THE COMPETITION PROTECTION OFFICE : Re TELEKOM SLOVENIJE and Siol in 1997-1999

THE COMPETITION PROTECTION OFFICE: Re TELEKOM SLOVENIJE AND SiOL IN 1997-1999

A CASE STUDY

URAD ZA VARSTVO KONKURENCE: OBRAVNAVA TELEKOMA IN SiOLa V LETIH 1997-1999

POSLOVNI PRIMER

TANJA DMITROVIĆ, MIRAN KOVAČ, ČRT KOSTEVC

Faculty of Economics, University of Ljubljana Kardeljeva pl. 17, 1000 Ljubljana, Slovenia Telephone: + 386 1 5892-400 Fax: + 386 1 5892-698 e-mail: [email protected], [email protected], [email protected]

ABSTRACT

The case deals with the development of the Slovenian Internet services market in the late 1990s and discusses a possible abuse of monopoly power by the national telecommunications company, Telekom Slovenije, and its wholly-owned Internet service provider SiOL. Three sets of legal proceedings run by the Competition Protection Office against Telekom and SiOL are discussed, regarding Telekom's pricing policy and bundling of services that have allegedly provided an advantage to SiOL over its competitors. The views of all parties concerned are presented. The case study serves a basis for class discussion rather than to illustrate either the effective or ineffective handling of an administrative complaint.

POVZETEK

Poslovni primer obravnava razvoj slovenskega trga internetnih storitev v drugi polovici 1990- ih let in s tem povezane obtožbe proti Telekomu Slovenije in njegovi podružnici SiOL-u. Drugi ponudniki dostopa do Interneta so v obdobju med 1997 in 1999 vložili pri Uradu za varstvo konkurence tri zahtevke za presojo morebitne zlorabe monopolnega položaja, ki se nanašajo na cenovno politiko Telekoma Slovenije in na prodajo svežnjev. Predstavljena so stališča in pogledi vseh vpletenih strank. Poslovni primer podaja zgolj osnovna izhodišča za razpravo v razredu in ni namenjen presoji učinkovitosti razreševanja poslovnega problema oz. upravnega postopka. THE COMPETITION PROTECTION OFFICE: Re TELEKOM SLOVENIJE AND SiOL IN 1997-1999

A CASE STUDY1

The elevator door opened. Out of the lift came a man, walking firmly and swiftly towards a wood-panelled door. The secretary greeted him as he passed on his way to his office. Mr. Andrej Plahutnik, as the man was called, was the Director of the Competition Protection Office of Slovenia (CPO), which was established in 1993 by the Competition Protection Act. Its central task is to oversee compliance with and execution of the competition law.

Mr. Plahutnik approached his desk, burdened by a stack of papers. The pile was in connection with the recent CPO case, concerning the bundling of services by the national telecommunications company, Telekom Slovenije2 and its wholly-owned Internet service provider (ISP) SiOL. Telekom Slovenije was the only national provider of fixed telephony. SiOL entered the market in 1997, but by 1999 its market share had reached around 30% of the household market and 60% of the business market. Thus, its owner, Telekom Slovenije, has been the target of several accusations, both informal, usually in the media, and formal legal proceedings.

In the two short years of SiOL's existence, this was already the third set of proceedings against it. The first one was filed in 1997 when Telekom introduced a special phone number which gave SiOL the privilege of charging customers local tariffs when accessing the Internet, regardless of the place of connection. This gave SiOL an advantage over other Internet service providers (ISPs) and was formally resolved only after Telekom offered the other ISPs the same access. However, the question remained whether Telekom had caused any business loss to the other ISPs. The second set of proceedings against Telekom was brought in spring 1999 by K2.net and Perftech, two members of SISPA, the Slovenian Internet Service Providers' Association, of which SiOL was also a member. It concerned an increase in the price of the leased lines used by ISPs to build up their networks. Since Telekom set the prices, SISPA viewed this as another step aimed at further impeding ISPs' competitiveness against SiOL. The CPO’s decision on both issues was still pending, when a third set of legal proceedings was filed in the late summer 1999 by another SISPA member, the ABM company. These proceedings were prompted by Telekom's decision to also include in its ISDN package SiOL's Internet connection software. ABM's claim was, that all other ISPs were thereby discriminated since an ISDN user would most likely use the software already provided in a package for no extra cost, and hence contract with SiOL as an Internet provider.

Telekom rejected all the ISPs’ claims, offering some very convincing explanations. Mr. Plahutnik realised that the issues at hand were no doubt very complex and would require a thorough market analysis before issuing a final ruling in all three legal proceedings.

1 The case was prepared as a basis for class discussion rather than to illustrate either the effective or ineffective handling of an administrative complaint. The authors thank Nevenka Hrovatin and Tomaž Turk for useful suggestions. 2 Also referred to simply as Telekom throughout this text. 2 EVOLUTION OF THE NEW SERVICE MARKET - THE INTERNET

A predecessor of the Internet was ARPA Net, a network used for military purposes in the US. Even though the academic sphere started using the Internet back in the 1980s, its widespread civil use really began in the 1990s. In Slovenia, use of the Internet lagged behind developments in EU countries, and especially the US. Growth accelerated only after 1995. Since 1995, when there were just five Internet providers, the Internet market in Slovenia has grown rapidly and in 1998 it already consisted of 40 commercial and non-commercial providers.

Developments in 1996

In 1995, Slovenia had 5 Internet providers: ARNES, SInet, K2.net, Quark, and Telekom Slovenije. While ARNES (Academic Research Network of Slovenia) was a state- sponsored organisation providing free Internet access to the two Slovenian universities, student organisations, research institutions, and other non-commercial institutions, the other ISPs were commercial firms. These providers (also called 'backbone' or primary providers) then already had the capability to connect Slovenian providers to large international networks, called backbones. An example of the latter is EBONE, a backbone which connects private networks and research institutions all around Europe.

In 1996, approximately 25% of all individual Internet users had Internet access from home, and the majority of them (2/3) used ARNES as their provider. In general (both from home and other places) ARNES was the leading provider (35%), followed by the computer centres of both Slovenian universities (18%), and KISS (the communication and information service of the Student Organisation at the University of Ljubljana) with an 11% share3. All other commercial providers (also called secondary providers) held the remaining 30% share. Among them were the largest: Nil (Eunet), Perftech, and Quantum.

ARNES was still the prevailing service provider among households. Telekom with its SiOL Internet service started to gain a visible share, while other providers kept relatively small market shares.

Telekom (SiOL) became a leading provider to companies (business market). In 1997, the market structure significantly changed compared to the story in 1996. Telekom already controlled half of the business market. Its share was even larger among small companies (this was mainly due to its acquisition of Nil). Perftech as the second largest commercial provider lagged far behind with a 5% market share. So did ARNES, which was providing support to

3 As already mentioned, ARNES was the Internet service provider to academic institutions. Using ARNES’ network, these (i.e. university computer centres and student organisations) often offered their own bundle of services to their clients (mail services perhaps being the most important). 3 the R&D departments of companies. Other companies held less than 5% of the market each. However, several small companies found a market niche as ‘presence providers’, that is as WWW applications developers. Among more notable providers to the business market, both in the area of dial-up access and in the area of leased lines access4, were Softnet, Pronet and Agenda.

In 1998 the number of Internet providers in Slovenia increased to 40 (see Exhibit 1), all of which were still in existence in the first half of 1999. Among these were 38 commercial providers of Internet access and two non-commercial providers, ARNES and KISS. In addition there were also some cable Internet providers, but most of them were still in the testing operational phase.

Commercial and non-commercial Internet service providers used either their own networks or they connected to other networks. By 1999, the number of commercial Internet ‘backbone’ network providers had increased to 9. Their networks were linked up with various Internet ‘backbones’ at various bandwidths around the world (see Exhibit 2).

 THE HOUSEHOLD MARKET

According to the RIS'98 survey5, 18% of the population between the ages of 15 and 65 were using the Internet in 1998. ARNES, both universities and KISS were still the leading providers for home access for households. Yet, this sort of access was a primary access for only one-third of all users. ARNES had an approximately 40% market share, university services (University of Ljubljana, University of Maribor and KISS), and SiOL each had a 20% share, and the other ISPs held the remaining 20% of the market. Compared to 1997, ARNES' share had fallen by some 5 percentage points. The majority of other providers experienced a similar decline in their market shares. This was the result of the increased market share of university services and SiOL. Among households considering a connection to the Internet, the big favourite was SiOL, a preference that differed significantly from that in 1997.

