with a broadband connection. However, a provider of VoB will largely be dependent on winning customers from Telenor or other providers in the retail market.

Horizontal integration 287. A provider is horizontally integrated when through ownership he has control of different parallel infrastructures that may be used to supply competing products to the end user. In this case the provider can strengthen its market power in a market by preventing competition from an alternative infrastructure over which it has control. 288. Telenor is a company with extensive operations in Norway and has high market shares and a strong position in many markets. Telenor is a major operator in the cable TV market, which represents a source of competitive services for call origination on fixed networks. 289. Furthermore, the company’s strong position in the market for call origination on mobile networks has presumably contributed to the fact that competition from this adjacent market is less that it otherwise would be, if the largest operator in mobile network origination were an operator other than Telenor. Telenor’s considerable operations in the area of wireless networks (e.g. WLAN) and broadband are also deemed to help to enable Telenor to maintain its market position in the call origination market.

55 Analysis of the market for call origination on the public telephone network provided at a fixed location

5.6 Conditions on the demand side

5.6.1 Market power/countervailing buying power33 290. The presence of customers with bargaining power can restrict a provider’s opportunity to behave independently in the market. Such countervailing buying power may be the result of a customer’s size, purchasing volume or the customer having something to offer, for example better market access to other markets. 291. Customers’ bargaining power vis-à-vis Telenor’s external call origination services cannot be measured on the basis of historical information, since these services have been subject to stringent regulation. Given a situation without such regulation, the demand side is deemed to have little bargaining power because Telenor has an incentive not to provide the service. 292. In the absence of regulation, countervailing buying power will be limited to cases where customers are either in a position to choose to offer call origination themselves instead of buying call origination from Telenor, or can offer Telenor something Telenor is interested in. 293. Earlier, the only possibility of originating fixed telephony traffic was to obtain costly infrastructure. This has been a major entry barrier that has largely prevented customers of call origination from originating calls themselves, cf. section 5.3.1. 294. However, providers who base their operations on purchasing call origination from Telenor may alternatively commit themselves to offering VoB, which in that case will entail a loss of origination revenue for Telenor. In consequence of VoB, not only Telenor’s call origination service will therefore be in less demand than before, but it will allow the demand side to apply a certain amount of pressure on Telenor. 295. Despite rapid growth in the broadband market, in the near future there will still be a number of end users who will not have a broadband connection. In addition, many of those who have broadband still prefer PSTN/ISDN instead of VoB. To reach most of these end users, the providers here will still be dependent on requesting Telenor’s call origination service. 296. Customers of call origination are not considered to have anything that is sufficiently interesting to offer Telenor for them to achieve good bargaining power in the absence of regulation. A possible exception here is certain foreign operators who in their respective home countries enjoy a similar position as Telenor and where Telenor has a similar position as this operator has in Norway. However, NPT doubts that there are constellations that would have caused the operator in question to have considerable bargaining power in relation to Telenor’s call origination service in the absence of regulation. 297. In addition to this there is the fact that Telenor’s external call origination service is only a result of the authorities’ requirements. NPT finds that in the absence of regulation the service would have been withdrawn from the market, or priced disproportionately high. The absence of an external call origination service would have probably sent more end users to Telenor. The fact that as a provider Telenor basically does not want to offer the service, further weakens customers’ bargaining power.

33 The criterion corresponds to “absence of or low countervailing buying power” in the Guidelines, paragraph 79.

56 Analysis of the market for call origination on the public telephone network provided at a fixed location

298. On this basis countervailing buying power is deemed to be relatively small.

5.6.2 Customers’ freedom of choice and possible costs of switching/lock-in effects 299. Restrictions or costs associated with the end user switching providers increase the opportunity for a provider with market power to behave independently in the market. Such restrictions may be of a practical, technical or financial nature, or may be a result of the end user having greater confidence in existing and well-established operators in preference to new operators and being unwilling to take the risk that a switch could involve. 300. No other operators than Telenor offer external call origination of fixed telephony traffic. Other operators who produce origination of traditional fixed telephony traffic have no incentive to offer call origination externally. Regardless, any external services from them would have to be of very limited extent since they only have infrastructure with very limited geographic reach at their disposal. In practice, customers therefore have no freedom of choice beyond producing call origination themselves. 301. Since Telenor is a vertically integrated provider, the costs of switching and lock-in effects in the retail markets for fixed telephony traffic will also have a bearing on the costs of switching and lock-in effects in the wholesale market for call origination. 302. Switching between services in the retail market in traditional fixed telephony traffic that is based on different call origination services basically means that the end user changes his access from one access network to another. A key characteristic of the call origination market is that most end users are unable to choose between different providers. This supports a virtually total lock-in effect. 303. The spread of VoB, with its related reduced need for control of the access network for call origination services, counteracts this. At a wholesale level, VoB represents freedom of choice since Telenor’s call origination customer as an alternative can offer VoB to their own end users who have a broadband connection. At the retail level, there will indeed be certain costs of switching since this type of fixed telephony usually has requirements regarding the terminal (special type of telephone or adaptor enabling the use of an ordinary telephone). However, these switching costs are deemed to be less significant since they typically can be covered by lower call rates over the course of a few months. 304. A large percentage of end users, even within a two-year period, will not have a broadband connection. The options of these end users are therefore basically limited to services that are based on call origination from Telenor. 305. On this basis the lock-in effect will still be relatively large. However, the lock- in effect may be reduced as a result of the fact that it will be possible to produce call origination based on broadband connections as the extent of such connections increases.

5.6.3 Customers’ access to information 306. For customers to be able to make effective choices between providers in a market they must have access to information that makes it possible to compare the various offers. Complicated price structures and various bonus and discount schemes

57 Analysis of the market for call origination on the public telephone network provided at a fixed location

can restrict the opportunities for effective retail choice and may contribute to strengthening an already dominant operator’s position in the market. 307. Since external alternatives to Telenor’s call origination services do not exist, factors relating to access to information from alternative providers are not relevant at the wholesale level. However, since Telenor is a vertically integrated provider, access to information in the retail markets could be relevant in this context. 308. Up until VoB was launched, it was relatively easy in the retail markets for fixed telephony to obtain and compare various services and prices. NPT’s telecom price guide at http://www.telepriser.no is considered a useful tool in this respect. With the launching of VoB, this situation has changed somewhat, since providers of VoB base themselves on different price structures. Among other things, the difference between prices for subscriptions and calls is said to be less clear in many of the offers from operators who offer VoB, compared to what customers in this market have been used to up to now. This can make comparisons of prices and services more complicated, contributing by itself to maintaining Telenor’s dominance, at least as long as VoB is viewed as a relatively new service in the market. 309. However, customers’ access to information is regarded as having little bearing on Telenor’s ability to maintain its market power in the call origination market.

58 Analysis of the market for call origination on the public telephone network provided at a fixed location

6 Designation of providers with significant market power in the area of call origination

310. The assessment of significant market power builds on the Guidelines, section 3.1, and is based on the different criteria discussed in the market analysis in Chapter 5 above. In accordance with the Guidelines, paragraph 76, and with a starting point in the existing market conditions, NPT has based the assessment of significant market power on a forward-looking market analysis. The time horizon for this analysis is approximately two years. However, NPT will monitor the market closely. If there are changes in the market conditions that suggest that the analysis should be revised on an earlier stage, NPT will carry out such a new analysis. 311. The Electronic Communications Act § 3-1, cf. the Framework Directive, Article 14 (2), states that: “A provider has significant market power when the provider individually or jointly with others has economic strength in a relevant market affording the provider the power to behave to an appreciable extent independently of competitors, customers and consumers.” 312. This is an important starting point for the assessment. The same is true of the amplification in the Guidelines, paragraph 74, that in ex ante assessments of market power it must be assessed in particular whether a provider’s strength in the market makes it possible to implement price increases without this causing a significant sales/revenue reduction for this provider.

