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Rome-Bruxelles, 20 September 2011 European Commission Directorate Rome-Bruxelles, 20 September 2011 European Commission Directorate for Competition Mergers Registry J- 70 1059 Bruxelles - Belgium by e-mail: [email protected] Observations relating to the case COMP/M.6281 — Microsoft/Skype (C 268/12 Official Journal of the European Union 10.9.2011) Need to impose interoperability of combined Skype/Microsoft services in the market of IP-to-IP voice and videotelephony services Dear Sirs, We are writing to you on behalf of Messagenet S.p.A. ( www.messagenet.it ), a fully-licensed fixed- line and VoIP telephone operator based in Italy. Messagenet, part of the COMM2000 group, is a leading Italian company in the development and on-line commercialization of Internet fax and SMS messaging as well as VoIP services, with more than 376,000 registered users, one million faxes managed per month and more than 88,000 VoIP telephone numbers assigned (January 2010). We are strongly concerned about various anticompetitive effects deriving from the proposed merger operation at stake, in particular with regard to the strengthening of the dominant position of Skype in the IP-to-IP services market and, namely, on the markets of IP-to-IP voice and video- telephony services (hereinafter together: the “Relevant Markets”). Other markets affected by the present operation are these of “Presence” and Instant Messaging (although they are not examined by the present letter). As it will be explained below, the main issue derives from the lack of interoperability of Skype IP-to- IP services with other similar services offered by third parties communications operators, which may become crucial for competition on such markets, especially with the strengthening of Skype’s position in combination with Microsoft. Specific remedies deemed to address this problem are therefore required in order to clear the merge. Messagenet S.p.A. Messaggistica e Telecomunicazioni Sede legale e operativa: Via Giacomo Leopardi, 9 – 20123 Milano (MI) P.Iva 13004930155 – Reg. Imp. MI 23010/2000 - REA 1605496 Tel +39 02 48102000 – Fax +39 02 48026819 1. INTRODUCTION Despite the fact that Skype generally claims to just provide users with software, it is clearly a provider of electronic communication services 1. A list of the communication services provided by Skype is available at the IPO Document (hereinafter: “IPO Doc”) filed with the US financial authorities in August 2010 2 (“Our Products”, pp. 141 and ff.). In addition, despite the fact the Skype claims to just rely on the connectivity and infrastructures of other operators, it is clear that some of its services are not purely software-based but they need some infrastructures and related control (at least data base of ID and super-nodes) in order to work properly (see IPO Doc, “ Peer-to-Peer Architecture ” p. 151). Furthermore, it should be noted that Skype also offers PSTN to VoIP and VoIP to PSTN services in the EU without the necessary UE authorizations and safeguards that other VoIP providers abide to (for example the identification of the user for law enforcement and national security, privacy regulations), thus competing unfairly.3 2. THE RELEVANT MARKETS As it will be explained below, the services comprised by the Relevant Market, i.e. video-telephony and IP-to-IP voice may not be substituted with other services, due to their technical features as well the different needs of the users which it are aimed to satisfy, and therefore constitutes specific relevant market. The Relevant Markets have global dimension, although only their effects on the EU market are considered in the present letter. (a) IP-to-IP voice services IP-to-IP voice service market consists of voice over IP services from terminal-to-terminal (including PC, smartphones and other devices identified by IP addresses). Such services are based upon broadband access services and allow the end users of a VoIP service provider (or more VoIP services providers, if their networks are interconnected and services are interoperable) to talk to each other, usually at no charge utilizing VoIP/IP end to end. This market is different from both traditional voice services over PSTN (including IP to PSTN and PSTN to IP) and from voice services partially over IP for the following reasons: 4 1 Although the qualification of some of these services as falling within the definition of the European Electronic Communications Framework for regulatory purposes may be controversial, it is stressed that the definition of the markets in this case is made for antitrust purposes, by applying the antitrust criteria of products substitutability and consumers demand. 2 http://www.sec.gov/Archives/edgar/data/1498209/000119312510182561/ds1.htm#rom83085_3a 3 See for example the recent actions against Skype taken by Italy’s Ministry of Telecommunications and AGCOM leading to the shut down of Italian Skype-in Numbers. 