4 Companies primarily used two types of access to Internet. Via dial-up connection to their ISP and from there on the ISP used a leased line; or directly to Internet, using the leased line, provided and serviced by their ISP. However, the ISP leased the leased lines as in the previous case from Telekom. Dial-up access refers to connection with modems over the PSTN – Public Switched Telephone Network (a modem is part of the equipment physically and logically connected to a leased line/ network access point). A leased line assures the leaseholders a permanent connection between two network connecting points or between one and more connecting points. The leaseholder leases a certain bandwidth at which information is being transmitted. Bandwidth is expressed in bits per second: 64 kbits/sec, 128, 264,512, 2 Mbit/sec, up to 2,5 Gbits/sec. Some Internet backbones allow even for higher bandwidth. In 1998, most Slovenian ISPs provided the bandwidth of 64 kbits/sec. A leased line rental fee is a monthly amount, paid by the user, depending on the aerial distance and bandwidth. A connection fee is a one-off fee, paid at the time of connection. With this payment, Telekom covers the cost of expanding the network. 5 In 1996, the Faculty of Social Sciences at the University of Ljubljana started a research project RIS - Use of the Internet in Slovenia. It focused on the use of computers and Internet among the companies, households and non- profit institutions. 4 Of the most intensive Internet users (see Exhibit 3), half of them used ARNES or university services, and they thus had free-of-charge access (however, they still had to pay for the telephone impulses, even for local calls, charged by Telekom). Among non-academic users, SiOL stands out. Customer satisfaction with ISPs depended mainly on the availability of free access lines and on the bandwidth of transmission. Smaller ISPs were usually rated better than ARNES and SiOL (Exhibit 4).

 THE BUSINESS MARKET

In 1998 already more than 50% of Slovenian companies had Internet access; more precisely, access was in place for about 80% of large companies, 60% of medium-sized companies and 50% of small companies6. Most of them (86%) used dial-up access, while the rest used leased line access. Decision to use leased lines was most often made by large companies (27% of large firms used leased lines, compared to 23% of medium-sized and small firms, and 11% of micro firms). Among firms that used modem access, the majority used the 64 kbps connecting bandwidths and only a third of all companies were planning to have faster connections. Usually their target was the ISDN7 connection at 128 kbps. In 1998, the percentage of ISDN connections ranged from 50% (among large companies) to 25% (among small companies).

By 1998, SiOL had increased its share to 50% among large companies and to 60% among small companies. Compared to previous years, user satisfaction with ISPs increased in all areas; nevertheless, smaller companies still fulfilled their customers' needs better than bigger ones (see Exhibit 4 for 1997 data). Only 10% were considering a switch to another ISP, which indicated high loyalty. The two main factors affecting satisfaction were the price and professional assistance.

 THE INSTITUTIONS

Institutions represented a separate market, since they were entitled to use the state- sponsored academic network (ARNES). The prevailing access provider was therefore ARNES with a 94% market share. Most using ARNES were satisfied with services involving instructions and help for users. Nevertheless, since 1997 a growing number of education institutions (primary and secondary schools, libraries and kindergartens) also used a commercial ISP besides ARNES or even only used a commercial ISP.

THE NETWORK ALTERNATIVES

The Telecommunications Act in Slovenia enabled Telekom to be the sole provider of the infrastructure necessary for Internet services up till 1 January, 2001. What this meant in practice was that Telekom was a monopoly ‘owner’ of the only physical infrastructure (telephone lines and other equipment used for telecommunications).

6 Large companies are defined as those with more than 250 employees, medium ones with 50-250 employees, small ones with 5-50 employees, and micro ones with less than 5 employees. 7 ISDN - Integrated Services Digital Network; the digital dial-up access as opposed to analogue dial-up access. 5 However, the fixed telephony network is not the only medium available for information transmission. One alternative is to use a cable TV operator's network. In 1999, this was still in the testing phase, even though the first acquisitions of cable operators had already occurred in 1997. The advantages of using cables lie in the existing widespread network, the high permeability of the lines and high bandwidths.

6 Possible substitutes are also represented by the networks owned by Slovenian Railways (Slovenske železnice) and the national electricity provider (ELES). Both companies (also state-owned bodies) already had in 1999 the capability and infrastructure to provide Internet access, but they had to acquire operating permits in order to compete with Telekom. However, neither of these networks has represented any serious threat to Telekom since its own network was much more extensive, and even if users were to switch to such alternative networks they would still have to connect via telephone lines and therefore pay for the related telephone impulses. On the other hand, the cable TV network was already present in users' homes and therefore a telephone connection was not required.

At the turn of the century, it was planned that another network would come into operation - the network of DARS (the Slovenian highway construction company). This company has been laying optical fibre along the path of the Slovenian highway-cross. In a few years, this could become a viable alternative to all of the previous networks. A further alternative involves the use of the mobile telephone system that would in the future efficiently use satellite links for data transmission. A new protocol has already been introduced to facilitate these plans.

TELEKOM SLOVENIJE

Telekom Slovenije was established on 1 January 1995 and was formerly part of the state-owned corporation PTT (Pošta Telegraf Telefon) that included telecommunications and postal services. Once it was established, Telekom retained the legal status of a state-owned corporation. The company’s formation and operation were regulated by the Telecommunications Act (Zakon o Telekomunikacijah). In 1999, Telekom was a state- supported monopoly and was to retain its monopoly ownership of the telecommunications infrastructure until 1 January 2001, when other competitors would be allowed to enter the market. Telekom’s monopoly covered amongst others fixed telephony, telex services and four bandwidth multimedia and data systems. The full list of services provided by Telekom included:

1. Telephony (for company purposes 080 and 090 and for other subscribers); 2. Sales of technical equipment (support for services that Telekom offers); 3. Additional services (wake-up calls, speed dialling, call holding, call redirection); 4. Flexible net (basis for the construction of intranet for companies); 5. Phone booths; 6. Phone information services; 7. SiOL (Internet telephony) + SiOL package (including services not directly linked to the Internet); 8. ISDN; 9. Mobile telephony (Telekom was an owner of the dominant mobile operator MOBITEL); 10. SIPAX.25 (X.25 network); 11. Line of stores (Telestores); and 12. Videotelephony (in development).

7 In mid-1999, the company employed some 3000 employees (3155 at the end of September 1997), but an additional 10% cutback was expected by the end of the year. The company was initially run by an eight-member board. Four members of the board, the CEO and his deputy, were appointed by the Slovenian government. On April 7, 1999 the Agency for Restructuring and Privatisation agreed to restructure the company. The new board consisted of five members (president, vice-president, two board members and a workers' representative), none of them appointed by the government. This signalled the beginning of much broader restructuring measures, initiated to prepare the company for changes in 2001, when the monopoly on telecommunications services was set to end. However, in response to technological advances in the telecommunications industry, Telekom had already formed in previous years two strategic business units which subsequently became independent subsidiary companies: Mobitel, a mobile telephony operator, and SiOL, an Internet service provider.

TELEKOM'S SERVICE: SLOVENIJA ONLINE – SIOL

SiOL, at the outset, was the brainchild of a dozen Internet enthusiasts who saw the new technology as the tool of the future and realised its profit potential. The fledgling market of the time consisted of just a few Internet providers. But this group of twelve computer experts went on to form the core of what later became SiOL - Slovenia Online - an Internet service provider.

In the early 1990s, the Internet market was not restricted by any stringent rules and regulations limiting new entries. The lack of expertise in Internet services (on the side of infrastructure providers) enabled most competitors to take advantage of the many existing loopholes. There was no system in place to allow Telekom (the sole provider of infrastructure) to control the bandwidths that the Internet providers were using. Most providers were therefore able to cut costs by paying the lowest possible tariffs, while operating at bandwidths in excess of those reported.