313. For the sake of clarity NPT wishes to emphasise that it is significant market power that is the relevant subject of assessment and not anti-competitive misuse of significant market power. It is therefore not central to the assessment whether any market power/dominance is actually misused or not. However, this does not mean that a provider’s behaviour in the market is irrelevant to the assessment of significant market power. Even if structural factors carry the most weight in the assessment, behaviour that contributes to creating or maintaining competitive advantage for a provider who already has a dominant position in the market may imply a strengthening of this provider’s market power.

314. According to Chapter 5, the following factors exist in Market 8 to indicate that Telenor has significant market power: o Telenor has a very high market share, roughly over 90 %. Although the market share has decreased somewhat in the last couple of years and the decline is expected to continue, NPT deems it as improbable that the market share will be less than 50 % over the course of the period covered by the market analysis. This implies a strong indication that Telenor has significant market power. o Entry barriers are large in consequence of dependence on the access network for the portion of the services in the retail market that are based on circuit-switched fixed telephony. In addition, economies of scale and scope are pronounced, at the same time as the market is characterised by stagnation. o Because Telenor is alone in offering external call origination, customers therefore have no others to choose from. Since most end users of PSTN/ISDN can only

59 Analysis of the market for call origination on the public telephone network provided at a fixed location

choose from among fixed telephony services originated by Telenor, the lock-in effect will be considerable, with little countervailing buying power. Bargaining power is further weakened by the fact that Telenor lacks the incentive to offer call origination. 315. The following circumstances in the call origination market are serving to limit Telenor’s significant market power: o There are relatively low entry barriers relating to VoB, where providers to a lesser degree will be dependent on Telenor’s access network and Telenor’s call origination service. o Services in adjacent markets, such as mobile telephony and broadband, exert considerable pressure on Telenor’s call origination services. 316. The factors in support of the notion that Telenor has significant market power in this market in the period to which this analysis pertains are deemed to weigh more heavily than the factors that are working to limit Telenor’s significant market power. In particular, NPT’s view is based on the company’s high market share, entry barriers and the weak bargaining power of the demand side. 317. In view of this, NPT concludes that Telenor ASA has significant market power in the market for call origination on the public telephone network provided at a fixed location (Market 8).

60 Analysis of the market for call termination on individual public telephone networks provided at a fixed location

II. Analysis of the market for call termination on individual public telephone networks provided at a fixed location (Market 9)

61 Analysis of the market for call termination on individual public telephone networks provided at a fixed location

7 Definition of the relevant geographic markets for call termination

318. In accordance with the Guidelines, paragraph 57, the geographic market may be defined as that area in which the relevant product is offered on approximately similar and sufficiently homogeneous conditions of competition. The degree of substitutability both on the supply and the demand side may be taken into consideration in the assessment of the geographic market and, as a part of such a substitutability assessment on the demand side, preferences and geographic purchase patterns should be taken into account. However, the Guidelines, paragraph 60, point out that geographic markets in the electronic communication sector have traditionally been determined by reference to the relevant network’s area of coverage as well as the effective boundaries (jurisdiction) of the legal regulation of the market. 319. Further reference to Norway as a jurisdiction should be taken to mean mainland Norway/Norwegian land territory, cf. the description of the applicability of the Electronic Communications Act in section 1.3. 320. The markets for call termination on fixed and mobile networks (Markets 9 and 16) differ from the remaining predefined markets in that a relevant market is defined for each provider of voice call termination. As with the call origination market (Market 8) Telenor provides most of the overall services in Market 9, whilst the remainder is distributed among the same operators as in Market 8. The definition of the geographic markets for providers of termination services on fixed networks is based on three groups of providers: Telenor, other operators that terminate voice calls based on their own access network and, finally, providers of VoB that do not have their own access network. 321. Like the company’s services in the retail market for domestic traffic, Telenor’s call termination services within a local interconnection area have prices independent of geography. Furthermore, Telenor provides call termination in the entire country, while the network’s coverage is all of Norway. In view of this, NPT deems that the entire country constitutes the geographic market for Telenor’s services for voice call termination on the fixed network. 322. Other providers of call termination, who base their services on their own access network, cf. Figur 4, the business models D-F, have services that are relatively quite limited, geographically speaking. For example, UPC’s telephony services, including voice call termination, are geographically limited to the (upgraded portion of) the company’s cable TV network. Telephony services, including voice call termination from various local/regional electrical utilities, are usually geographically limited to these companies’ broadband networks. In the business market, some providers have networks with limited reach that individual businesses and/or industrial parks are connected to and that constitute the basis for fixed telephony services, including voice call termination. 323. To NPT’s knowledge, these operators, like Telenor, provide voice call termination at prices independent of geography within their networks. Furthermore, it appears that their fixed telephony services aimed at end users are also priced independently of geography. In view of this, the geographic market is deemed to correspond to the geographic extent of the individual provider’s network.

62 Analysis of the market for call termination on individual public telephone networks provided at a fixed location

324. The last group of possible providers of voice call termination on the fixed network are providers of VoB (for example Telio) who do not themselves offer broadband access, cf. Figur 4, business model G. The potential coverage here will be the same as the total national broadband coverage. Here, too, it appears that telephony services are characterised by pricing independent of geography. On this basis the geographic market for termination of voice calls is also deemed to be national. However, from what NPT has ascertained, most of these providers are currently not setting their own termination charge, cf. section 3.4.2. However, Telio signed an interconnection agreement with Telenor in the autumn of 2005 and will thus set their own termination charge.

63 Analysis of the market for call termination on individual public telephone networks provided at a fixed location

8 Assessment of criteria for significant market power in the markets for termination

8.1 General considerations on assessing criteria for significant market power and competition issues in Market 9

325. The market for call termination on individual public telephone networks provided at a fixed location (Market 9) and the market for voice call termination on individual mobile networks (Market 16) are different from the other previously defined markets in that the total national market is not the starting point. The analyses of the call termination markets are based on the competitive situations related to the services of each provider. The provider that controls call termination access has, in practice, a monopoly in the relevant market. In other respects, NPT refers to the fact that ERG has identified special competition problems related to call termination. This is discussed in particular in Chapter 5 of the policy document from ERG34. 326. Just as with NPT’s analysis of Market 16, NPT finds that in regard to Market 9 it is not appropriate to assess all the criteria for significant market power as they appear in the Guidelines. The reason for this is that several of these criteria are deemed to be of little relevance for the call termination markets, and that assessing the criteria that are omitted would not have changed the result of the analysis. The following criteria relating to significant market power are assessed: market share, profitability/price developments, entry barriers/innovation and market power on the demand side.

8.2 Market share35

327. Assessment of market share is a natural starting point for analyses of significant market power (dominance), cf. the Guidelines, paragraph 76. A provider’s market share should exceed 40 % before this factor indicates significant market power. If the market share is over 50 %, it would be exceptional were the provider not to be considered to have significant market power. As a rule providers with less than 25 % market share are not considered to have significant market power. 328. As stated previously, each network used for terminating voice calls to fixed locations constitutes a separate relevant market. This means that each provider has a 100 % market share in the respective markets. NPT finds that the following operators offer termination of voice calls on fixed networks and set their own termination charges: Consorte, Equant, MCI WorldCom, NetCom, NextGenTel, Priority Telecom Norway / UPC / SmartCall, TDC Song, Tele2, Telenor, Telio and Ventelo.

34 ERG Common Position on the approach to Appropriate remedies in the new regulatory framework, which was approved in April 2004, is available on NPT’s website, www.npt.no under the menu selection SMP. 35 Cf. the Guidelines, paragraphs 76 and 77.

