European competition law and the communications sector: the shift from regulation to enforcement

Christian Duvernoy and Omar Shah

Wilmer, Cutler & Pickering

Post-liberalisation restructuring of the European communica- adopted on an accelerated timetable separately from the other tions industry continued in 2001, albeit at a slower pace than in measures in the Package. Regulation 2887/2000 was intended to 2000. The burst of the “New Economy” bubble and the high cost open access to the incumbent’s local loop, both for competitive of obtaining UMTS licences dampened the appetite for large- infrastructure operators and service providers. By the end of 2001, scale deals and reduced the amount of available capital. On the however, the European Commission had to bring enforcement regulatory front, however, competition and communications reg- proceedings against three member states (Greece, Portugal and ulatory authorities continued to focus on enforcement proceed- Germany) to push implementation of the Regulation. It has noted ings to achieve their policy goals. This shift from regulation to en- that implementation of local loop unbundling has been very dis- forcement can be seen both in the fundamental revision of the EU appointing, in part due to complex operational issues that arose communications regulatory framework and in the active process in regard to collocation and pricing (the Commission’s 7th Re- of review of mergers and acquisitions, often cleared only subject port on the Implementation of the Telecommunications Regula- to conditions (see also chapter “EU regulatory framework for tory Package). telecommunications”). The New Regulatory Framework The year began with entry into force of a last, purely regulatory measure, as part of the EU’s telecommunications framework: as The New Regulatory Framework for electronic communications, of 1st January, 2001, Regulation (EC) 2887/2000 mandated un- approved in final form by the European Council on 14th Febru- bundled access to the local loop. This Regulation evolved into a ary, 2002, introduces a more enforcement-oriented approach to key component of the proposed Telecoms Package that was regulation. The New Framework, which member states have 15

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Technological developments and policy goals

The shift from regulation to enforcement that is embodied in the New Framework is likely to be reinforced by the following interlinked and overlapping factors:

• Convergence. The telecoms, media and IT industries continue to converge to form an electronic communications sector. The response of NRAs and competition authorities is to try to prevent the emergence of bottlenecks and of firms seeking to act as gatekeepers to those bottlenecks on the emerging economic value chain in the electronic communications sector, primarily through the use of competition law- based standards (see main text “Key cases: Preventing bottlenecks in convergent markets”).

• Infrastructure competition. Regulators will be keen to facilitate convergence by stimulating competition between alternative infra- structures and by encouraging incumbent telcos to divest overlapping infrastructure assets. This may be achieved more and more through the use of ex post competition law procedures, in the context of a deal clearance, rather than ex ante sector-specific obligations.

• Behavioural undertakings. Regulators are likely to be increasingly prepared to see the enforcement of behavioural undertakings put into place in the context of merger control proceedings as a half-way house between the imposition of structural remedies and simply rely- ing on sector-specific regulation. Although fewer new behavioural remedies were imposed in 2001 than in 2000, the effect of earlier reme- dies was a significant issue in several cases.