Soon after its breakthrough to the market, Telekom acquired Nil, an existing Internet provider whose experience and technical know-how was exactly what a young upstart unit like SiOL needed. SiOL brought Telekom’s vast financial support into the marriage, while Nil, a market leader at the time, offered the necessary market experience and technology. Like any upstart, it encountered numerous problems at the beginning, many of which were a direct result of Telekom’s size, which prevented SiOL from being flexible enough to follow and/or predict market trends. It had a hard time responding to the signals of the fast growing market that showed no signs of slowing down. Every important decision had to be brought to Telekom’s board, which took time and involved a plethora of bureaucratic procedures. This led to ever-increasing thoughts of reorganisation.

Finally, on July 1, 1997, SiOL was established as a new independent strategic business unit (SBU). The ambitions at that time were to become Telekom’s most flexible and profitable unit as its capacities were being filled as fast as SiOL could extend them. The growth of the new firm was astonishing. It managed to quadruple the number of its customers from September 1996 to September 1997, when it achieved a market share of 14.3%. By the end of 1998, it had increased its share of the Internet market already to one-third of all household users, and to more than one-half of all business users.

8 Many problems concerning SiOL's role in the Internet market were caused by its ownership structure. At the beginning of 1999, SiOL was still Telekom's SBU and had no real independence. However, various internal and external pressures prompted the decision to spin-off SiOL, which on 26 July 1999 became an independent limited liability company, yet still in the sole ownership of Telekom Slovenije. The internal reasons for the spin-off were linked to efficiency. In spite of its independent status within Telekom, the hierarchical structure hampered SiOL's flexibility, which in the dynamic Internet market represented a real impediment. On the other hand, it was hoped the reorganisation would stop the endless accusations that Telekom was abusing its dominant position by applying cross-subsidy practises.8 Telekom admitted it had been financing SiOL, yet it claimed it had done so legally.

THE PROCEEDINGS

All three sets of proceedings were in one way or another linked to the alleged privileged role that Telekom’s own Internet provider SiOL was supposed to have compared to other providers of the same service. As the RIS survey indicated, SiOL was the principal Internet provider to the largest users of the service (companies and government institutions) covering two-thirds of the market of small companies and one-half of the big company market. SiOL was clearly the market leader in the business market. Among households, ARNES remained the biggest provider, but SiOL’s share had grown from one-fifth of the market in 1996 to one-third by the end of 1998. The question that came to Mr. Plahutnik’s mind was whether Telekom was abusing its legal monopoly to fortify SiOL’s market position.

Legal proceedings No. 1: Connection issues

The first proceedings against Telekom referred to the allocation of the special access number 0880 in 1997 to SiOL. Under the existing telephone system, Slovenia was divided into 12 local dial-up areas. Within these areas local-call prices applied which were significantly lower than the long-distance inter-area prices applied to calls between areas. The access number 0880 allowed a phone user in any part of the country to make calls at the local- call price. In practice, this meant that SiOL could use a single access point to connect to the network, while its customers with dial-up access were charged only local-call prices regardless of where in Slovenia they were located. The clients of the other ISPs that were located in a local dial-up area other than their provider’s had to pay the price for a long- distance inter-area call when connecting to the provider’s network. The other ISPs that wanted to provide their clients with the same benefit as SiOL had to build access points in all local dial-up areas which they wanted to serve. Therefore, they had to contend with much higher unit costs and reduced profit. Other ISPs claimed that the cost (and consequently price) advantage enabled SiOL to rapidly increase its market share.

Telekom’s vice-president, Mr. Kramberger, denied the accusations and offered an alternative explanation. He stated that all providers had actually been offered the use of the 0880 number as an access number, but for a variety of reasons none of them decided to take it up. They all wanted to get additional services with that number, something more than even SiOL had. Telekom provided the 0880 number as a complete service and not just parts of it as 8 Appendices 1-3 provide some notes regarding competition protection legislation and cross-subsidising. 9 other providers wanted. According to Telekom, the accusations that SiOL was in a privileged position had not been proven and remained based on SiOL's remarkable growth rate and speculations. Furthermore, Telekom claimed that other Internet providers had a cost advantage over SiOL, and not vice-versa. This was mainly due to the fact that SiOL used a professional system of Internet connections (so-called flexible multiplexors) that allowed for a sufficient number of connection channels and guaranteed customers uninterrupted access to the Internet. According to Telekom's data, the other providers relied on copper cables and modems (supposedly an antiquated technology) – where disconnections and interruptions are far more frequent. But such technological solutions enabled those providers to operate with lower costs and allowed profit margins. SiOL's growing market share was therefore solely a result of a more quality-aware and customer-oriented approach. The competitors were, as far as Telekom was concerned, stuck in the past and unaware of their customer's real needs. In response to this claim, the ISPs had a ready answer – SiOL might be using sophisticated equipment, but that was an investment made possible through the financial support of Telekom, which constituted more proof of Telekom’s non-competitive practices.

Under pressure from the CPO, Telekom was finally forced to introduce a new service with the new access number 0889 that was tailored to suit the other providers. Both access numbers apply local tariffs to phone calls, independently of the place of connection, however there are differences in the discounts on telephone impulse prices. While SiOL got a 50% discount, the other access providers got lower discounts. However, the dispute between Telekom and the SISPA (Slovenian Internet Service Providers’ Association) as to whether Telekom was really failing to offer the same service to all Internet providers (the SISPA’s view) or whether the same service was actually available and thereby no protectionism was shown towards SiOL (Telekom’s claim) remained open. To clarify the issue, Mr. Plahutnik requested from the ISPs proof of their financial losses due to not getting the 0880 number. However, none of ISPs provided the relevant documentation. But before this issue was finally resolved, Telekom's new pricing system for leased lines, announced in February 1999, attracted another wave of accusations and protests.

Legal Proceedings No. 2: Pricing issues

The new pricing system represented Telekom’s attempt to level the playing field and to ensure that all Internet providers operated under the same conditions and none of them was privileged. The users affected by its decision were first of all the large ones, such as the state administration, the two universities, both licensees of mobile telephony - Mobitel and Simobil, banks, traders and other large companies, but also a multitude of small ones. The loudest were the Internet service providers joined together in the SISPA. Consequently, they commenced legal proceedings at the CPO against Telekom.

The new Telekom tariffs were supposed to come into effect on 1 March 1999 as stated in the new price list. However, the problem was that Telekom not only changed its tariffs, but also its system of charging, so leaseholders of leased lines were not able to calculate the increase in cost that the change would bring about. The biggest change was reflected in the way distances were measured. Previously, Telekom had been using the physical distance of cable between the users' connecting points for billing; after 1 March as a measure of length it started using aerial distance which is usually shorter than physical distance, thereby reducing

10 the costs of interconnection. Yet, as mentioned, no easy comparison between the old and new costs could be established. According to the calculations of the SISPA (provided in Exhibit 5), there would be an increase of up to 11 times more than the previous price, while Telekom estimated the average increase to be in the magnitude of 14%. The differences were due to the use of the modems involved. If providers used their own modems, Telekom was unable to supervise the exact bandwidths and therefore it charged the highest rental. On the contrary, by using Telekom's modem, the provider was charged according to the established bandwidth. Nevertheless, Mr. Bulat of the SISPA argued that most already had their own modems - and this included banks, ISPs including ARNES, schools and other institutions – and had no incentive to use Telekom’s modems. The SISPA’s calculations therefore presupposed the use of the user’s own modems, while Telekom’s calculations envisaged the use of Telekom’s modems that could be monitored.

On the other hand, Telekom reasoned that using alternatives to copper wires, such as elastic networks, or ISDN, could prove even cheaper for the users. Among those using ISDN were many education institutions. Nevertheless, Mr. Kramberger, the vice-president of Telekom, promised Telekom would allow customers to use their own modems, even though the CPO took the view that ‘…by requesting that the ISPs use Telekom's modems, Telekom had not violated competition rules if that was a necessary act to ensure its own legal rights’.