64 Analysis of the market for call termination on individual public telephone networks provided at a fixed location

329. NPT will base decisions to be laid down relating to various obligations in Market 9 on the providers existing in this market at any given time. It may therefore be relevant to issue new decisions vis-à-vis new providers entering the market. 330. Although NPT has no exact overview of voice call termination on fixed networks, it sees no reason for the share of such traffic terminating on Telenor’s network to diverge substantially from the equivalent share that originates on Telenor’s network. This indicates that over 90 % of all voice call termination on fixed networks takes place on Telenor’s network. In its consultation response to the first version of the market analysis, Telenor estimated that Telenor’s share of total termination of voice calls to geographic numbers in Norway is 81 % measured in the number of call minutes, 83 % measured in revenues and 90 % measured in the number of calls. Telenor has not documented these numbers. However, NPT believes it is probable that Telenor has a higher market share than what they claim in the total market for voice call termination. In any case, Telenor’s share is very high, and the uncertainty has no bearing on the outcome of the analysis. 331. Even if the individual networks used for terminating voice calls at fixed locations each constitute a separate relevant market, the difference in the magnitude of Telenor’s services and those of the other providers is not without importance for the degree of market power. In this regard NPT refers to section 8.5. 332. The 100 % market share for all the providers mentioned means that there is a strong presumption that all the providers have significant market power in their respective fixed networks and that they can largely act independently of customers and other providers. 333. However, market share alone is insufficient to determine whether a provider has significant market power, but must be viewed in context with the other relevant assessment criteria, cf. the Guidelines, paragraph 79.

8.3 Profitability and price developments

334. If over a period of time an operator operates with a price that is substantially higher than the underlying costs and thereby achieves high profitability (compared with alternative investments), this may be an indicator of significant market power. 335. However, allowance must be made for the possibility that high profitability over a given period of time may be the result of other factors than market power, for example the benefits of efficiencies, innovation or accounting write-offs that do not necessarily correspond to the actual value reduction in invested capital. 336. Similarly, low profitability is not necessarily an argument against the operator being assessed as having significant market power, but may be a result of inefficient production. 337. The development of prices over time may likewise indicate something about the degree of competition, possibly the degree of potential competition, and can thereby provide a pointer to whether a provider has market power. 338. External call termination services from Telenor have been subjected to obligations for cost orientation, which imply that their profitability shall be equivalent to a “reasonable return”. Since this requirement has been strictly enforced,

65 Analysis of the market for call termination on individual public telephone networks provided at a fixed location

profitability here provides no indication of the extent to which these services are affected by Telenor having any significant market power here. 339. NPT has no specific information regarding the profitability of the other providers in Market 9. These providers have relatively small networks, the rollout of which has been strictly limited, and it is assumed that they have established themselves in areas where they have deemed it possible to attain profitability (relatively low costs). On the other hand, these providers will not benefit from the same economies of scale as Telenor. 340. Since 1998 the price of Telenor’s external call termination services has been equal to the corresponding price for call origination. The reason for this is that both services involve the same cost elements. Thus, in the same way as for call origination, the price of Telenor’s call termination services contain two elements, a start-up charge and minute charge, where the minute charge is differentiated depending on whether the calls are placed during the day or evening/night/weekend. Figur 7 in section 5.2 therefore shows the change in Telenor’s prices for both call origination and call termination since 1 January 1998. As of 1 February 2006 Telenor’s charges for termination within a local interconnection area are 5.4 øre per call, 3.8 øre per minute peak and 2.6 øre per minute off-peak, respectively (all prices unchanged since 1 October 2004). 341. From January 1998 to August 1999 the rates were reduced a number of times, and were then stable until 1 October 2004, when Telenor reduced its minute rate by 0.3 øre both day and night, equivalent to about 7 % and 10 %, respectively. Several of the rate reductions came as the result of NPT’s monitoring of interconnection prices. In principle this could indicate that Telenor has had the opportunity to maintain a relatively high price providing corresponding high profitability, and which to a certain degree can indicate that the company has significant market power. However, it may also be due to a lack of experience in relation to “hitting” the right price level. In recent years, Telenor’s regulatory accounts have shown that the return on interconnection products overall has been in accordance with the cost orientation obligation. 342. The strict practising of cost orientation means that historic price developments and profitability are not very relevant indicators for whether or not Telenor has significant market power. 343. The prices of other operators’ voice call termination services on their fixed networks have not been regulated, and NPT therefore deems that their prices may largely indicate the degree of their market power. In termination of voice calls on fixed networks the practice for the first few years was by and large price reciprocity, i.e. all providers had the same prices as Telenor. However, in the last two to three years an increasing number of providers have set their prices at a higher level than Telenor. Some providers still have the same termination prices as Telenor, e.g. Consorte and NextGenTel. Some providers have only slightly higher prices than Telenor. For example, as of 1 February 2006 Tele2’s charges for termination within a local interconnection area are 5.4 øre per call, 4.1 øre per minute peak and 2.9 øre per minute off-peak, respectively. A few providers have significantly higher prices than Telenor. As of 1 February 2006 both Priority Telecom’s and Ventelo’s charges for termination within a local interconnection area are 11.6 øre per call, 7.1 øre per minute peak and 5.0 øre per minute off-peak, respectively.

66 Analysis of the market for call termination on individual public telephone networks provided at a fixed location

344. In early 2005, first PortIT, and then SmartCall, increased their termination charges to a level equivalent to about 15-25 times that of Telenor’s termination charge (up to 63 øre per minute). However, within a relatively short period these prices were reduced to a level close to the level of other providers. The reason for the price reduction appears to have been that Telenor left a voice message with price information to its subscribers initiating calls to end users of SmartCall and PortIT36. Since then, Port IT has left the Norwegian telephony market. 345. In NPT’s view, the fact that these extremely high prices were reduced a short while later, indicates that these providers do not have the freedom to set extremely high prices for call termination. On the other hand, the fact that many operators set significantly higher termination charges than Telenor’s level, indicates that the providers have significant market power. 346. On this basis, NPT finds that price developments indicate that providers other than Telenor can also have significant market power in the market for call termination on an operator’s own network.

8.4 Entry barriers37 and potential competition

347. Potential competition from new operators will normally affect a dominant operator’s behaviour in the market, including pricing. Various forms of entry barriers may, however, weaken or remove the basis for potential competition.38 348. Voice call termination to a fixed location is performed on the network to which the receiver of the call is connected. To NPT’s knowledge, there is no technology on the fixed network that enables anyone other than the provider with the customer relationship with the called party to provide the call termination service. This applies both to services based on traditional circuit-switched technology and services based on VoB. 349. The absence of the capability of others to offer such services constitutes the crux of the competition problem in this market and is the direct reason that the individual networks are considered as separate markets. Any change in the capability of others to provide such call termination will thus imply a completely different competitive situation in this market. However, NPT does not see any indications that any such technology will be put into service in the foreseeable future. 350. Another factor is that the Calling Party Pays principle in practice reduces the significance of competition in the call termination markets. This is because the principle basically implies that the end users will not have any incentive to switch providers because competitors offering lower termination charges enter the market. 351. In the same manner as with NPT’s analysis of Market 16, the entry barriers here have been viewed as virtually absolute, at the same time as potential competition

36 End users of PortIT include in this connection end users of operators who had entered into an agreement with PortIT for indirect interconnection with Telenor and other providers. PortIT set the prices of call termination to the networks of these operators. 37 Cf. the Guidelines, paragraph 81. 38 ESA writes about entry barriers in, inter alia, the Guidelines, paragraph 81: “In fact, the absence of barriers to entry deters, in principle, independent anti-competitive behaviour by an undertaking with a significant market share.”

67 Analysis of the market for call termination on individual public telephone networks provided at a fixed location is relatively moderate. Furthermore, like with the analysis of Market 16, NPT deems it inappropriate to assess other possible structural or strategic barriers to entry.

8.5 Conditions on the demand side

352. The presence of customers with bargaining power can restrict a provider’s opportunity to behave independently in the market. Such countervailing buying power may be the result of a customer’s size, purchasing volume or the customer having something to offer, for example better market access to other markets.