months to implement into national law, is and the weight of the evidence. They will • Stimulating increased competition in based on two fundamental principles: no longer be able to rely on mechanistic the provision of mobile services. application of the SMP threshold under • A more flexible substantive test, based existing sector-specific regulation to jus- Access to broadband networks on competition law, is better suited to tify regulatory intervention. NRAs will Unbundling the local loop: OFTEL en- regulating the emerging electronic com- have to prove, on the basis of evidence forcement action against BT. Although munications sector than the previously gathered during their investigations, that the definition of SMP introduced by the applicable standard. The New Frame- undertakings are dominant, individually New Regulatory Framework has not yet work thus replaces the somewhat me- or collectively, before they are in a posi- been implemented into national law, chanical 25% market share test for signif- tion to intervene. The Commission will there is evidence to suggest that NRAs icant market power (SMP) with the more be able to take part in this process only as may already be anticipating the reform. flexible concept of dominance developed an observer in national cases or, in ex- They are tending to adopt a more sophis- under the EC competition rules. treme cases, by exercising its right to sub- ticated approach based upon market stitute its judgment for that of the NRA. analysis rather than simply intervening on • Since the national regulatory authori- Judicial review may increase in impor- the basis that the 25% SMP threshold is ties (NRAs) have now achieved a consid- tance if significant differences of opinion satisfied. For example, although the Reg- erable degree of independence and exper- develop between NRAs and the Commis- ulation on unbundling of the local loop tise, they should have even greater re- sion. continues, at present, to refer to the old sponsibility and discretion in applying the concept of SMP as embodied in existing regulatory framework to domestic elec- Key cases sector-specific regulation, the UK NRA, tronic communications markets. Thus, OFTEL, has shown that it will carry out a for example, the New Framework en- Beyond the changes in approach to regu- thorough market analysis before inter- trusts NRAs with the task of defining rel- lation that can be expected to result from vening in certain markets. In an ex officio evant markets within their territory, in adoption of the New Package, several investigation, OFTEL found that BT’s accordance with principles of competi- cases in 2001 demonstrate the ongoing charges for certain services to unbundled tion law and taking account of the Rec- importance of merger clearance and regu- local loop operators were excessive and ommendation and Guidelines to be pub- latory enforcement proceedings in achiev- that BT had SMP. However, OFTEL took lished by the Commission on this issue. ing the policy goals of the Commission immediate regulatory action only in re- NRAs are also responsible for assessing, and national regulators. These goals in- spect of certain services (provision of line where appropriate in co-operation with clude: information and escorted access to ex- national competition authorities, the changes). With respect to connection and competitiveness of these markets. As a • Ensuring open access to broadband rental charges for external tie cables check on this increased authority, the networks. (which link operators’ equipment with Commission obtains a veto right on cer- BT’s local exchanges), it deferred any reg- tain NRA decisions, where they would • Safeguarding against excessive market ulatory action pending a separate analysis conflict with internal market objectives. power through the vertical integration of of competition in the relevant market. delivery networks with exclusive rights to OFTEL took the view that the require- Fact-based inquiries content. ment (of existing sector-specific regula- The New Framework is likely to spur tions) for such prices to be cost-oriented NRAs to achieve regulatory goals using • Preventing new bottlenecks in conver- could not be considered in isolation from enforcement procedures that turn even gent markets (for example, interactive the extent of competition for the services more on the individual facts of the case TV services). in question.