The price estimates of other large users of leased lines were similar to those of the SISPA. A representative of the Government Centre for Informatics (CVI), which was the largest user, claimed that it was almost impossible to calculate the differences in costs and that it would rather wait for the bill to arrive. ARNES, the biggest non-commercial ISP, predicted the costs would be highest in the cities, where copper wires represented more than half of all the leased lines. The rental fee for a 64 kbps copper wire used to be SIT 18,000 9 regardless of the distance. According to the new price list, the fee had increased to SIT 111,753 a month for each kilometre of aerial line. They added: ‘While Telekom has little overhead costs with copper wires, which are present everywhere where fixed telephones exist, the costs for schools and research institutions could increase from SIT 20,000 – SIT 30,000 to SIT 100,000 – SIT 300,000’.

Telekom had an additional argument for the changes to the billing system (using aerial distance) and to prices – alignment of the system with the European Union's practises. Thus, it lowered prices in the area of low bandwidths (64 kbps) and increased prices in the middle range (128 kbps), which had been lagging behind the European average. It had also reduced high bandwidth connection prices in the interurban area (see Exhibit 6). A member of the Telekom board argued that the linear function of prices had been changed into a root function, therefore prices for longer lines with greater capacity had fallen by about 30%, while medium capacity line prices had gone up by no more than 25%. ‘The European trend’, claimed Telekom, ‘is to lower the long distance fees comparably to the local fees.’ For a comparison of international prices, see Exhibits 7 and 8.

Mr. Kramberger explained the implementation strategy for the new pricing system. If the new price list would lead to a price increase of less than 30% (this was considered a medium increase), the new system would be applied immediately. However, in cases where the increase would exceed 30% Telekom would allow gradual increases on a case-by-case basis. Further, on the CPO's insistence Telekom provided unofficial calculations for some of

9 SIT stands for the Slovenian tolar, which is Slovenia’s currency. 11 the ISPs. Some calculations, for ARNES and CVI as an example, even showed a drop in their costs by 15%-23% (see Exhibit 9).

Nevertheless, the SISPA insisted that the rise in prices was substantially more than the rise in costs and that SiOL had retained its privileged position over other Internet providers in spite of the price adjustments. On the other hand, Mr. Kramberger stated that under the old pricing system other Internet providers had an advantage over SiOL. While other providers were buying copper wires or hiring lines with very low bandwidths at negligible costs, to which they connected modems with higher bandwidths, SiOL had been using a higher quality flexible multiplexors network. This enabled the latter to provide enough connecting points for individual users, including enough bandwidth. ‘Other providers were simply taking advantage of gaps in the law,’ claimed Mr. Kramberger. This view was also supported by the CPO which recognised inconsistencies on both sides. While checking out one of the ISPs, it discovered (through the assistance of an engineer) that it had contracted such low bandwidths that it could not have been able to connect even individual users in the first place but, ironically, it was still operating, even with many subscribers!

With different claims on both sides, it was obvious that an independent cost analysis was required. The State Secretary for Postal Services and Telecommunications, Mr. Rozman, admitted that, ‘The government is responsible solely for determining the prices of public telecommunications services, thus for the prices in voice telephony. We don't have any jurisdiction over giving approvals for leased lines' tariffs. The government can intervene only if the prices have caused disturbances in the market.’ Still, after 1 March 1999, the Ministry of Transport and Telecommunications undertook a price analysis, comparing Slovenian leased line prices with European ones (Exhibit 10). The results showed that in some cases the new prices of leased lines were substantially higher than their European equivalents. Therefore, at a meeting of the parliamentary committee for infrastructure and the environment the government suggested Telekom gradually reduce its rental prices by the end of 2000.

Legal proceedings No. 3: Bundling of services

After SiOL's spin-off in the summer of 1999, it was anticipated that the clear division of accounts between SiOL and its parent company would contribute to greater transparency in the market. However, the CPO’s task was not over yet. It still had to issue a ruling in both cases, since Telekom's past actions could have significantly affected the present market structure. As if this were not enough, ABM, one of the ISPs, filed another set of proceedings at the CPO against Telekom in September 1999. The proceedings were by Telekom's decision earlier in the year to include in its ISDN 3000 package software for Internet connections. The ISDN 3000 package was available only to those customers who already had a phone connection (PSTN). Since Telekom Slovenije was the only provider of fixed telephony, the package was intended for existing clients who wanted to upgrade their phone connections with ISDN technology. Compared to the old (PSTN) technology, ISDN offered the possibility to install two phone lines instead of one and enabled quicker Internet connections. Even though both technologies offered basically the same type of services (voice telephony and Internet connections), they required different (non-interchangeable) types of lines, phones and modems.

12 The ISDN 3000 package contained all components necessary for voice telephony and Internet connections: ISDN line, ISDN phone, ISDN modem, and Internet access software. Not surprisingly, Telekom chose SiOL's software which would allow the ISDN user a simple and quick connection to the Internet, using SiOL as the provider. A few weeks after the package’s introduction to the market in January 1999, ABM requested that Telekom also include its software enabling connections to its network, Amis.net. However, Telekom turned down this request. ABM's response was to file legal proceedings at the CPO a few months later accusing Telekom of discriminatory behaviour. Telekom's defence was simple; the inclusion of SiOL's software did not preclude ISDN users from connecting to the Internet through any other ISP. Telekom only wanted to offer an additional benefit to ISDN users who would at the end decide which provider to choose. As Telekom’s price list suggested (Exhibits 11), even though the ISDN 3000 package was priced below the total sum of the prices of the individual components, SiOL’s software was not provided for free (Exhibit 12). Consumers could not break-up the offered bundle (therefore exclude any of the components), but were still free to choose between purchasing the bundle and the individual components. In Telekom’s view, the discounted price of the package, due to the much lower margins on terminal equipment (phones and modems), was a legitimate sales promotion strategy aimed at increasing sales of ISDN connections.

Mr. Plahutnik realised that the CPO's decision regarding the legal proceedings could have a significant effect on the future use of the Internet in Slovenia. On one hand, competition among suppliers was a prerequisite for low access prices and high quality services, and if Telekom was actually driving all other ISPs out of the market this could lead to monopoly pricing and slow down future Internet development. But, on the other hand, should Telekom and SiOL be punished for offering consumers some extra benefits that might only be evidence of superior economic efficiency and customer focus?

13 EXHIBIT 1: SERVICE PROVIDERS IN 1998 (USING DIAL-UP ACCESS)

PROVIDER NETWORK WWW SISPA P1 P2 PO ARNES www.arnes.si www2.arnes.si X - - KISS www.kiss.uni-lj.si www.kiss.uni-lj.si - - ABM AMIS.NET www.abm.si X 1,970 4,100 ACTUAL-IT S-net www.actual-it.si 1,350 8,100 - AGENDA SloN www.slon.net X 6,290* 6,290* AMADEJ Amadej www.amadej.si X 4,190 7,325 - ARCTUR SiOL www.arctur.si 2,396! 8,519! - B2 Amadej www.b2mb.si 5,450 5,450 - ESOTECH S-net www.esotech.si X 1,417 8,505 - EUROCOM S-net www.eurocom.si X 1,350 4,900* FREECOM AMIS.NET www.amis.net 1,970 4,100 IBM IBM Global Network www.ibm.net 4,095* 4,095* ICSI SloN www.icsi.si 2,400 6,290* INETIA.COM SiOL www.inetia.com 2,090 6,495 - INFOTEHNA SiOL www.infotehna.si 2,396! 8,519! - INSERT Zaslon www.insert.si 1,000 4,800 - INTERTRADE ITS IBM Global Network www.its.si 2,200 7,100 IRTS Amadej www.irts.si 1,400 8,400 - K2.NET K2.net www.k2.net X 1,890 7,560 KIVI SiOL www.kivi.si 2,396! 8,519! - KRAJNIK SiOL www.krajnik.si 4,820* 4,820* MAIS SiOL www.mais.si 2,396! 8,519! MEDINET AMIS.NET www.medinet.si X 1,970 4,100 - METALING AMIS.NET www.metaling.si X 1,970 4,100 - MULTIMEDIA S-net www.multimedia.si 1,417 8,505 - NETICOM - www.neticom.si 1,931 4,747 NEVTRON - www.nevtron.si 2,867 7,875 ORPO - www.orpo.si X 1,950 6,200 - PERFTECH s5.net www.s5.net X 1,690 8,505 PROM AMIS.NET www.prom.si 1,970 4,100 PRONET SiOL www.pronet.si 2,396! 8,519! - QUANTUM Quark www.quantum.si 1,500 3,900 RR Zaslon www.rr-vel.si 1,433 8,600 - SGN Amadej www.sgn.net 1,910 6,160 - SiOL SiOL www.siol.net X 2,396! 8,519! S-NET S-net www.s-net.net X 1,417 8,505 - SOFTNET S-net www.softnet.si X - - UNISOFT s5.net www.unisoft.si X 2,304 8,188 UNISTAR - www.unistar.si X 1,312 7,087 - ZASLON Zaslon www.zaslon.si X - -

Notes: Exchange rate (1 June 1999): 1 USD = SIT 185.2558 according to the Bank of Slovenia’s middle exchange rate.

