Annex 1

Analysis of the market for access and call origination on public mobile telephone networks

Revised and updated

13 December 2005

Analysis of the market for access and call origination on public mobile telephone networks

Table of Contents: Summary ...... 4 1 Background and legal framework for the market analysis...... 8 1.1 Background...... 8 1.2 Legal framework for the market analysis...... 9 1.3 General – Market Definition ...... 11 2 Description and definition of the relevant product market...... 13 2.1 Market definition in the Recommendation...... 13 2.2 Market for access and call origination on mobile networks in Norway – overview and history ...... 14 2.2.1 Introduction ...... 14 2.2.2 Overview ...... 15 2.2.3 Retail market ...... 15 2.2.4 Supply-side operators in the relevant market ...... 17 2.2.5 Demand-side operators and products at the wholesale level in the Norwegian mobile market ...... 19 2.3 Definition of the product market - details ...... 22 2.3.1 Access and call origination...... 23 2.3.2 Definition of access and origination on the fixed line network...... 24 2.3.3 VoB...... 25 2.3.4 Differentiation between business and residential customers...... 26 2.3.5 Pre-paid cards/subscriptions and post-paid subscriptions ...... 26 2.3.6 SMS (Short Messaging Service) ...... 26 2.3.7 Voice telephony on the 3G network...... 27 2.3.8 Other data services ...... 29 2.3.9 International roaming ...... 29 2.4 Conclusion...... 30 3 Definition of the relevant geographic market...... 30 4 Analysis of the market - single dominance...... 32 4.1 Introduction ...... 32 4.2 Market share, profitability and structural indicators ...... 33 4.2.1 Market share...... 33 4.2.2 Profitability...... 38 4.2.3 Overall size of the undertakings and experience in the field of mobile communication ...... 40 4.3 Entry barriers...... 41 4.3.1 Control of infrastructure not easily duplicated...... 41 4.3.2 Sunk costs...... 43 4.3.3 Economies of scale...... 43 4.3.4 Economies of scope...... 47 4.3.5 Access to financial resources...... 48 4.3.6 Technological superiority...... 48 4.3.7 Barriers to expansion...... 49 4.3.8 Access to distribution and sales channels...... 52 4.3.9 Vertical integration...... 53 4.3.10 Customers’ freedom of choice, access to information and possible costs of switching/lock-in effects ...... 55 4.3.11 Product differentiation/Bundling of products...... 58 4.3.12 Regulatory entry barriers...... 59 4.3.13 Frequency resources...... 60

2 Analysis of the market for access and call origination on public mobile telephone networks

4.3.14 Summary – the most important entry barriers...... 61 4.4 Other criteria and indicators ...... 61 4.4.1 Access at the wholesale level ...... 61 4.4.2 Prices and price developments ...... 62 4.4.3 Subsidisation of handsets/other market activity...... 66 4.4.4 Lack of potential competition...... 67 4.4.5 Market power/countervailing buying power ...... 68 5 Analysis of the market - collective dominance...... 69 5.1 General - Collective Dominance ...... 69 5.2 Criteria for collective dominance ...... 71 5.2.1 Market concentration...... 71 5.2.2 Similar market shares ...... 71 5.2.3 Mature market ...... 72 5.2.4 Lack of technical innovation/mature technology ...... 72 5.2.5 Absence of excess capacity ...... 73 5.2.6 Transparency ...... 74 5.2.7 Homogeneous products...... 74 5.2.8 Lack of countervailing buying power...... 75 5.2.9 Retaliatory mechanisms...... 75 5.2.10 High barriers to entry...... 76 5.2.11 Lack of potential competition...... 76 5.2.12 Lack or reduced scope of price competition...... 77 6 Assessment of significant market power and designation of provider(s) with significant market power ...... 77 6.1 General - Significant Market Power...... 77 6.2 Assessment of single dominance...... 78 6.3 Assessment of collective dominance...... 80 6.4 Conclusion...... 82 Glossary...... 83

3 Analysis of the market for access and call origination on public mobile telephone networks

Summary

This document contains the market analysis that the Norwegian Post and Telecommunications Authority (NPT) has carried out on what is considered to be the relevant market for access and call origination on public mobile telephone networks. The market analyses provide the basis for applying sector-specific measures in the various markets in which an operator/operators with significant market power are identified. Chapter 1 contains a description of the background and legal framework for the market analyses. Chapter 2 contains a description of the market for access and call origination on public mobile telephone networks, at both the retail and wholesale levels. Furthermore, the chapter contains an assessment and definition of the relevant product market recommended by ESA. In NPT’s assessment, the market includes the following: • access and call origination (outgoing voice telephony) on public GSM networks and 3G networks at the wholesale level • access by pre-paid card/subscription and post-paid subscription • access for residential customers/households and business customers • originated SMS messages

In NPT’s assessment, the market does not include the following: • access and call origination on fixed networks • mobile VoB

• international roaming In calculating market share, NPT has elected to exclude data services other than SMS. NPT is of the opinion that this does not affect the result of the actual market analysis. In Chapter 3 the relevant geographic market is defined as Norway. The actual analysis of the relevant market, which concludes with an assessment and designation of operators with significant market power, is contained in Chapters 4, 5 and 6. As a general rule, a provider is considered to have significant market power if its market share is over 40-50 %. Current providers in this market are Telenor Mobil AS and NetCom AS. NetCom has a market share at the wholesale level of just over 30 %. In principle, this is too low to indicate significant market power, particularly when there is another operator in the market with a substantially higher market share. NetCom has indeed increased its market share over time, but in NPT’s opinion it is nonetheless improbable that through competition over the next few years the market share will rise to a level indicating significant market power. NPT is also of the opinion that application of the relevant criteria in Chapter 4 fails to show other factors which can particularly indicate that NetCom alone has significant market power. NPT therefore finds that NetCom cannot be deemed to have sole significant market power in this market.