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Broader implications. OFTEL’s approach satellite transmission because of the dif- Increasing importance of open access. in this case is likely to foreshadow the ap- ferent relative levels of penetration of This decision demonstrates again that as proach that will be taken by NRAs to the satellite, cable and terrestrial broadcast cable operators continue to increase new concept of SMP once it is adopted infrastructure. It would not be economi- market penetration and the range of ser- into national law. This approach is also cally feasible, due to Finland’s topogra- vices that they provide to consumers, the likely to expose the inherent tension be- phy and relatively limited market for ra- issue of open access to their networks is tween the overlapping roles of the NRA dio and TV broadcasting, to replicate likely to become more contentious. Both and the Commission in the New Regula- national coverage of the terrestrial the UK (OFTEL) and the Dutch regula- tory Framework. In particular, there is transmission infrastructure by cable or tors (NMa and OPTA) have investigated likely to be considerable controversy satellite. As a result, the Commission re- and published reports on the issue in over: quired that the parties divest their over- 2001. It appears unlikely, given the con- lapping terrestrial transmission infra- clusions of the NMa, OFTEL and others • The extent to which the Commission is structure (TDF’s subsidiary, Telemast, in their reports, that regulators would be prepared to substitute its judgment for was Digita’s main competitor). inclined to rely on sector-specific legisla- that of NRAs. tion on this issue. Instead, it seems more Further issues of market definition. The likely that they will keep under review, • Whether any inconsistency between Commission also found that the introduc- under EC and national competition views at NRA and EC level can be ex- tion of Digital Audio Broadcasting in Fin- laws, the relative levels of market power ploited by the addressees of any formal land would create a distinct market for held by cable operators. Regulators decisions in judicial review proceedings digital (as opposed to analogue) transmis- could be expected to seek open access before the national and Community sion of radio programmes. Additional in- undertakings only in the event that cable courts. vestment would be required to implement operators’ market power allowed them digital transmission as well as co-opera- to act as gatekeepers to emerging down- Digital transmission of radio and TV via tion in the allocation and management of stream services markets. Much will de- alternative infrastructures. With the ad- frequencies over multiplexers (not re- pend on the speed of rollout, in the vari- vent of broadband, downstream services quired for analogue transmission ser- ous national markets, of alternative are viewed as becoming more important vices). The issue of market definition may xDSL, broadband fixed wireless and than upstream infrastructure provision need to be revisited in future, since the si- UMTS infrastructures, and their relative on the economic value chain. As a result, multaneous transmission of TV and radio success in attracting investment by po- the focus of regulatory scrutiny is shift- via the internet (for example, over xDSL tential service providers on downstream ing from the regulation of individual networks) may amount to a future com- markets. types of infrastructure to the assessment petitive constraint. of the competitive interaction between infrastructure alternatives. Regulators UGC/Liberty Media. The Commis- appear to be proceeding on the assump- sion’s assessment of the acquisition by tion that competition between alterna- Liberty Media Corporation of joint con- tive infrastructure providers that are not trol over UnitedGlobalCom (UGC), and subject to specific regulation, and are all its subsidiary UPC, illustrates the im- capable of carrying broadly the same portance of cable infrastructure as a services, should lead to a better competi- platform for the provision of broadband tive outcome. The consumer is better communications services. In its investi- served by a lower infrastructure cost gation the Commission considered, for component in the prices paid for down- the first time, a possible market for the stream services than would be achieved provision of broadband triple play ser- solely through competition between in- vices provided over cable networks. dividually regulated infrastructure Third parties argued that an upgraded providers. cable network would be the only net- work that could simultaneously provide Vertical integration between network One problem that arises with this as- broadcast TV (analogue and digital), operators and content providers sumption is where there are existing, high-speed internet access, interactive Liberty Media/KDG. The Bundeskartel- asymmetrical, regulatory obligations, TV services and telephony. They also lamt, Germany’s competition regulator, such as between cable and xDSL in argued that cable operators could fore- just completed an investigation into Lib- UGC/Liberty Media (see below close competitors’ access to their net- erty Media’s acquisition of KDG “UGC/Liberty Media”). Another is works, whereas competing xDSL opera- (Deutsche Telekom’s cable television as- where penetration levels for different tors, with (in their view) a technologi- sets). The Bundeskartellamt prohibited types of infrastructure in a particular ge- cally inferior product, were under a the acquisition on the grounds that it ographic market are asymmetrical. This regulatory obligation to grant such ac- would strengthen dominant positions in issue was raised in the Commission’s in- cess. the markets for: vestigation of the acquisition by Télédif- fusion de France (TDF) of joint control The Commission left open the issue of • Signal transmission to cable TV cus- of Digita Oy (Digita) from Yleisradio market definition, but dismissed these tomers. Oy, Finland’s national public broad- arguments. The Commission noted that caster. In its assessment, the Commis- it had not been shown that there was • Supplying content feeds to broadband sion found that the market for terrestrial such a distinct consumer demand for this cable networks. transmission of high/low power fre- combination of services that a cable op- quency radio and TV programmes was erator could target specific customers for • Supplying pay-TV channels to pay-TV distinct from the markets for cable and sales. operators.