P1 - price (in SIT – the Slovenian tolar) for private users (not companies) for 5 hours’ monthly Internet use (all costs except telephone impulses included) P2 - price (in SIT) for private users for 30 hrs monthly Internet use (all costs except telephone impulses included) The two non-commercial providers do not charge any price for daily use. Only KISS charges a yearly subscription of SIT 1000. PO - special offer for companies; specialised providers for companies SISPA - membership in the SISPA (Slovenian Internet Service Providers’ Association) * Unlimited access for one month ! Telephone impulses included in the price

14 Source: RIS, 1998.

EXHIBIT 2: COMMERCIAL PRIMARY (BACKBONE) INTERNET NETWORK PROVIDERS IN 1998*

NETWORK: Amis.net IBM Global K2.net S5.net SiOL Slon S-net Network Company Medinet d.o.o. IBM Slovenija K2.net d.o.o. Perftech d.o.o. Telekom Agenda d.o.o. S-net d.o.o. name: d.o.o. Slovenije d.d. (SiOL) URL address: www.amis. www.ibm.net www.k2.net www.perftech. www.siol.net www.slon.net www.s-net.si net si Backbone AT&T Ehningen, Ebone AT&T Frankfurt AT&T Uunet connections: (1,5 MBps) or Germany and (256 Kbps) (2 MBps) (45 MBps) (2 MBps) (1 MBps) Sprint, USA Vienna, Austria Unified no No no 0889 32 360 0880 32 320 in august 1999 0889 32 400 calling (testing phase) number (UCN): Price (SIT): 2.08/1.04** 1.895/0.9475** 2.08/1.04** Billing depending on 100 hrs according to depending on depending on according to tokens method: package prepaid use/ prepaid package package use/ prepaid hrs. hrs. Monthly price 1,000 4,700 1,350 900 (Stude.net) 1,100 (standard) 990 – 3,990 N/A*** (SIT): (students) – (students) – – 5,500 (Non- – 5,500 5,850 (family 5,400 stop.net) (unlimited ISDN) (unlimited access) access) Average 257 313 213 218 200 266 270 hourly price (SIT):****

Notes: * Acting also as service providers – ISPs. Excluded are the backbone providers Amadej and Quark. Other commercial ISPs use one of the networks. ** Higher/lower price, depending on traffic. *** Not applicable due to the token system. **** Excluding impulses and taxes

Source: RIS, 1998.

15 EXHIBIT 3: MARKET SHARE OF INTERNET SERVCE PROVIDERS AMONG REGULAR MONTHLY USERS

1. Among individuals in households

The figure shows people who are regular monthly users of the Internet. Rough figures reveal 17,000 people accessing the Internet from home using SiOL; 35,000 - 40,000 using ARNES; 6,000 - 7,000 students using the university system and KISS (The Communication and Information Service of the Student Organisation SOU). As already mentioned, university computer centres were actually using ARNES’ network and were not ‘real’ ISPs. Other providers account for the remaining 8,000 - 9,000 people. However, the figures do not only include those with a username and password, but also other members of the family etc. The numbers apply to individuals only - not households (members of the same household could use different ISPs).

18% Arnes

Universities and KISS 43% 12% SIOL

20% I don't know 7%

Source: RIS, 1998.

16 17 18 2. Among companies

Among companies, SiOL held two-thirds of the small company market (between 5 and 50 employees and less than SIT 400 million in annual revenue) and half of the market of large and medium companies, which ads up to 6/10 of all companies. Another large provider was ARNES and 5 other companies: Medinet, K2.net, Perftech, Unistar and Softnet. Together, these 5 hold 1/8 of the market. The RIS'98 survey shows a drop in small commercial Internet providers' market share, due to rapid Internet market growth. In fact, small ISPs have expanded their operations and increased their client numbers.

Source: RIS, 1998.

19 EXHIBIT 4: USER SATISFACTION WITH INTERNET ACCESS PROVIDERS

The exhibit shows selected results of telephone surveys (n=6,500 for households and 3,500 for companies). Overall satisfaction with ISPs was measured on a five-point scale, score 1 denoting not satisfied at all, and 5 meaning completely satisfied. The components of satisfaction included: stability of the server, accessibility, connection bandwidth and customer service.

1a. Company satisfaction in 1997

PROVIDER LEASED DIAL-UP TOTAL LINE ACCESS Average N Average N Average N score score score Agenda 4.00 2 4.17 12 4.14 14 ProNET 4.00 5 4.17 12 4.12 17 Zaslon 3.88 8 4.03 29 4.00 37 Eurocom 4.33 9 3.73 11 4.00 20 ABM 4.33 3 3.91 11 4.00 14 ARNES 4.04 26 3.93 54 3.96 80 Unistar 4.50 4 3.79 14 3.94 18 NIL 4.00 44 3.81 54 3.90 98 Insert 4.75 4 3.62 13 3.88 17 IBM 4.11 9 3.63 8 3.88 17 K2.net 3.86 7 3.85 27 3.85 34 Medinet 3.00 1 3.87 24 3.84 25 Inetia 4.00 2 3.79 14 3.81 16 Infotehna 3.80 5 3.77 13 3.78 18 SiOL 3.50 46 3.53 343 3.53 389 Perftech 3.43 7 3.52 54 3.51 61 TOTAL AVERAGE 3.82 247 3.68 917 3.71 1164

Source: RIS, 1997.

1b. Company satisfaction in 1999

Provider Average score ARNES 3.9 Agenda 4.4 Amis.net 4.4 Boter 4.0 K2.net 4.3 Moj net 4.0 Medinet 4.4 S5.NET (Perftech) 4.1 SiOL 3.7 TOTAL AVERAGE 3.8

Note: The average score refers to both dial-up access and leased lines. Satisfaction with leased lines was slightly higher.

20 Source: RIS, 1999.

21 2. Household satisfaction (active users only) in 1998

Provider Average score K2.net 4.27 Medinet 4.22 Perftech 4.08 ARNES 3.79 Telekom-SiOL 3.64 Univerza-LJ 3.63 Univerza-MB 3.59 KISS 3.26

Source: RIS, 1998.

EXHIBIT 5: THE EFFECT OF PRICE LIST CHANGE FOR LEASED LINES: COMPARISON OF CALCULATIONS BY TELEKOM AND THE SISPA

Telekom's calculations (using Telekom’s modems) in SIT * Before 1 March 1999 After 1 March 1999 EU average 64 kbps 61,661.25 52,800.20 43,372.00 128 kbps 70,200.00 74,576.40 85,139.10 2048 kbps 265,612.50 206,615.40 182,225.00

SISPA's calculations (using ISPs’ own modems) in SIT ** Before 1 March 1999 After 1 March 1999 64 kbps 18,000.00 206,615.40 128 kbps 21,375.00 206,615.40 2048 kbps 81,000.00 206,615.40

Notes: * Example: previously inter-urban leased line - two access lines 1 km and one inter-urban line 3 km; after change: aerial line of 3 km. ** Example: prices of 3 km leased lines (2-wires; copper line; without Telekom modems).

Source: Stergar, 3/13/1999.