8.5.1 General considerations on countervailing buying power in Market 939 353. The demand side in this market is represented by providers to which the calling party has a customer relationship. This will be Telenor, providers who base themselves on carrier pre-selection from Telenor, providers other than Telenor who produce call origination themselves, providers of VoB, providers of mobile telephony and providers abroad. 354. There are three factors indicating that the customers’ bargaining power in Market 9 is weaker than most other business relationships between a buyer and a seller. a. The originating operator has no freedom of choice in its demand for call termination. b. The originating providers’ ability to deny their counterpart a corresponding service when traffic flows in the opposite direction is insignificant. The reason for this is that the government can mandate entry into interconnection agreements (including mandating the provision of call termination), cf. Electronic Communications Act § 4-2, second paragraph, to ensure end-to-end connectivity. c. The Calling Party Pays principle implies a lack of incentive for the operators to offer low termination charges. High termination charges will by themselves provide high revenues with virtually the same cost level as with low prices. Moreover, a high termination charge could worsen the competitors’ operating conditions in the retail market. 355. Nevertheless, these factors are no impediment to the possible existence of a certain amount of countervailing buying power. However, this is contingent on the customer being able to charge a relatively high price for equivalent and/or other services when the roles are reversed. The customer can also exercise market power by seeking to inform the end users directly about higher prices for calling relevant called parties.

8.5.2 Countervailing buying power in relation to Telenor’s call termination services 356. Telenor accounts for most of the total call termination services on fixed networks. Furthermore, the company accounts for all of the external call origination

39 The criterion corresponds to “absence of or low countervailing buying power” in the Guidelines, paragraph 79.

68 Analysis of the market for call termination on individual public telephone networks provided at a fixed location services and almost all of the external transit services. The company therefore has direct interconnection with most major providers in the Norwegian market on the basis of a standard interconnection agreement. As a consequence of this and of the corresponding relatively marginal activity between other providers where Telenor is not involved, the Interconnection Agreement sets strict guidelines for services in the markets for call termination. 357. Of Telenor’s call termination services, well over half is generated by calls from Telenor’s end users on the fixed network, whilst a large percentage of the remaining calls are generated by Telenor’s end users on its mobile network. 358. As a consequence of the stringent regulation that Telenor’s services are subject to, in terms of both non-discrimination and cost orientation, there has in practice been little to negotiate about. A consequence of this is that the degree of the individual customer’s bargaining power vis-à-vis Telenor has not revealed itself. However, NPT finds that the regulation up until now is a consequence, inter alia, of there being little countervailing buying power with regard to Telenor’s call termination services. 359. In a hypothetical case without regulation of Telenor’s services in this market, NPT believes that most customers will have little or no bargaining power. Here NPT refers, inter alia, to the fact that in the largest group of external customers (providers that base their services on Telenor’s carrier pre-selection services) most offer relatively marginal or no call termination services, at the same time as they have a limited product range and a low degree of market power in other markets. 360. Some customers are big in other markets important to Telenor, and in principle they will be able to use this to pressure Telenor. Examples here are NetCom (TeliaSonera) in Sweden and TDC in Denmark. However, this is contingent on there not being equivalent regulations in the markets in question here, which does not seem very realistic. The business relations between Tele2 and Telenor in mobile telephony in Norway/Sweden might imply a certain amount of bargaining power for Tele2 in the absence of regulation. 361. With high prices and/or unreasonable terms in general, or threats to that effect from Telenor, customers can seek to influence the end users by sharing this information with them. It is assumed that the most efficient method is to motivate the media to cover the issue and/or get the message out through advertising campaigns directed at the consumer market. However, it will not be effective until the prices reach a relatively extreme level and/or when the terms are otherwise relatively unreasonable. 362. The aforementioned implies that some customers can have a certain amount of bargaining power vis-à-vis Telenor’s call termination services in given circumstances. However, this bargaining power is not deemed to be sufficient to substantially weaken Telenor’s significant market power in call termination on its own network.

8.5.3 Countervailing buying power in relation to other call termination services 363. The remaining operators’ call termination services on fixed networks have much in common. However, NPT agrees that there are also a number of differences among them that may have significance for competition. But as a consequence of the relatively marginal services each of these operators represents, NPT has not seen it necessary to examine in detail any differences in the services of these operators.

69 Analysis of the market for call termination on individual public telephone networks provided at a fixed location

364. On this basis all of these providers are assessed together. These providers have the following conditions in common, which at the same time differentiate them from Telenor. a. Their call termination services are very limited compared with Telenor. b. Their negotiating counterpart for most of their demand is large (Telenor). c. Only a marginal share of the call termination that they perform is generated by calls from their own end users. d. They have previously not been subject to special market regulation.

365. Like Telenor, the remaining providers have an incentive to set high call termination charges, but unlike Telenor there have until now been no regulatory requirements regarding the prices these providers can charge. 366. The prices for call termination from these providers have at the outset been subjected to real negotiation. The providers have had little direct interconnection traffic among themselves; instead such traffic is routed as transit traffic through Telenor. However, the negotiations have primarily been conducted between Telenor and each of the other providers. Earlier, use of the reciprocity principle was common between Telenor and the other providers. This may indicate that in the past the demand side (in this context primarily Telenor) has had a strong enough negotiating position to counteract these companies’ monopoly situations, both through its size and by its influence on the interconnection regime, including the formulation of standard terms and conditions. However, the extent of reciprocity may, to a certain degree be historically determined and be due to the advantages of simplicity. 367. However, in recent years more and more of the other providers have increased their termination charges for traffic to geographic numbers. Some providers have chosen to have a termination charge that is only marginally higher than Telenor’s termination charge. However, others have set a termination charge nearly double that of Telenor. For example, as of 1 February 2006 both Priority Telecom and Ventelo had a minute rate of 7.1 øre and 5.0 øre, respectively, while Telenor’s comparable minute rates were 3.8 and 2.6 øre. This indicates that Telenor’s bargaining power is not sufficient to prevent other providers from increasing their termination charges. In the last edition of its Interconnection Agreement, Telenor also made it clear that other providers are free to set their own termination charges for geographic numbers. 368. At the same time, several providers have chosen to continue having reciprocal termination charges with Telenor. Among other things, this may be because in the Interconnection Agreement, Telenor requires reciprocal prices to accept reciprocal payment for connection services, cf. section 3.4.1. In NPT’s opinion, this indicates that Telenor nevertheless has a certain degree of bargaining power vis-à-vis other providers with respect to setting termination charges. 369. The fact that Telenor is subject to regulation of its interconnection services and in other areas, serves to reduce Telenor’s bargaining power. 370. As covered in section 8.3, in early 2005, PortIT and SmartCall increased their termination charge to a level about 15-25 times higher than Telenor’s prices (up to 63 øre per minute). Telenor then elected to increase its retail price correspondingly for calls to end users connected to PortIT and SmartCall. At the same time Telenor informed its customers about the high price through a voice message before commencement of the call. Even if implementation of such voice messages met technical problems in the beginning, this step by Telenor was determinative in the

70 Analysis of the market for call termination on individual public telephone networks provided at a fixed location reduction of the termination charges shortly after to about the same level as other providers. 371. Telenor’s ability to influence the end customers through, inter alia, setting up relevant retail prices correspondingly, and simultaneously introducing voice messages with price information, therefore appears to hinder providers from setting extremely high prices and maintaining them over long periods. However, it appears that Telenor cannot prevent other providers from setting prices for termination that will be disproportionately high. In this context, disproportionate means prices that are ineffective in an economic sense.

8.5.4 Conditions on the demand side – summary 372. In principle, the bargaining power of customers is small due to lack of choice in call termination. Nor are they able in practice to deny their counterpart equivalent service when traffic flows are reversed. 373. Most customers of Telenor’s call termination services have a very poor bargaining position since they do not possess potential advantages for Telenor. As a consequence of a strong position in some other markets and the possession of potential advantages for Telenor, it is conceivable that some customers may at the outset have a certain amount of bargaining power vis-à-vis Telenor’s call termination services. For instance, this applies to certain foreign markets and customers such as NetCom, TDC and Tele2. However, they might be subject to special regulation in the relevant countries, preventing them from being able to give Telenor special treatment. In view of this, the countervailing buying power vis-à-vis Telenor’s call termination services is deemed to be insubstantial, and will consequently just barely be able to counteract the company’s market power. 374. Other providers of call termination services primarily have Telenor as their negotiating counterpart. Even though Telenor, through its strong position in this and other markets, may have a certain amount of bargaining power, the increase of termination charges by many of the other providers in recent years shows that Telenor’s bargaining power is not sufficient to counteract the market power of these providers. At the same time, NPT believes that Telenor has sufficient bargaining power to be able to prevent providers from establishing, over the long term, extremely high termination charges, inter alia through the use of voice messages with price information, should the difference in retail prices be sufficiently large. Nevertheless, there is a certain probability that providers other than Telenor can also set termination charges that are disproportionately high.