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The Bundeskartellamt also took the Telekom, the Bundeskartellamt viewed crosoft had no presence in this market. view that the acquisition would give the the harmful competitive impact of the However, the OFT did note that given merged entity better access to content merger as too substantial to approve the the leading position of Microsoft in than other network operators. Using its transaction. other areas of software development, position as the largest content buyer in and the possible convergence of PC and Germany, the merged entity would not As with the UGC case (see above set-top box software, the potential for only gain superior access to content “UGC/Liberty Media”), it is clear that the foreclosure at some point in the future from entities related to Liberty Media Bundeskartellamt’s primary concern was could not be ruled out. (for example, Discovery Communica- to prevent the creation of a bottleneck on tions, UPC, QVC and News Corp.) but the cable TV market. The concern was Concerns with leveraging. The approach also to the content of other companies. that Liberty Media would emerge as a of the Commission and the OFT in these In addition, the regulator believed that gatekeeper to both content and infra- cases suggests that where dominant Liberty’s content offering would become structure. players seek to capture value in emerging relatively much more important once it convergence markets, their behaviour had entered the German market. Liberty Preventing bottlenecks in convergent will be judged in accordance with a dom- would then supply around 60% of all markets inant operator’s higher standard of care. broadband cable customers in Germany Microsoft/Telewest/UPC/NTL/TV They will not be allowed to extend their and use the network to distribute its own Cabo. Regulators have become increas- dominance through the acquisition of content. ingly vigilant about preventing domi- majority stakes or through the acquisi- nant players from exercising control tion of decisive influence over the tech- over emerging markets through the use nology decisions of key market opera- of equity stakes in other companies. An tors using strategic minority stakes. It is example of this is the decision of the also likely that such strategic minority Commission to open an ex officio an- stakes will continue to be the subject of titrust investigation into Microsoft’s regular complaints by competitors and strategic investments in European cable therefore the target of continuing regula- operators, following on from its prior tory scrutiny. merger control investigation of Mi- crosoft’s acquisition of joint control Roaming and termination charges in over Telewest, a UK cable operator, in the mobile sector 2000. In that case, the Commission had Vodafone/Airtel/Eircell. Behavioural required Microsoft to limit its invest- undertakings imposed in an earlier proce- ment in the UK cable operator. This was dure do not appear to be a bar to subse- intended to preserve Telewest’s ability quent acquisitions in the same sector pro- to make independent commercial deci- vided that such acquisitions do not create sions as to the type of software to be unacceptable levels of market power. As The Bundeskartellamt did not accept the used in its digital television set-top boxes part of its conditional clearance of the view that the merger would lead to im- and thus preclude a de facto standardisa- landmark Vodafone AirTouch/Mannes- provements in competition sufficient to tion of the industry around Microsoft mann merger in 2000, the Commission outweigh the negative effects of resulting software. The own-initiative investiga- had imposed behavioural undertakings dominance in the markets identified. tion revealed that Microsoft was seeking on the merged entity (Vodafone) with re- Substantial competition between Liberty to influence the technology decisions of spect to an emerging market for advanced and Kirch would be unlikely, due to ex- other European cable operators by using seamless pan-European mobile telecoms isting links between the two (Liberty its minority stakes to establish joint services for internationally mobile cus- holds a significant minority stake in Technology Boards that would make tomers and in particular multinational News Corp. which, in turn, is linked binding recommendations as to opera- customers (Mannesmann Undertakings). with Kirch Pay-TV through BSkyB) and tors’ technology decisions. In order to In the Commission’s view, the merger their relationship of interdependence. In prevent the emergence of supply bottle- would allow Vodafone to dominate this the market for the supply of pay-TV necks and maintain competition in the newly created market. Thus the Mannes- channels to pay-TV operators, the mo- market for the supply of software for mann Undertakings sought to stimulate nopoly platform operator (Premiere digital television set-top boxes, the competition within that market by forc- World) would, in the view of the Bun- Commission required Microsoft and its ing Vodafone to provide third parties deskartellamt, simply be replaced by two strategic allies to abolish or change these with non-discriminatory access to certain monopolistic platform operators (Lib- Technology Boards so that their recom- services (that is, wholesale interconnec- erty for the cable sector and Premiere mendations were no longer binding. tion services and discounted inter-opera- World for the satellite sector). Upgrad- tor tariffs) for a three year period until ing the network to offer a competitive As regards Microsoft’s minority stake in 2003. voice telephony service and providing Telewest, the UK’s Office of Fair Trad- sufficient bandwidth to compete with ing (OFT) obtained jurisdiction over ap- When Vodafone sought to acquire con- Deutsche Telekom’s xDSL broadband proval of the investment, following Mi- trol in first Eircell (in Ireland) and then services might have generated sufficient crosoft’s decision to relinquish joint Airtel (in Spain), certain third parties ar- countervailing competitive benefits to control at the insistence of the Commis- gued that the acquisitions should be allow the Bundeskartellamt to clear the sion. The OFT took the view that the ex- blocked as they would create anti-com- deal. However, Liberty refused to enter istence of Microsoft’s stake in Telewest petitive effects on the pan-European into commitments to undertake all of the was unlikely to materially increase the roaming market and the international investments required. Absent the emer- risk of creating a bottleneck on the mar- wholesale roaming services markets. In gence of a viable competitor to Deutsche ket for set-top box software, since Mi- the alternative, it was argued that the