22 EXHIBIT 6: LEASE OF CONNECTION LINES

1. PRICE LIST BEFORE 1 MARCH 1999

The monthly payment for national digital data connections for different connecting bandwidths is set out accordingly: for connection bandwidths up to 64 kbit/s: up to 15 km SIT 1,860.75 per km (/ km) from 15 km up to 80 km SIT 27,911.25 + SIT 335.25 / km from 80 km SIT 49,702.50 + SIT 166.50 / km for connection bandwidths of 64 kbit/s: up to 15 km SIT 2,553.75 / km from 15 km up to 80 km SIT 38,306.25 + SIT 454.50 / km from 80 km SIT 67,848.75 + SIT 227.25 / km for connection bandwidths of 2 Mbit/s: up to 15 km SIT 25,537.50 / km from 15 km up to 80 km SIT 383,062.50 + SIT 4,545.00 / km from 80 km SIT 678,487.50 + SIT 2,272.50 / km for connection bandwidths of 8 Mbit/s: up to 15 km SIT 51,075.00 / km from 15 km up to 80 km SIT 766,125.00 + SIT 9,090.00 / km from 80 km SIT 1,356,975.00 + SIT 4,545.00 / km for connection bandwidths of 34 Mbit/s: up to 15 km SIT 178,762.50 / km from 15 km up to 80 km SIT 2,681,437.50 + SIT 31,815.00 / km from 80 km SIT 4,749,412.50 + SIT 15,907.50 / km

Data connection line is a connection line between the user (usually an ISP or a company with leased connection line access to the Internet), and the closest telecommunications multiplexor. A data connection line is available with two data transferring devices (i.e. modems ... ). These are provided by Telekom Slovenije.

Source: Telekom Slovenije, 1999, pp. 3-5.

23 2. PRICE LIST AFTER 1 MARCH 1999 IN SIT:

Price without Price with tax Tax tax 3. LEASE OF INTERNET CONNECTION LINES

3.1. PRICE OF CONNECTION Price of connection for national and international connections

3.1.1. Connection prices for different bandwidths - do 64 kbit/s in 64 kbit/s one off payment 140,000.00 144,200.00 3.0% - 128 kbit/s one off payment 235,000.00 242,050.00 3.0% - 256 kbit/s one off payment 330,000.00 339,900.00 3.0% - 512 kbit/s one off payment 375,000.00 386,250.00 3.0% - 1024 kbit/s one off payment 380,000.00 391,400.00 3.0% - 2048 kbit/s one off payment 545,000.00 561,350.00 3.0%

3.1.3. Transfer of the connecting point to a one off payment 50 % of connection costs 3.0% new address 3.1.4. Connection of previously disconnected lines (due to non-payment of monthly one off payment 100 % of connection costs 6.5% connection costs) 3.1.5. Change of the subscriber’s name or title free of charge

3.2. MONTHLY PAYMENT 3.2.1. National connections The distance is calculated as a straight line between two points (aerial distance)

3.2.1.1. Connection prices for data connections for distances up to 5 km for every 100 m: - up to 64 kbit/s up to 0.1 km + 14,119.50 14,543.09 3.0% + from 0.1 km for 969.70 998.79 3.0% every 0.1 km - 64 kbit/s up to 0.1 km + 17,649.30 18,178.78 3.0% + from 0.1 km for 1,212.10 1,248.46 3.0% every 0.1 km - 128 kbit/s up to 0.1 km + 24,928.40 25,676.25 3.0% + from 0.1 km for 1,712.00 1,763.36 3.0% every 0.1 km - 256 kbit/s up to 0.1 km + 35,500.50 36,565.52 3.0% + from 0.1 km for 2,438.00 2,511.14 3.0% every 0.1 km - 512 kbit/s up to 0.1 km + 46,717.40 48,118.92 3.0% + from 0.1 km for 3,208.30 3,304.55 3.0% every 0.1 km - 1024 kbit/s up to 0.1 km + 55,859.00 57,534.77 3.0% + from 0.1 km for 3,836.20 3,951.29 3.0% every 0.1 km - 2048 kbit/s up to 0.1 km + 69,065.50 71,137.47 3.0% + from 0.1 km for 4,743.10 4,885.39 3.0% every 0.1 km

2. PRICE LIST AFTER 1 MARCH 1999 IN SIT (STILL IN EFFECT):

24 Price without Price with tax Tax tax 3.2.1.2. Connection prices for data connections for distances from 5 km up to 50 km for every km: - up to 64 kbit/s up to 5 km + 61,634.80 63,483.84 3.0% + from 5 km for 554.10 570.72 3.0% every km - 64 kbit/s up to 5 km + 77,041.00 79,352.23 3.0% + from 5 km for 692.70 713.48 3.0% every km - 128 kbit/s up to 5 km + 108,816.40 112,080.89 3.0% + from 5 km for 1,689.70 1,740.39 3.0% every km - 256 kbit/s up to 5 km + 154,962.50 159,611.38 3.0% + from 5 km for 3,083.20 3,175.70 3.0% every km - 512 kbit/s up to 5 km + 203,924.10 210,041.82 3.0% + from 5 km for 4,883.70 5,030.21 3.0% every km - 1024 kbit/s up to 5 km + 243,832.80 251,147.78 3.0% + from 5 km for 5,807.70 5,981.93 3.0% every km - 2048 kbit/s up to 5 km + 301,477.40 310,521.72 3.0% + from 5 km for 7,154.40 7,369.03 3.0% every km

3.2.1.3. Connection prices for data connections from distances from 50 km for every km: - up to 64 kbit/s up to 50 km + 86,569.30 89,166.38 3.0% + from 50 km for 117.20 120.72 3.0% every km - 64 kbit/s up to 50 km + 108,780.20 112,043.61 3.0% + from 50 km for 183.20 188.70 3.0% every km - 128 kbit/s up to 50 km + 184,852.90 190,398.49 3.0% + from 50 km for 752.70 775.28 3.0% every km - 256 kbit/s up to 50 km + 293,706.50 302,517.70 3.0% + from 50 km for 1,631.00 1,679.93 3.0% every km - 512 kbit/s up to 50 km + 423,690.60 436,401.32 3.0% + from 50 km for 2,755.60 2,838.27 3.0% every km - 1024 kbit/s up to 50 km + 505,179.30 520,334.68 3.0% + from 50 km for 3,453.50 3,557.11 3.0% every km - 2048 kbit/s up to 50 km + 623,425.40 642,128.16 3.0% + from 50 km for 4,317.60 4,447.13 3.0% every km

Source: Telekom Slovenije, 1999a, pp. 8-12.

25 EXHIBIT 7: INTERNATIONAL COMPARISON OF LEASED LINE PRICES BEFORE 1 MARCH 1999

Group Country The ratio of prices of 64Kbps to 2Mbps lines 1 Slovenia 8.98 Czech Republic 10.52 Hungary 10.15 2 Austria 6.53 Italy 8.93 Switzerland 7.45 3 Denmark 6.44 the Netherlands 6.01 Sweden 4.23 Great Britain 4.54 4 France 5.14 Germany 7.62 5 Belgium 7.27 Greece 3.96 Ireland 7.63 Portugal 6.55 Spain 7.71

Notes: The countries are grouped according to the following: 1. EU candidate-countries 2. Neighbouring and territorially similar countries to Slovenia 3. Countries with developed (working) competition in telecommunications 4. Large countries with less developed competition in telecommunications 5. Other countries with less developed competition in telecommunications

Source: A Dutch Consultancy – Nepostel – study (published in the Analysis of Leased Lines from the Ministry of Transport and Telecommunications, 1999, page 4).

26 EXHIBIT 8: INTERNATIONAL COMPARISON OF LEASED LINE PRICES AFTER 1 MARCH 1999 (IN EUR; 1EUR~190 SIT IN 1999)

Lines with bit connection bandwidth of 64 kbps Country 3km 30km 300km Austria 281 436 836 Belgium 259 473 750 Denmark 355 679 946 Finland 0 0 0 France 252 400 640 Germany 89 424 662 Greece 318 751 1,279 Ireland 126 351 463 Italy 341 703 1,456 The Netherlands 133 461 662 Portugal 170 497 970 Spain 267 436 772 Sweden 215 254 353 Switzerland 155 412 838 Great Britain 237 473 684 Total 3,198 6,750 11,311 EU average in EUR 228 482 808 EU average in SIT 43,372 91,544 153,401 Prices in Slovenia (SLO) in SIT 42,241 75,487 115,869 Index SLO/EU 97 82 75

Lines with bit connection bandwidth of 2Mbps Country 3km 30km 300km Austria 1125 1425 4222 Belgium 720 3300 7111 Denmark 1462 4575 7333 Finland 450 675 2222 France 877 1800 5333 Germany 652 2250 4222 Greece 877 2400 4888 Ireland 1237 2100 4666 Italy 1102 5025 12000 The Netherlands 1395 2475 4444 Portugal 1147 1575 8000 Spain 1260 3000 8667 Sweden 450 1125 2000 Switzerland 1305 3075 7555 Great Britain 337 1500 5778 Total 14396 36300 88441 EU average in EUR 960 2420 5896 EU average in SIT 182,225 459,485 1,119,486 Prices in Slovenia (SLO) in SIT 206,615 480,337 1,702,825 Index SLO/EU 113 104 152

Sources: Analysis of leased lines from the Ministry of Transport and Telecommunications, 1999, p. 7; Leased lines take more attention than necessary, 3/26/1999, p. 16.