71 Analysis of the market for call termination on individual public telephone networks provided at a fixed location

9 Designation of providers with significant market power in the area of call termination

375. The assessment of significant market power builds on the Guidelines, section 3.1, and is based on the different criteria discussed in the market analysis in Chapter 8 above. In accordance with the Guidelines, paragraph 76, and with a starting point in the existing market conditions, NPT has based the assessment of significant market power on a forward-looking market analysis. The time horizon for this analysis is approximately two years. However, NPT will monitor the market closely. If there are changes in the market conditions that suggest that the analysis should be revised on an earlier stage, NPT will carry out such a new analysis. 376. The Electronic Communications Act § 3-1, cf. the Framework Directive, Article 14 (2), states that: “A provider has significant market power when the provider individually or jointly with others has economic strength in a relevant market affording the provider the power to behave to an appreciable extent independently of competitors, customers and consumers.” 377. This is an important starting point for the assessment of significant market power. The same is true of the amplification in the Guidelines, paragraph 74, that in ex ante assessments of market power it must be assessed in particular whether a provider’s strength in the market makes it possible to implement price increases without this causing a significant sales/revenue reduction for this provider. 378. For the sake of clarity NPT wishes to emphasise that it is significant market power that is the relevant subject of assessment and not anti-competitive misuse of significant market power. It is therefore not central to the assessment whether any market power/dominance is actually misused or not. However, this does not mean that a provider’s behaviour in the market is irrelevant to the assessment of significant market power. Even if structural factors carry the most weight in the assessment, behaviour that contributes to creating or maintaining competitive advantage for a provider who already has a dominant position in the market may imply a strengthening of this provider’s market power. 379. Significant market power may be achieved by one provider alone (single dominance) or together with others (collective dominance). However, the question of collective dominance is not relevant for the markets in question, since there is only one provider in each market. 380. The following factors indicate that all providers of termination services on fixed networks have significant market power in the market for voice call termination on an operator’s own network: • The providers have market shares of 100 %. • The markets have absolute entry barriers resulting from the fact that no possibility exists for other operators to provide call termination service on the various individual networks. • The providers have an incentive to set relatively high prices.

72 Analysis of the market for call termination on individual public telephone networks provided at a fixed location

381. Most customers of Telenor’s call termination services have relatively little bargaining power. NPT cannot see that the demand side has sufficient corrective effect on Telenor’s market power to prevent that Telenor must be deemed as having significant market power in the market for termination of voice calls on an operator’s own fixed network. 382. The services of the remaining operators are primarily demanded by Telenor. Telenor’s negotiating strength appears to only a certain extent to be able to counteract the market power these operators have at the outset. Through, inter alia, the use of voice messages with price information, Telenor will nevertheless be able to prevent smaller providers from setting extremely high prices over a long period of time. However, it is not a given that Telenor can prevent cases of smaller providers of termination services setting disproportionately high prices. 383. NPT believes that smaller providers’ market share of 100 % for call termination on their own network, the inherent entry barriers in these markets, the providers’ incentive to set relatively high termination charges as well as the existence of high prices for a steadily increasing number of providers are compelling circumstances that imply that these providers too must be deemed to have significant market power in the market for call termination on an operator’s own fixed network. 384. In this analysis, NPT has found that the following operators set prices for voice call termination on their own fixed network and thus have significant market power: Consorte AS, Equant Norway AS, MCI WorldCom AS, NetCom AS, NextGenTel AS, Priority Telecom Norway AS / UPC Norge AS / SmartCall AS, TDC Song AS, Tele2 Norge AS, Telenor ASA, Telio AS and Ventelo Norge AS.

73 Analysis of the market for transit services in the fixed public telephone network

III. Analysis of the market for transit services in the fixed public telephone network (Market 10)

74 Analysis of the market for transit services in the fixed public telephone network

10 Definition of the relevant geographic market for transit services

385. In accordance with the Guidelines, paragraph 57, the geographic market may be defined as that area in which the relevant product is offered on approximately similar and sufficiently homogeneous conditions of competition. The degree of substitutability both on the supply and the demand side may be taken into consideration in the assessment of the geographic market and, as a part of such a substitutability assessment on the demand side, preferences and geographic purchase patterns should be taken into account. However, the Guidelines, paragraph 60, point out that geographic markets in the electronic communication sector have traditionally been determined by reference to the relevant network’s area of coverage as well as the effective boundaries (jurisdiction) of the legal regulation of the market. 386. Further reference to Norway as a jurisdiction should be taken to mean mainland Norway/Norwegian land territory, cf. the description of the applicability of the Electronic Communications Act in section 1.3. 387. Since the transit market (Market 10) is limited to Norwegian territory, NPT deems it necessary to clarify the division between domestic transit and international transit services. This is primarily relevant regarding transit services to/from Norway. As it was stated in section 3.4.4, such transit traffic is routed through a special exchange on the network (international exchange), and conveyance from another point of interconnection to the international exchange is included as part of the transit market (Market 10). 388. At the outset, portions of the conveyance from/to the international exchange to/from the equivalent exchange in another country can also be considered a part of domestic transit services (Market 10). Here NPT is referring to those portions of such transit traffic that take place on Norwegian territory. However, in practice it will be difficult to separate this portion of the conveyance from other conveyance of such transit traffic. In addition, customers will not be concerned with the various geographic elements in such transit services, but only with the service as a whole. Conveyance of transit services from/to the international exchange to corresponding exchanges in other countries is therefore not part of the transit market (Market 10). 389. As stated in Chapter 3, this relevant market consists of conveyance of calls between interconnection areas within an operator’s fixed network and from another network to a third network. With Telenor’s strong position in the retail markets for telephone services (Markets 3 – 6), this means that most of the transit market consists of conveyance between points of interconnection on Telenor’s network that Telenor uses as inputs in its retail traffic services. 390. Furthermore, Telenor conveys a great deal of transit traffic between other fixed and mobile networks in Norway since most major providers in the Norwegian market have direct interconnection with Telenor, and to a lesser degree with each other. 391. There are only marginal external domestic transit services from operators other than Telenor. 392. Providers other than Telenor in the retail market for telephony largely base their services on leased lines for producing transit services between (and to a certain

75 Analysis of the market for transit services in the fixed public telephone network extent within) the largest cities. Telenor’s transit services are used to a far greater degree between points of interconnection covering smaller portions of the population. The reason for this is that since the traffic is heaviest between the large cities, it will usually pay for an operator to produce transit services itself by purchasing transmission capacity (fixed charge per month) rather than purchasing transit services from Telenor (fixed charge per minute). In the same way as for the call origination market, the existence of alternative services within and between the biggest cities strongly suggests that these segments should be defined as separate geographic markets. 393. On the other hand, the difference between high-traffic and low-traffic segments is evened out to a certain extent by the fact that the different providers have different volumes. A relatively large operator like Tele2, for example, will be able to save costs on producing transit services itself even in relatively low-traffic areas. Likewise, a small operator will usually come out better by purchasing transit services from Telenor on high-traffic segments. 394. In addition, Telenor’s product “Emulated leased lines for interconnection” is enabling more operators to produce transit services themselves, even on the low- traffic segments. This is because the emulated leased lines for interconnection service is cheaper than Telenor’s ordinary leased line service between the various points of interconnection. 395. After the introduction of Telenor’s new interconnection structure, the largest providers are primarily connected to all the points of interconnection, whilst the smallest ones are primarily connected to Oslo only, or Oslo and one or more of the biggest cities. 396. In view of the above, the demand for conveyance of traffic between the various points of interconnection cannot be deemed to be great enough for them to constitute different geographic markets. Furthermore, Telenor’s external transit services are priced independently of geography, which also supports the contention that different geographic markets do not exist. 397. On the basis of the above, NPT believes that the relevant geographic market for transit services (Market 10) is Norway.