4 For the sake of clarity, the VOIP technology does not constitute a reason of market differentiation. Messagenet S.p.A. Messaggistica e Telecomunicazioni Sede legale e operativa: Via Giacomo Leopardi, 9 – 20123 Milano (MI) pag. 2 P.Iva 13004930155 – Reg. Imp. MI 23010/2000 - REA 1605496 Tel +39 02 48102000 – Fax +39 02 48026819 - Voice quality is substantially higher than PSTN, IP to PSTN and PSTN to IP (because the PSTN does not support HD voice) - the end users are identified by ID and the terminal point is identified by IP addresses, rather than geographic E164 numbering ; therefore, nomadic use is possible; - the availability of users is marked by the “presence” function; - the service is normally offered for free, while remuneration derives from other sources (advertising, sale of “fringes”); remuneration may also partially consists in subsidies deriving from services in other markets (voice PATS); - the service is normally not regulated (this is the case in the EU, since Skype services are currently not regulated under the European Electronic Communication Framework, unlike traditional PATS voice). IP-to-IP voice services are frequently marketed together with traditional PATS services (in the case of Skype, the PSTN-like products are known as Skype-in (PSTN to IP) and Skype-out (IP to PSTN),which of course do not have high quality voice), however this is not a bundle in commercial terms, since users are not obliged to buy a subscription for all services. The PSTN-like services of Skype are normally bought by Internet users to replace traditional phone services. In other words, Skype-in and Skype-out services are substitute for traditional PATS voice services, not for pure VOIP services. (b) Video telephony services Video telephony services are based upon broadband access services and allow end users to video-communicate among each other by their PCs (or similar devices) integrated with webcams. Like IP-to-IP voice, the terminal point of the end customer is identified via IP addresses and allows nomadic usage. 5 Voice quality is higher than PSTN. The features mentioned above for the IP-to-IP voice services apply, mutatis mutandis , also for the video telephony. It must be stressed, however, that videotelephony is by definition “IP-to-IP”, there I no need to distinguish it by similar products using geographic numbers. These services satisfy a demand of communication different from traditional or pure voice services. Skype is by far the largest provider of video telephony services on the world market. In addition, also Microsoft is engaged in the provision of such services. (c) Structure of the relevant markets These markets are featured by: 5 Video telephony via PSTN or dedicated lines is marginal and limited to the corporate market. Messagenet S.p.A. Messaggistica e Telecomunicazioni Sede legale e operativa: Via Giacomo Leopardi, 9 – 20123 Milano (MI) pag. 3 P.Iva 13004930155 – Reg. Imp. MI 23010/2000 - REA 1605496 Tel +39 02 48102000 – Fax +39 02 48026819 - growing scale and scope economies as also confirmed by the IPO Doc, as well as increasing marginal returns which grant a very high value to the marginal client / traffic;6 - large sunk costs and high fixed costs and are subject to a continuous technological development; - strong network effects (as also confirmed by the IPO Doc), which may be easily transformed into network externalities (or diseconomies), just by denying interoperability of the dominant services with those provided by smaller operators; - In addition, the convergence process and the substantial network effects affect, just to name some, the access to fixed and mobile telephony networks, contents and DRM systems, possibly jeopardizing the competitiveness of the mentioned market in favour of the former In markets with the above features of high sunk costs, companies are more prone to adopt exclusionary practices in order to maximize the (incremental) margins. 3. THE DOMINANT POSITION OF SKYPE IN THE RELEVANT MARKETS Skype is the dominant operator in the EU and in the world markets for IP-to-IP voice and video telephony services, with more than 663 million registered users on global level, more than 98% of whom use a free version of the product, and about 9 million users buy paid Skype services with additional functions 7. According to the IPO Doc (p. 93), in June 2010 Skype had 560 Million registered users, 124 of which were active users (and 8,1 were paying), growing quickly. Also Microsoft provides IP-to-IP voice and video telephony services. As a matter of fact, in April 2005 Microsoft launched " MSN Video Conversation "8 and several new releases of the service have been marketed since then. On the other side, companies like Google, VOIP Bastard, Apple Facetime ecc. are marginal in the IP-to-IP voice and video call segments. Google has concentrated mostly on a different market (the management of calls incoming from the PSTN) and in the US only.
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