27 EXHIBIT 9: COMPARISON OF PRICES FOR LEASED LINES FOR INSTITUTIONS AND ISPS BEFORE AND AFTER 1 MARCH 1999 (TELEKOM’S CALCULATIONS):

1. Institutions:

Leaseholder Lease* before 1 March Lease after 1 March % change in 1999 (in SIT) 1999 (in SIT) the lease Arnes 19,320,104.64 14,925,243.03 -22.7 CVI 37,327,515.05 31,551,495.85 -15.47 Agency for Payments 5,463,378.23 5,295,177.50 -3.08 Schools 1,226,047.00 1,617,600.00 31.9

2. ISPs:

Leaseholder Lease* before 1 March Lease after 1 March % change in 1999 (in SIT) 1999 (in SIT) the lease Perftech 2,503,708.00 3,117,366.61 24.5 ABM 30,375.00 112,116.20 269.1 K2.net 153,000.00 218,904.20 43.1 SiOL 15,556,000.00 14,865,771.00 -4.43

Note: * Lease stands for leased line price.

Source: Analysis of leased lines from the Ministry of Transport and Telecommunications, 1999, pp. 13-14.

28 EXHIBIT 10: COMPARISON OF OLD AND NEW PRICES AND COSTS (CALCULATION BY MINISTRY OF TRANSPORT AND TELECOMMUNICATIONS) IN SIT Type of P1 – price before 1 P2 – price after Estimated costs EU average Ratio P2/P1 service March 1999* 1 March 1999* 1 2 3 4 5 6=3:2 64kbps Connection 90,000-135,000 140,000 155-104 fee for data: monthly fee: 3km 61,661.25 52,800.20 43,372.00 86 5km 66,768.75 77,042.20 71,807.00 115 30km 99,123.75 94,358.50 91,544.00 95 50km 108,213.75 108,212.50 106,479.00 100 100km 126,393.75 117,940.20 110,122.00 93 2Mbps connection 90,000-247,500.00 545,000.00 605-221 fee: monthly fee: 3km 265,612.50 206,615.40 182,225.00 78 5km 316,687.50 301,477.40 183,335.00 95 30km 640,237.50 480,337.40 459,485.00 75 50km 731,137.50 623,425.40 544,228.00 85 100km 912,937.50 839,305.40 616,195.00 92

Note: * When comparing prices before and after price rises, the changes in methodology also have to be considered. The new system uses aerial distance instead of the previously used physical distance of the line, therefore it includes a 10-25% decrease in price.

Source: Analysis from the Ministry of Transport and Telecommunications, 1999, pp. 12-13.

29 EXHIBIT 11: PRICE LIST FOR ISDN CONNECTIONS

Type of connection Price (with taxes) in SIT PSTN (classic technology) 51,170.00 ISDN 59,500.00 Upgrade from PSTN to ISDN 28,560.00

Source: Telekom Slovenije, 1999

EXHIBIT 12: PRICE STRUCTURE FOR ISDN 3000 PACKAGE

Type of connection Price (with taxes) in SIT Upgrade from PSTN to ISDN 6,402.75 ISDN phone 21,420.00 ISDN modem 30,077.25 SiOL software on CD-rom 2,000.00 TOTAL 59,900.00

Note: Only the existing owners of a PSTN connection were eligible to purchase the ISDN 3000 package.

Source: Telekom Slovenije, 1999

30 APPENDIX 1: EXCERPTS FROM SLOVENIAN COMPETITION PROTECTION LEGISLATION

SLOVENIAN COMPETITION PROTECTION ACT (CPA)

Article 11 The following, in particular, shall be considered an abuse of a company's dominant position:  the sale of goods or services at disproportionately high prices or the purchase of goods or services at disproportionately low prices;  a company demanding that its buyers, customers, sellers or contractors provide it with unusual payment or other benefits;  a company demanding that buyers of goods or services buy, in addition to the goods or services ordered, goods or services which they would otherwise not buy, or in like manner demand the sale of goods or the performance of services;  refusing to sell goods or perform services even though the buyer or customer offers a suitable price and meets other conditions;  actions by which a company or association of companies without good reason and disregarding good business practices creates differences in the terms of business between buyers or sellers of goods (discrimination);  actions by which a company is forced to accept a permitted or non-permitted agreement or join an association, and actions which inflict or might inflict damage on a company which did not want to accept an agreement or join an association;  actions by which some other company suffers a significant reduction in its ability to buy or sell goods, and especially a boycott of a company; and  any unjustified rejection of an offer from another company which would like to join a commercial or professional association, if the rejection affects or might reduce the competitiveness or worsen the position of the company which is applying for membership of the association. 

(Source: Official Gazette of the Republic of Slovenia, no. 18/1993)

31 APPENDIX 2: EXCERPTS FROM THE EU’S COMPETITION PROTECTION LEGISLATION

Article 86 of the EC Treaty Any abuse by one or more undertakings of a dominant position within the common market or in a substantial part of it shall be prohibited as incompatible with the common market in so far as it may affect trade between Member States.

Such abuse may, in particular, consist in: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; or (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

APPLICATION OF ARTICLE 86 TO TELECOMMUNICATIONS

Article 86 applies when: (i) the undertaking concerned holds an individual or joint dominant position; (ii) it commits an abuse of that dominant position; and (iii) the abuse may affect trade between Member States.

Abuse of a dominant position

The Commission's activity may concern mainly the following broad areas of abuses: A. TOs'10 abuses: in particular, they may take advantage of their monopoly or at least dominant position to acquire a foothold or to extend their power in non-reserved neighbouring markets, to the detriment of competitors and customers. B. Abuses by an undertaking other than TOs: these may take advantage of the fundamental information they hold, whether or not covered by intellectual property rights, with the object and/or effect of restricting competition. C. Abuses of a dominant purchasing position: for the time being this concerns mainly the TOs, especially to the extent that they hold a dominant position for reserved activities in the national market. However, it may also increasingly concern other undertakings which have entered the market.

TOs’ abuses

10 TO – Telecommunications Organisation 32 An abuse within the meaning of Article 86 is committed where, without any objective necessity, an undertaking holding a dominant position in a particular market reserves to itself or to an undertaking belonging to the same group an ancillary activity which might be carried out by another undertaking as part of its activities in a neighbouring but separate market, with the possibility of eliminating all competition from such an undertaking. The Commission believes that this principle applies, not only when a dominant undertaking monopolises other markets, but also when by anti-competitive means it extends its activity to other markets. Hampering the provision of non-reserved services could limit production, markets and above all the technical progress which is a key factor of telecommunications. The Commission has already shown these adverse effects of usage restrictions on monopoly provision in its decision in the `British Telecom' case. In this Decision, it was found that the restrictions imposed by British Telecom on telex and telephone networks usage, namely on the transmission of international messages on behalf of third parties: (i) limited the activity of economic operators to the detriment of technological progress; (ii) discriminated against these operators, thereby placing them at a competitive disadvantage vis-à-vis TOs not bound by these restrictions; and (iii) made the conclusion of the contracts for the supply of telex circuits subject to acceptance by the other parties of supplementary obligations which had no connection with such contracts. These were considered abuses of a dominant position identified respectively in Article 86 (b), (c) and (d). This could be done: (a) as above, by refusing or restricting the usage of the service provided under monopoly so as to limit the provision of non-reserved services by third parties; or (b) by predatory behaviour, as a result of cross-subsidising.