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Mannesmann Undertakings should be ex- As the status of roaming under existing forcement from regulation has much to tended beyond the initial three year pe- sector-specific regulation is still unclear, do with the effort to come to grips with riod to ensure that Vodafone could not the Commission has been careful to de- convergence and, in particular, competi- take advantage of the increased market scribe it as a form of access under the Ac- tion between alternative technological power it would achieve as a result of these cess Directive that is part of the New Reg- platforms. In turn, the phenomenon of acquisitions. In rejecting these arguments, ulatory Framework. The Commission’s convergence reinforces the move from the Commission noted that the acquisi- sector inquiry showed that operators may regulation to enforcement, in order to al- tions would not add significantly to not necessarily be individually dominant low regulators to deal on the facts with Vodafone’s existing European footprint, on wholesale or retail roaming markets. complex competitive relationships. Con- nor, as a result of the Mannesmann Un- The new concept of SMP will therefore vergence may also trigger a (somewhat dertakings, would they result in foreclo- need to be interpreted as incorporating belated) restructuring of sectoral regula- sure of third parties to Vodafone’s en- situations of collective dominance in or- tors. Thus, the UK government plans to larged network: both Eircell and Airtel der to allow for regulatory intervention merge its five existing sectoral regulators would also be subject to the Mannesmann by NRAs in roaming markets. The Com- (OFTEL, Independent Television Com- Undertakings as soon as they came under mission has referred to (in its working mission, Broadcasting Standards Com- Vodafone’s sole control. In addition, document “On the initial findings of the mission and so on) into one super-regula- there would be sufficient competition on sector inquiry into mobile roaming tor, the Office of Communications (OF- the international wholesale roaming ser- charges”): COM) by the end of 2003. Similar vices markets in Ireland, Spain and in initiatives may follow in other national other countries where Vodafone was ac- • The existence of a number of eco- jurisdictions. There may also be an in- tive, because of the presence of alternative nomic links between mobile operators creased emphasis on co-operation be- network operators in both countries after (interconnection agreements, member- tween NRAs and national competition the acquisitions. Finally, the three year ships of the GSM Association, the WAP authorities in the context of assessing duration should not be extended because and the UMTS forum, and the standard- M&A transactions. it was set in the light of the anticipated ised terms and conditions of roaming timetable for the rollout of UMTS net- agreements). The long-awaited consolidation of na- work infrastructure and, in any event, the tional incumbent telecoms operators is undertakings had already achieved their • The existence of high barriers to entry. another variant of convergence that objective of stimulating competition be- seems likely to re-emerge on the agenda. cause other operators such as Orange, In its assessment, the Commission also The combined pressure of high debt lev- KPN and Telecom Italia were offering suggested that the technology-driven na- els and low profitability in increasingly competing pan-European flat rate ser- ture of the mobile market did not seem to commoditised core fixed-line busi- vices. have affected the conditions of competi- nesses could force incumbents to ex- tion prevailing on the wholesale interna- plore defensive cross-border mergers. International roaming: enforcement ac- tional roaming market. Such a new wave of restructuring would tion by the Commission. The provision of provide more opportunity to achieve international roaming by mobile opera- International roaming is clearly the type policy goals in the communications sec- tors has been coming under increasing of issue in which the Commission is likely tor through enforcement proceedings. regulatory scrutiny as a result of persis- to take the lead, as NRAs lack sufficient Assessment of the competitive interac- tent allegations that consumer pricing is incentives to intervene and the ability to tion between broadband cable, ADSL, excessive. As a follow-up to the EU-wide co-ordinate any intervention. NRAs may, satellite, terrestrial, UMTS and broad- sector inquiry into mobile roaming in however, rely on the findings of the Com- band fixed wireless networks is likely to January 2000, Commission inspectors mission’s investigation in future national increase in significance as the battle to and officials from national competition enforcement procedures in relation to na- capture maximum value from the Euro- authorities carried out simultaneous tional roaming. In particular, the Com- pean broadband revolution hots up. dawn raids at nine European mobile tele- mission’s findings on the question of Given the shift from regulation to en- phony operators located in the UK and whether mobile operators collectively forcement, a co-ordinated approach to Germany on 11th July, 2001. According have SMP on international roaming mar- the Commission, NRAs and national to the Commission, the sector inquiry had kets are likely to be of considerable bene- competition authorities will be re- established serious competition concerns fit in assessing whether mobile operators quired. regarding pricing practices for mobile collectively have SMP on national roam- roaming that warranted further investiga- ing markets. Further, the Commission’s tions, in particular in the UK and Ger- analysis of relevant markets in the roam- many. The purposes of the inspections in ing case may also affect the UK Competi- these countries were: tion Commission’s ongoing (and the Eu- ropean Commission’s own recently an- • To investigate whether mobile opera- nounced) investigations of mobile tors had fixed retail prices. termination rates. The issue of whether there is a market for the termination of • To establish whether German opera- calls on an individual operator’s network tors had fixed wholesale prices, and is clearly going to be crucial in these inves- whether these prices were excessive or tigations. discriminatory. The future The Commission is currently examining these suspected infringements under Arti- In a mutually reinforcing cycle, the main cles 81 and 82. cases in 2001 show that the shift to en-

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