76 Analysis of the market for transit services in the fixed public telephone network

11 Assessment of criteria for significant market power in the market for transit services

11.1 Market share40

398. Assessment of market share is a natural starting point for analyses of significant market power (dominance), cf. the Guidelines, paragraph 76. A provider’s market share should exceed 40 % before this factor indicates significant market power. If the market share is over 50 %, it would be exceptional were the provider not to be considered to have significant market power. As a rule providers with less than 25 % market share are not considered to have significant market power. 399. As stated in Chapter 3, in this analysis transit services (Market 10) consist of traffic from another network to a third network and conveyance of traffic between points of interconnection on an operator’s own network. 400. Like the call origination market, there are a number of challenges related to estimating market share in the transit market. Like call origination on an operator’s own network, transit services on an operator’s own network are included in the market, and estimating market share in the transit market based on revenues is therefore difficult. 401. The data obtained for conveyance from another network to third networks can be subject to a certain amount of uncertainty due, inter alia, to the fact that such conveyance can be bundled with other services. Nor does NPT have accurate overviews of the share of traffic conveyed by Telenor’s competitors between interconnection areas. Furthermore, NPT has been unable to include a proportional share of various connection services etc. in estimating market share. These factors imply a certain amount of uncertainty regarding estimated market share. However, NPT believes this uncertainty is of little significance in assessing whether or not Telenor has significant market power. 402. A starting point for identifying market share in Market 10 is the retail markets for traffic in fixed telephony. As shown by Figur 6, see section 5.1, Telenor’s market share measured in revenues in the first half of 2005 was approximately 65 % for overall fixed network traffic. Telenor performs all transit services in its own end user business itself. NPT assumes that the percentage of traffic originating and terminating in the same local area is more or less the same regardless of which provider the end user is connected to. Most major providers in the Norwegian market are connected in all Telenor’s interconnection areas, and they consequently carry out transit services in the form of conveyance between interconnection areas on their own network. A number of smaller providers only have connection to one or a few of Telenor’s interconnection areas. This implies that Telenor has at least a 65 % market share in transit services in the form of conveyance between interconnection areas on its own network. 403. In addition, Telenor accounts for the vast majority of external sales of transit services in the form of conveyance from another network to a third network. Moreover, to NPT’s knowledge, only Telenor sells external transit services in the

40 Cf. the Guidelines, paragraphs 76 and 77.

77 Analysis of the market for transit services in the fixed public telephone network

form of conveyance between points of interconnection on its own network. Telenor offers this bundled with call origination and call termination through the products call origination outside interconnection area and call termination outside interconnection area. These factors are serving to increase Telenor’s total market share in transit services to substantially more than 65 %. NPT has not given priority to calculating Telenor’s market share in transit services more accurately. 404. Telenor’s market share in the retail market has decreased somewhat in recent years, and NPT expects this trend to continue. NPT expects more to switch to producing transit services themselves compared with 2004, in consequence of lower connection charges and low prices for leasing emulated lines for interconnection. Furthermore, some smaller providers (e.g. providers of VoB) might conceivably use other providers as intermediaries between themselves and Telenor. These factors are contributing to a lower market share for Telenor in the transit market. 405. On the other hand, transit services in the form of conveyance to a third provider are expected to grow as a result of the fact that a steadily increasing share of traffic involves more and more networks, inter alia since traffic to and from mobile networks is growing. Since Telenor is expected to continue having direct interconnection with most major providers, this may lead to increased market share for Telenor. 406. There is generally great uncertainty with respect to VoB’s future impact on the transit market. 407. Although there are more uncertainties related to Telenor’s current and future market share in transit services, NPT finds that it is overwhelmingly probable that the company’s market share will be substantially higher than 50 % within the time period this market analysis is meant to cover. 408. In consequence of this there is clear indication that Telenor has significant market power in transit services. 409. However, market share alone is insufficient to determine whether a provider has significant market power, but must be viewed in context with the other relevant assessment criteria, cf. the Guidelines, paragraph 79. The remaining assessment criteria are discussed in the following sections.

11.2 Profitability and price developments

410. If over a period of time an operator operates with a price that is substantially higher than the underlying costs and thereby achieves high profitability (compared with alternative investments), this may be an indicator of significant market power. 411. However, allowance must be made for the possibility that high profitability over a given period of time may be the result of other factors than market power, for example the benefits of efficiencies, innovation or accounting write-offs that do not necessarily correspond to the actual value reduction in invested capital. 412. Similarly, low profitability is not necessarily an argument against the operator being assessed as having significant market power, but may be a result of inefficient production. 413. The development of prices over time may likewise at the outset indicate something about the degree of competition, possibly the degree of potential

78 Analysis of the market for transit services in the fixed public telephone network

competition, and can thereby provide a pointer to whether a provider has market power. 414. The external provision of interconnection services from Telenor has been subject to the cost orientation obligation. Since Telenor’s interconnection charges have been subject to regulation, the historical profitability of its external services cannot in any case be regarded as an indication of whether or not Telenor has had significant market power in transit services. 415. Furthermore, transit services that the company produces and uses as inputs in its own services in the retail market are not priced and it is therefore not possible to determine the profitability connected with these services. 416. Unlike its call origination and termination charges, the rates for Telenor’s external transit services are not differentiated with regard to the time the transit takes place. However, the rates are differentiated on the basis of whether the transit takes place within the region or between regions. In addition to the minute charge there is a charge per call. The development of this service has been as shown in Figur 8. As of 1 February 2006 Telenor’s transit charges are 1.5 øre per call, 2.0 øre per minute within an interconnection area and 4.0 øre per minute outside an interconnection area, respectively.

0,120 0,100 0,080 0,060

Kroner 0,040 0,020 0,000 jan.98 jan.99 jan.00 jan.01 jan.02 jan.03 jan.04 jan.05 sep.98 sep.99 sep.00 sep.01 sep.02 sep.03 sep.04 mai.98 mai.99 mai.00 mai.01 mai.02 mai.03 mai.04 mai.05

Price per call Price per minute within an interconnection area Price per minute outside an interconnection area

Figur 8 Price developments in Telenor’s transit services. Source: NPT.

417. Like Telenor’s external call origination and call termination services, these prices were initially reduced a great deal following liberalisation in January 1998. However, the current prices have been unchanged for more than five years. 418. The strict practising of cost orientation means that historic price developments and profitability are not very relevant indicators for whether or not Telenor has significant market power.

11.3 Entry barriers41

419. Potential competition from new operators will normally affect a dominant operator’s behaviour in the market, including pricing. Various forms of entry barriers42 may, however, weaken or remove the basis for potential competition.

41 Cf. the Guidelines, paragraph 81.

79 Analysis of the market for transit services in the fixed public telephone network

420. Entry barriers will differ for different types of transit services. Transit services in the form of conveyance between networks will therefore be discussed separately from transit services in the form of conveyance on an operator’s own network. This analysis begins with the factors deemed in particular as having entry-deterring effects.

11.3.1 Entry barriers in relation to offering conveyance of traffic from another network to a third network 421. Transit services in the form of conveyance of traffic from another network to a third network requires establishment of interconnection with operators who control the respective networks. 422. As a consequence of Telenor’s obligation to provide interconnection services, the company’s nationwide network and large market share in the retail markets for fixed line and mobile telephony, most major providers in these retail markets have direct interconnection with Telenor. Telenor uses these established interconnection relationships in its transit services. 423. Other operators that may wish to provide such transit services must establish equivalent direct interconnection with a number of operators besides Telenor. Such direct interconnections are associated with certain not insignificant fixed costs. For it to be profitable for these providers to establish direct interconnection with one another, the traffic base must be sufficiently large for these fixed costs to be covered. 424. To NPT’s knowledge, the traffic base is too small between most operators other than Telenor for it to pay to establish direct interconnection. Besides the relatively small traffic base, Telenor’s relatively low (cost oriented) price for transit service means that direct interconnection is rarely profitable. 425. The costs associated with establishing direct interconnection are therefore deemed to constitute a high entry barrier for transit services of this kind. 426. The growth of VoB may increase the extent of direct interconnection between different providers, particularly if direct IP-to-IP interconnection is established. Several operators will thereby have the opportunity to offer conveyance of traffic from another to a third network. On the other hand, such a development could also lead to demand largely disappearing for external transit services for exchanging traffic between two providers of VoB. For the remaining parts of the transit market, NPT cannot see that VoB will have a substantial impact on entry barriers.