(Source: http://europa.eu.int/comm/competition/antitrust/legislation/apart86_en.html, 11/28/2001)

33 APPENDIX 3: CROSS-SUBSIDISING

CROSS-SUBSIDISING PRACTICES IN GENERAL

Cross-subsidising means applying economic power to assist one part of a firm. Usually, conglomerates use profits from branch A to support deep, 'unfair' price cuts by branch B. The danger exists that those price cuts intimidate other firms.

When cross-subsidising means the general support for competitive ventures by branch B, then there is a possible threat of predatory pricing. Of course, this support can be either financial, through venture capital, supplied to branch B by open capital markets, or it can be managerial, scientific, advertising.

Whether the cross-subsidising has predatory effects is largely dependent on the market position of the branch. If a branch is dominant, the support will fortify it further. However, if it has a small market share that will increase the competition it applies to other, dominant firms. Diversification of a unified firm is not necessarily predatory in nature, yet, if all branches of a diversified firm are dominant in their market, their pooled resources are likely to increase their dominance, while a string of small branches can hardly do any harm to competition in the market. On the other hand, conglomerates usually also have a much lower ability to 'cross-subsidise' than unified firms. However, this depends on the basic market position, degree of security, and flow of funds.

(Source: Shepherd William G., 1997, pp. 284-285)

CROSS-SUBSIDISING IN THE TELECOMMUNICATIONS SECTOR (THE EUROPEAN COMMISSION'S VIEW)

Cross-subsidising does not lead to predatory pricing and does not restrict competition when it is the costs of reserved activities that are subsidised by the revenue generated by other reserved activities since there is no competition possible as to these activities. This form of subsidisation is even necessary as it enables the TOs holders of exclusive rights to perform their obligation to provide a public service universally and on the same conditions to everybody. For instance, telephone provision in unprofitable rural areas is subsidised through revenues from telephone provision in profitable urban areas or long-distance calls. The same could be said of subsidising the provision of reserved services through revenues generated by activities under competition. The application of the general principle of cost orientation should be the ultimate goal, in order, inter alia, to ensure that prices are not inequitable as between users.

Subsidising activities under competition, whether concerning services or equipment, by allocating their costs to monopoly activities, however, is likely to distort competition in violation of Article 86. It could amount to an abuse by an undertaking holding a dominant position within the Community. Moreover, users of activities under monopoly have to bear 34 unrelated costs for the provision of these activities. Cross-subsidising can also exist between monopoly provision and equipment manufacturing and sale. Cross-subsidising can be carried out through:  funding the operation of the activities in question with capital remunerated substantially below the market rate;  providing for those activities premises, equipment, experts and/or services with a remuneration substantially lower than the market price.

As to funding through monopoly revenues or making available monopoly material and intellectual means for the starting up of new activities under competition, this constitutes an investment whose costs should be allocated to the new activity. Offering the new product or service should normally include a reasonable remuneration of such investment in the long run. If it does not, the Commission will assess the case on the basis of the remuneration plans of the undertaking concerned and of the economic context.

Transparency in the TOs' accounting should enable the Commission to ascertain whether there is cross-subsidising in the cases in which this question arises. The ONP Directive provides in this respect for the definition of harmonised tariff principles which should lessen the number of these cases.

This transparency can be provided by an accounting system which ensures the fully proportionate distribution of all costs between reserved and non-reserved activities. Proper allocation of costs is more easily ensured in cases of structural separation, i.e. creating distinct entities for running each of these two categories of activities.

An appropriate accounting system approach should permit the identification and allocation of all costs between the activities which they support. In this system all products and services should bear proportionally all the relevant costs, including costs of research and development, facilities and overheads. It should enable the production of recorded figures which can be verified by accountants.

(Source: http://europa.eu.int/comm/competition/antitrust/legislation/apart86b_en.html, 11/28/2001)

35 SOURCES:

Interviews:

. with Mr. Kramberger Miran, vice-president of the board of Telekom Slovenije, May 1999. . with Mr. Plahutnik Andrej, Director of the Competition Protection Office, May 1999. .

Written sources (all newspaper sources are in the Slovenian language):

. Analiza zakupa vodov Ministrstva za promet in zveze (Analysis of leased lines from the Ministry of Transport and Telecommunications; in Slovenian). Internal document. Ljubljana, March 1999. 15 pages. . Telekom Slovenije – Cenik pred 1. marcem, 1999 (Telekom Slovenije – Price list before 1 March 1999; in Slovenian). Internal document. Ljubljana, 1999. 6 pages. . Telekom Slovenije – Cenik po 1. marcu (Telekom Slovenije – Price list after 1 March 1999; in Slovenian). Internal document. Ljubljana, 1999a. 39 pages. . Najeti vodi so deležni večje pozornosti, kot si jo zaslužijo (Leased lines take more attention than necessary; in Slovenian ). Delo newspaper, Ljubljana, 3/26/1999, page 16. . Lenart Andreja, Pagon Samo: Konkurenčna politika na primeru spora med ABM d.o.o. in Telekomom Slovenije d.d. (Competition policy case: Dispute between ABM and Telekom Slovenije; in Slovenian)). Research paper. Ljubljana: Faculty of Economics, 2001. 26 pages + 10-page appendix. . Maselj Brane: Telefoniranje bo dražje (Calling is going to be more expensive; in Slovenian). Delo newspaper, Ljubljana, 1/6/1999. . Maselj Brane: Pogubna strategija statusa quo (A destructive strategy of status quo; in Slovenian). Delo newspaper, Ljubljana, 4/19/1999. . Shepherd W.G.: The Economics of Industrial Organization. Prospect Heights (Illinois): Waveland Press, 1997. . Sraka Saša: Kam po dostop? (Where to get access? ; in Slovenian). PC & Mediji newspaper, Internet supplement, Ljubljana, July/August 1999, pp. 12-15. . Stergar Aleš: Uporabniki pa vseeno norijo (Users are still going mad about it; in Slovenian). Delo newspaper, Ljubljana, 3/11/1999. . Stergar Aleš: Telekomova simulacija (Telekom’s simulation; in Slovenian). Delo newspaper, Ljubljana, 3/12/1999. . Stergar Aleš: Udarec prek modemov (A strike through modems; in Slovenian). Delo newspaper, Ljubljana, 3/13/1999. . Stergar Aleš: Zavora za podražitev (Stopping the price increase; in Slovenian). Delo newspaper, Ljubljana, 3/19/1999. . Stergar Aleš: Velikan ponuja roko (A giant offers a hand; in Slovenian). Delo newspaper, Ljubljana, 3/20/1999. . Stergar Aleš: Telekom z novimi cenami za 1.april (Telekom with new prices on April 1; in Slovenian). Delo newspaper, Ljubljana, 3/31/1999. . Stergar Aleš: Telekomovi računi že kar po novem (Telekom’s bills already the new way; in Slovenian). Delo newspaper, Ljubljana, 4/2/1999. . March March March March March April July .

36 Internet sources:

. European Union [ HTTP://EUROPA.EU.INT/COMM/COMPETITION/ ], 11/28/2001. . K2.NET [ HTTP://WWW.K2.NET ], 11/28/2001. . RIS – Raba Interneta v Sloveniji (Research project: Use of the Internet in Slovenia) [ HTTP://WWW.RIS.ORG ], 11/28/2001; RIS 1997: [ HTTP://RIS.ORG/SI/RIS97.HTML ], 11/28/2001; RIS 1998: [ HTTP://RIS.ORG/SI/RIS98.HTML ], 11/28/2001; RIS 1999: [ HTTP://WWW.RIS.ORG/1999 ], 11/28/2001.L . SISPA – Slovenian Internet Service Providers' Association: [ HTTP://WWW.SISPA.ORG ], 11/28/2001. . Slovenia Online – SiOL [ HTTP://WWW.SIOL.NET ], 11/28/2001 . . Telekom Slovenije [ HTTP://WWW.TELEKOM.SI ], 11/28/2001. . Urad za varstvo konkurence, Republika Slovenija (Competition Protection Office, Republic of Slovenia) [ HTTP://WWW.SIGOV.SI/UVK ], 11/28/2001.

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