Complaint Against BT's Pricing of Digital Cordless
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Competition Act 1998 Complaint against BT’s pricing of digital cordless phones Final decision of the Office of Communications ("Ofcom") This is the non-confidential version. Confidential information and data have been redacted. Redactions are indicated either by “[]” or “[“ text ”]” Issued: 1 August 2006 Contents Contents......................................................................................................................................2 Summary ....................................................................................................................................3 Section 1 ..............................................................................................................................4 Background ................................................................................................................................4 Section 2 ..............................................................................................................................7 The Facts ....................................................................................................................................7 Section 3 ............................................................................................................................13 Market Definition .....................................................................................................................13 Dominance Assessment............................................................................................................36 Analysis of alleged predation ...................................................................................................94 Section 4 ..........................................................................................................................149 Conclusion..............................................................................................................................149 Appendix ................................................................................................................................150 2 Competition Act 1998 - Complaint against BT relating to pricing of digital cordless phones Summary 1. The Office of Communications (‘Ofcom’) has concluded that BT Group plc (‘BT’) has not infringed Section 18 (the ‘Chapter II prohibition’) of the Competition Act 1998 (the ‘Act’) or Article 82 of the EC Treaty (‘Article 82’) in relation to the pricing of its digital cordless telephones. 2. Ofcom’s decision is made following an investigation which was opened on 26 April 2005 following the submission of a complaint on 29 March 2005. The complaint alleged that BT was dominant in the supply of cordless telephones in the UK and that BT had abused its dominant position by predatory pricing behaviour in its supply of digital cordless telephones. The complaint was submitted by Herbert Smith on behalf of Binatone Telecom plc and a co- complainant who wishes to remain anonymous. 3. Ofcom has issued draft non-infringement decisions to the parties in respect of this matter on 20 October 2005 (‘1st draft decision’) and 9 May 2006 (‘2nd draft decision’). Ofcom has considered the comments that were made to it in response to those drafts. 4. During its investigation, Ofcom has considered the available evidence and concluded that the relevant market is for the wholesale distribution of all consumer fixed-line telephone equipment in the UK and that BT is not dominant in the relevant market. Consequently, BT’s conduct is not caught by the Chapter II prohibition or the prohibition in Article 82 and, therefore, there are no grounds for action. 5. In the course of the investigation, Ofcom also considered evidence from BT in relation to its pricing to assess whether, in the event that Ofcom had found BT to be dominant in that market, its conduct could have been considered to be predatory pricing prohibited by Chapter II and Article 82. Ofcom has concluded that even if Ofcom had found BT to have been dominant in that market, it would have then gone on to find that BT was not abusing its dominant position by engaging in predatory pricing. This reinforces Ofcom’s conclusions on dominance since part of the basis of the complainants’ submissions in relation to BT’s alleged dominance was that BT’s adoption of a predatory strategy had raised barriers to entry. 3 Section 1 Background Introduction 6. On 26 April 2005, Ofcom opened an investigation following a complaint that BT had infringed Chapter II of the Competition Act 1998 (the ‘Act’) and/or Article 82 of the EC Treaty (‘Article 82’) in its conduct in setting a price for various models of its branded cordless telephones. The complaint was submitted on 29 March 2005 by Herbert Smith on behalf of Binatone Telecom plc (‘Binatone’) and a co- complainant who wishes to remain anonymous (collectively, ‘the complainants’). 7. The Competition Bulletin entry for this investigation can be viewed at: http://www.ofcom.org.uk/bulletins/comp_bull_index/comp_bull_ccases/closed_all/ cw_828/ 8. On 20 October 2005, Ofcom issued a draft non-infringement decision to the parties in respect of this matter. Comments were received from both the complainants and BT. Ofcom issued a 2nd draft non-infringement decision to the parties in respect of this matter on 9 May 2006. Comments were received by both the complainants and BT. Details of the responses to the draft decisions together with Ofcom’s considerations and reasons for making this decision are set out in Section 3. Overview of the consumer fixed-line telephone equipment sector 9. Consumer fixed-line telephone equipment includes all equipment complementary to the consumption of fixed-line voice services and includes telephone handsets, including those with answering machines. 10. All telephone handsets enable consumers to make and receive calls, as well as provide basic functions typically including last number redial, mute button, phone number memory, and ringer/handset volume control. 11. However, different types of phones can offer different levels of functionality and quality of service when used in connection with the complementary fixed line voice service. Cordless phones offer greater mobility to the consumer when making or receiving a call. Digital Enhanced Cordless Telephony ('DECT') phones potentially offer improved call clarity and greater call range than analogue cordless phones. Some phones include answering machines. Others offer features including polyphonic ring tones, SMS and colour displays. (Further detail on different types of phones and their features is set out in the relevant market section at paragraphs 90- 109 below). 12. Figure 1 and Figure 2 below illustrate the relative importance of the product segments. Seven million handsets were sold between August 2003 and July 2004 with fixed phone sales of £299m and DECT phone sales of £214m. 4 Competition Act 1998 - Complaint against BT relating to pricing of digital cordless phones Figure 1 Product segments in the consumer telephone sector (share by volume) 100% 90% 32% 31% 35% 80% 70% 1% 1% 1% 60% corded decorative 50% DECT 36% cordless analogue 50% answering machine only 40% 59% 30% 20% 25% 10% 16% 9% 0% 2% 1% 1% Jan-Aug 03 Jan-Aug 04 Jan-Aug 05 Source: GfK Figure 2 Product segments in the consumer telephone sector (share by value) 100% 14% 13% 12% 90% 80% 70% 60% 62% corded DECT 50% 73% 80% cordless analogue answering machine only 40% 30% 20% 22% 10% 13% 6% 0% 1% 1% 1% Jan-Aug 03 Jan-Aug 04 Jan-Aug 05 Source: GfK 5 The supply of fixed-line telephones 13. Wholesale suppliers of fixed-line telephone equipment in the UK are primarily concerned with the design, branding and wholesale supply of telephones. Most suppliers do not have their own manufacturing facilities for fixed-line telephone equipment but sub-contract this activity to manufacturers in the Asia-Pacific region, principally in Hong Kong, South Korea, Taiwan, Thailand, the Philippines and the People’s Republic of China. There is currently no UK-based manufacturing of fixed-line telephone equipment. Figure 3 below sets out the structure of the UK sector and key participants. 14. As illustrated in Figure 3, all major suppliers offer equipment wholesale and offer equipment to retail buyers through a number of supply channels – through wholesale distributors, high street retailers, catalogue based retailers and internet based retailers. In addition BT and Panasonic supply directly via their own websites.1 Figure 3 Supply chain for fixed-line telephones Manufacturers Wholesale Retailers Consumers Suncorp suppliers Argos Domestic VTech BT Dixons Business CCT Binatone Comet Uniden Philips John Lewis Consumers IDT Panasonic Tesco A-Team Homebase Magic Box Ascalade (Onetel, Motorola) And others. Aztech Harvard (Betacom, PDT Cable & Wireless, ntl) D I Intech I N R Doro Orchid S D E Acro T E T R P A And many others I E I B N L U D E T E R O N S R T S 1 Ofcom understands that BT does not supply consumer phones separately through BT retail outlets other than through website sales. 6 Competition Act 1998 - Complaint against BT relating to pricing of digital cordless phones Section 2 The Facts The undertakings 15. BT Group plc (‘BT’), whose registered office is at 81 Newgate Street, London EC1A 7AJ, is the listed holding company for an integrated telecommunications group that provides voice and data services in the UK and elsewhere. Its principal activities include local, national and international telecommunications services, broadband and internet services, and IT services.