11.3.2 Entry barriers to conveyance of traffic on an operator’s own network 427. Unlike the type of transit services mentioned above, for transit services in the form of conveyance between areas of interconnection on an operator’s own network it is necessary only to establish interconnection with Telenor. However, connection to all or several of Telenor’s points of interconnection is required. 428. For this form of transit service as well, the connection costs for establishing interconnection are a type of entry barrier. Nevertheless, except for the smallest operators, the exchange of interconnection traffic with Telenor is sufficiently great that it appears to make sense for an operator to produce such transit services itself.

42 ESA writes about entry barriers in, inter alia, the Guidelines, paragraph 81: “In fact, the absence of barriers to entry deters, in principle, independent anti-competitive behaviour by an undertaking with a significant market share.”

80 Analysis of the market for transit services in the fixed public telephone network

429. As a rule it will not be very meaningful in VoB to talk about conveyance of traffic between interconnection on an operator’s own network, since the possibility of nomadic use means in principle that the entire Internet may comprise the individual provider’s “access network”. As stated in section 3.5.6, NPT deems that the portion of the call conveyed on such a provider’s “network” consists only of call origination or call termination, but not transit services. Since providers of VoB will continue to be dependent on terminating traffic on Telenor’s network, they either have to establish connection in all interconnection areas with Telenor or purchase transit services in the form of call termination outside the interconnection area, or route traffic in transit via another provider that has established interconnection with Telenor. 430. The entry barriers to conveying traffic between interconnection areas on an operator’s own network are therefore deemed to be relatively low.

11.4 Potential competition and innovation

431. As a rule, in markets with a high degree of innovation the opportunity to exercise market power will be more limited than in markets with little innovation. Technological development may therefore be of significance for potential competition in the market. Innovation resulting from technological development can therefore contribute to weakening an operator’s position in the market in relation to potential competitors. 432. It follows from this and section 11.3 that technological developments that lower the costs of interconnection may improve the ability for potential operators both to provide transit services externally and produce transit services for their own use. Telenor’s reduction of connection charges as part of its changeover to another technological platform in 2004 may indicate that the costs connected with establishing direct interconnection have become lower than before. 433. For the conveyance of calls between points of interconnection on an operator’s own network, internal production employing leased lines is the only relevant alternative to Telenor’s external transit services. The technological development of such lines, which means lower conveyance costs, improves the ability to convey calls between points of interconnection within an operator’s own network. Telenor’s offer of emulated leased lines for interconnection, which represents more cost effective conveyance than traditional leased lines, makes it possible for many providers in the retail market to produce transit services themselves. 434. Furthermore, the spread of VoB with capacity for direct IP-to-IP interconnection could enable many direct connections between such providers. 435. In view of this, the technological and price development of interconnection and emulated leased lines for interconnection, and any coverage of direct connections between providers of VoB, are serving to counteract Telenor’s market power in transit services to a certain extent.

81 Analysis of the market for transit services in the fixed public telephone network

11.5 Provider behaviour

11.5.1 Bundling of products/product differentiation43 436. A high degree of product differentiation, or heterogeneous products, can create customer loyalty, and make it difficult for competitors to enter the market, as opposed to where products are more homogeneous. Strong brand names will have a corresponding effect. 437. Bundling of products is a variation of product differentiation. An operator with market power in a relevant market can link (tie together) services or products in this market with services or products in another market, so that the operator can provide a bundle of services/products that are differentiated from the competitors’ offering and that the competitors have a limited opportunity to copy. In this way bundling of services/products can contribute to market power in one market creating competitive advantage in another market. Such competitive advantage may be relevant to the assessment of significant market power in the latter market. 438. According to the definition in the Interconnection Agreement, call origination and termination outside the local interconnection area involve bundling transit services with call origination and termination, respectively, as they are defined in these analyses. This form of bundling seems to exist in most comparable countries. In principle, the service could contribute to consolidating Telenor’s market power in transit services. However, these services are demanded primarily by small operators, which in the absence of such bundling would largely have to purchase the bundled services separately. In view of this, this form of bundling cannot be assumed appreciably to affect Telenor’s market power in transit services. 439. With the introduction of emulated leased lines for interconnection, a bundle may in principle be claimed to exist between transmission capacity (leased lines) and interconnection. On the other hand, since the services are offered unbundled, there is no risk of customers being forced to purchase products that they are not interested in. The introduction of this service may increase competition in the transit market since this product can make it more attractive for customers of transit services to connect to several points of interconnection and in this manner produce more transit services themselves within their own network. 440. In view of this, bundled sales/product differentiation cannot be deemed to affect Telenor’s market power in the transit market to an appreciable degree.

11.5.2 Leverage of significant market power to closely related markets44 441. Significant market power in one market may help to strengthen a provider’s market power in a closely related market. Such leverage of market power may be vertical, i.e. between a wholesale market and a retail market, or horizontal, i.e. between various product markets at the same level in the value chain.

43 The criterion corresponds to “product/services diversification (e.g. bundled products or services)” in the Guidelines, paragraph 79. 44 Cf. the Guidelines, paragraph 85.

82 Analysis of the market for transit services in the fixed public telephone network

Vertical integration45 442. A vertically integrated provider is characterised by the provider’s activities comprising more than one link in the relevant value chain. Typically a vertically integrated provider will be present both in infrastructure markets (“upstream markets”) and retail markets (“downstream markets”). Through a strong position in the “upstream market” vertically integrated providers can try to keep competitors in the “downstream market” out of this market, for example through the pricing of products in the “upstream market” or by not offering products in the “upstream market” to competing providers in the “downstream market” at all. In this way a vertically integrated provider with a strong position in the “upstream market” can strengthen his position in the “downstream market”. 443. Telenor is a vertically integrated operator that owns both a nationwide transport network and an access network. This forms the basis of its wholesale services. A vertically integrated provider like Telenor will have the ability to shut competitors out of the retail market through its strong position in this wholesale market. In this way the company can maintain its strong position in the retail market. 444. Conversely, a strong position in the retail market may mean that alternative wholesale providers are barred at the outset from serving large portions of the retail market, i.e. the end users that Telenor has. The reason for this is that alternative providers in the wholesale market only serve end users who are not customers of Telenor. Although potentially a certain share of Telenor’s end users can also be served, this is contingent upon first capturing these customers, which can be relatively resource-intensive. This is reinforced by the fact that Telenor’s high volume on its own network means that the fixed costs connected with interconnection are of relatively little importance. 445. The spread of VoB may lead to a reduction of both Telenor’s market share in the retail markets for traffic and Telenor’s advantages from its vertical integration, which will contribute to counteracting the company’s market power. However, there are uncertainties regarding this development. Since Telenor has significant market power in the broadband market with nearly 60 % of the retail market, one can nevertheless expect that Telenor will also capture a significant share of the market for VoB. 446. Telenor’s strong position in the retail markets for fixed telephony is therefore helping to maintain Telenor’s strong position in the transit market, but the contribution can be weakened as a result of the spread of VoB.

Horizontal integration 447. A provider is horizontally integrated when through ownership he has control of different parallel infrastructures that may be used to supply competing products to the end user. In this case the provider can strengthen its market power in a market by preventing competition from an alternative infrastructure over which it has control. 448. Telenor has high market shares and a strong position in many wholesale markets. It is primarily its relationship to the wholesale market for leased lines and mobile telephony that is deemed to be of crucial significance for Telenor’s market power in transit services.

45 The criterion corresponds to “vertical integration” in the Guidelines, paragraph 79.

83 Analysis of the market for transit services in the fixed public telephone network

449. With regard to conveyance between points of interconnection on an operator’s own network, providers other than Telenor will in many cases be dependent on using Telenor’s leased line services. Telenor’s strong position in leased lines can potentially be abused by failing to provide service to operators demanding transit services and/or Telenor can provide the service at unreasonable terms. As a consequence of the regulatory regime that has so far existed, Telenor has been restrained from doing this. However, NPT finds that Telenor may have the ability to use its strong position in leased lines to maintain its market position in transit services. 450. Furthermore, Telenor’s high market shares in the wholesale and retail markets for mobile telephony means that a large share of traffic exchanged between Telenor’s fixed network and other networks also takes place within Telenor. The maintenance of its market position in mobile telephony helps to consolidate the company’s position in the transit market. By omitting, if it so chooses, to enter into a direct interconnection agreement between the company’s mobile operations and other operators, Telenor’s market share in transit services might be strengthened further. 451. Telenor’s ability to use its position in leased lines and mobile telephony to consolidate or strengthen its market position in transit services depends on the regulatory obligations, if any, that exist for the relevant services in these markets.

11.6 Market power/countervailing buying power46

452. The presence of customers with bargaining power can restrict a provider’s opportunity to behave independently in the market. Such countervailing buying power may be the result of a customer’s size, purchasing volume or the customer having something to offer, for example better market access to other markets. 453. Most of Telenor’s transit market services (Market 10) are required by Telenor itself. The customers of Telenor’s external services in Market 10 are other providers in the retail markets for fixed and mobile telephony, i.e. basically the same ones requiring Telenor’s call termination services. The bargaining power of these operators was discussed in section 8.5.2. It was concluded that the bargaining power of customers vis-à-vis Telenor is not sufficient to weaken Telenor’s market power to a substantial degree. The same is deemed to be applicable with regard to Telenor’s transit services. 454. Unlike with call termination, however, the customers have alternatives to Telenor’s transit services. This applies especially to the ability to convey traffic between points of interconnection on the customer’s own network. 455. The main alternative to Telenor’s transit services between other networks is to enter into interconnection agreements with the providers in question. As previously mentioned, cf. section 11.3.1, this is hardly relevant due to relatively high fixed costs such direct interconnection involves. However, it could be more relevant for providers of VoB should technological and market developments facilitate IP-to-IP interconnection. 456. The above-mentioned means that a certain amount of countervailing buying power exists in the form of conveyance between points of interconnection on an

46 The criterion corresponds to “absence of or low countervailing buying power” in the Guidelines, paragraph 79.

84 Analysis of the market for transit services in the fixed public telephone network operator’s own network, which helps to weaken Telenor’s market power somewhat in this form of transit services.

85 Analysis of the market for transit services in the fixed public telephone network

12 Designation of providers with significant market power in the area of transit services

457. The assessment of significant market power builds on the Guidelines, section 3.1, and is based on the different criteria discussed in the market analysis in Chapter 11 above. In accordance with the Guidelines, paragraph 76, and with a starting point in the existing market conditions, NPT has based the assessment of significant market power on a forward-looking market analysis. The time horizon for this analysis is approximately two years. However, NPT will monitor the market closely. If there are changes in the market conditions that suggest that the analysis should be revised on an earlier stage, NPT will carry out such a new analysis. 458. The Electronic Communications Act § 3-1, cf. the Framework Directive, Article 14 (2), states that: “A provider has significant market power when the provider individually or jointly with others has economic strength in a relevant market affording the provider the power to behave to an appreciable extent independently of competitors, customers and consumers.” 459. This is an important starting point for the assessment of significant market power. The same is true of the amplification in the Guidelines, paragraph 74, that in ex ante assessments of market power it must be assessed in particular whether a provider’s strength in the market makes it possible to implement price increases without this causing a significant sales/revenue reduction for this provider. 460. For the sake of clarity NPT wishes to emphasise that it is significant market power that is the relevant subject of assessment and not anti-competitive misuse of significant market power. It is therefore not central to the assessment whether any market power/dominance is actually misused or not. However, this does not mean that a provider’s behaviour in the market is irrelevant to the assessment of significant market power. Even if structural factors carry the most weight in the assessment, behaviour that contributes to creating or maintaining competitive advantage for a provider who already has a dominant position in the market may imply a strengthening of this provider’s market power. 461. In the market for transit services Telenor has a market share that is probably substantially higher than 65 %. Entry barriers in the market exist primarily as a consequence of fixed costs related to the establishment of direct interconnection with many providers and in part to the low price of Telenor’s transit services due to government price regulation. Telenor’s strong position in the retail market for fixed telephony (vertical integration) helps to consolidate Telenor’s position in the market for transit services. Telenor’s strong market position in leased lines and mobile telephony can, in addition, further maintain or strengthen the company’s position in the market for transit services in the absence of certain obligations relating to the company’s services in these markets. 462. On the other hand, the customers (primarily the largest ones) are able to produce transit services themselves. The technological and price developments related to leased lines and interconnections indicate that such alternatives may become increasingly more relevant, which to a certain extent can counteract the strength of Telenor’s market position, also as a consequence of the fact that this adds to the

86 Analysis of the market for transit services in the fixed public telephone network customers’ negotiating strength. Nevertheless, these factors are not deemed to be compelling enough to conclude that Telenor does not have significant market power here. 463. In view of the above-mentioned, NPT has concluded that Telenor ASA has significant market power in the market for transit services.

87 Glossary for the analyses of the markets for call origination, call termination and transit services on the fixed public telephone network

Annex 1. Glossary

Access network Is the last portion of the circuit on the network between the individual end user, which the end user uses exclusively up to the node on the transmission network that the end user shares with another on the transport network. Broadband Designation of an electronic communications network with high transmission capacity (bandwidth), i.e. capacity that does not restrict the transmission of sound, data and full-motion video. Since the capacity needs will change with the development of new applications, services and technologies, the definition of broadband must be dynamic. Call origination The initial portion of the conveyance of a call, which ends at the first point on the network that can exchange interconnection traffic. Called party Subscriber receiving calls for electronic communications services. Calling party Subscriber who initiates an electronic communications service. Coaxial cable High-capacity cable used, inter alia, in cable TV networks. End user Any physical person or body corporate entering into an agreement for access to an electronic communications network or communications service for their own use or to rent out. IN Intelligent Network. Is used as a designation for telecom network architecture where service control is separated from call control. Makes it simpler to provide tailored services to users. Interconnection Function allowing the conveyance of traffic between providers such that end users can communicate with one another and have access to public electronic communications services independent of which provider they are connected to. IP Internet Protocol is the (packet switched) method in which data is sent from one machine to another on the Internet. ISDN Integrated Service Digital Network. Digital network that integrates several types of service: voice, text, data and images. ISP Internet Service Provider. Provider of access to the Internet. Sometimes there is a distinction between ISPs that only provide Internet access and others that provide value added services in addition. Leased line Electronic communications service in the form of permanently established capacity for signal transmission as an input for service production or as transmission Glossary for the analyses of the markets for call origination, call termination and transit services on the fixed public telephone network

between different geographic addresses for end users. Provider Any physical person or body corporate that provides others with access to an electronic communications network or service. PSTN Public Switched Telephone Network. The ordinary analogue telephone network SMS Short Message Service. A system for sending or receiving short text-based messages to or from mobile phones. Telephone service Electronic communications service that transmits voice between terminal equipment connected to network termination points on an electronic communications network Termination The last portion of the conveyance of a call, which begins at the last point on the network that can exchange interconnection traffic. Transit Service for transmitting a call from one connection point to another point of interconnection on a telecom operator’s network. VAS Value Added Services. Services that provide “added value” for the user. Can be produced using IN or external computer systems. Voice over Broadband Telephony supplied via a broadband connection and (VoB) where the voice signals are transferred with the use of IP. WLAN Wireless Local Access Network. Provides wireless access to a network from a PC or other communication device via an access point. Often based on the 802.11 standard. xDSL DSL, Digital Subscriber Line. Is a term for various standards for broadband transmission over existing telephone lines (copper wire) to subscribers. The letter x stands for the different variants.

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