4 Analysis of the market for access and call origination on public mobile telephone networks

Telenor Mobil’s market share in the retail market is just under 60 %, while its market share as network operator (in “the upstream market”) is close to 70 %. Telenor Mobil’s market share is thus well above the level normally indicating significant market power. Telenor Mobil’s market shares have been trending downward for several years, but its reduction in market share as network operator must nevertheless be characterised as moderate. NPT places considerable emphasis on Telenor Mobil’s high market share in its assessment of the undertaking’s market power. Because of the high and relatively stable market share there is also a legal presumption that Telenor has significant market power. A high market share alone is not sufficient for concluding that an operator has significant market power. NPT has therefore looked at several other criteria that are relevant for assessing an operator’s position in the market. The analysis concludes with an overall assessment of all the criteria. It would be very expensive to duplicate the networks of Telenor Mobil or NetCom, and therefore achieve comparable coverage without network access such as co- location, national roaming and/or other sharing of infrastructure. The fact that Telenor Mobil has mobile networks with very good coverage in Norway, indicates that the company has market power in the relevant market. The market has relatively large entry barriers at the network level. The sunk costs of rolling out a mobile network of a certain size would be high, particularly so for building infrastructure in less densely populated areas. NPT finds that there are economies of scale inherent in network operations in Norway. Significant fixed costs for rolling out mobile networks in Norway together with a relatively small demand due to low population density and few inhabitants are likely to make these economies of scale substantial. NPT furthermore finds that Telenor Mobil has larger economies of scale than NetCom. Telenor Mobil also has larger economies of scope related to parts of the Group’s other operations. Telenor is a main supplier of input factors to NetCom through its position as provider of leased lines. This is also likely to be the case for new network operators. Mobile density is high in Norway, and it will therefore be considerably more difficult for new operators to acquire new customers than it was for Telenor and NetCom in the 1990s. There is still growth in terms of revenue, though the rate of this growth is now falling. However, growth in revenue through new services is expected, even though it is still uncertain how the new sources of income will affect the overall picture. Furthermore there is still considerable income potential for increased voice telephony from the fixed network, but in this case such growth in income is likely to be counteracted by reduced prices. Frequency resources are currently available in Norway for both GSM and 3G. The limited interest shown at the last auctions of GSM and UMTS frequencies, along with the fact that two of the four UMTS licences that were offered in 2000 have been returned, may also indicate that substantial entry barriers exist at the network level in the mobile communications market. Price levels and price developments alone do not provide any clear and certain picture of the competitive situation in the Norwegian market and the market power of the operators. However, price developments do provide some indication that there have been periods of relatively high intensity of competition between the existing operators in the retail market. However, neither Telenor nor NetCom have been price leaders in

5 Analysis of the market for access and call origination on public mobile telephone networks the retail market in recent years. Resellers and Tele2 have been leaders in pushing retail prices down. Other market activities, particularly increasing marketing and subsidising of handsets, indicate relatively strong competition at the retail level. However, in the last couple of years Telenor has managed to hold its position in the retail market with respect to market share. In any case, one cannot conclude on the basis of the competitive situation in the retail market that there is effective competition at the network level. A main reason for the competition observed in the retail market is that there are relatively many operators with access to Telenor’s and NetCom’s mobile networks that offer services in the retail market. There are just under 20 resellers competing for end users. Furthermore, Tele2 has been a pro-active operator based on its MVNO agreement with Telenor. With respect to access for resellers, this has been regulated under the old rules, inter alia by an obligation of cost-oriented prices. However, in recent years there seems to have been some competition at the network level between Telenor and NetCom to attract resellers. Based on the MVNO access and national roaming agreements that Telenor has signed, it can hardly be concluded that there is effective competition in the relevant market. With respect to the national roaming agreement that Teletopia has and the MVNO agreements that have been signed more recently, Telenor has been obliged to provide access. Telenor Mobil’s very high market share on the network level and strong position in the retail market, the relatively high entry barriers at the network level and lack of competition for forms of access other than resale, indicate to a considerable degree that there is no effective competition between the existing providers in the market and that Telenor has significant market power. In NPT’s opinion, Telenor can largely act independently of NetCom, other competitors and end users. Telenor has managed to maintain a very high market share at the network level, despite increased intensity of competition in the retail market and movement in the customer base. Because there are relatively high entry barriers on the network level in the Norwegian mobile market, NPT believes that potential competition will be limited, even though it exists. “3” has obtained a licence and will possibly build networks in Norway. Nordisk Mobiltelefon is currently expanding its CDMA450 network, which is particularly aimed at users where the GSM/UMTS networks have no coverage. However, there is little to indicate that these providers represent any considerable potential competition and weaken the market power of the existing network operators. Potential competition is also affected by the degree of access to existing mobile networks and infrastructure through, for example, co-location and national roaming. NPT does not expect the above factors to change significantly in the near future. On the basis of the assessment of market shares alone, NPT is of the opinion that there is a presumption that Telenor alone has significant market power in the relevant market. Furthermore, this overall assessment of the criteria for single dominance clearly indicates that Telenor Mobil alone has the economic strength in the relevant market enabling it to act largely independently of NetCom and other competitors, customers and consumers. On the basis of, inter alia, the responses to the consultation in the national consultation on the market analysis, NPT has seen it necessary to undertake an assessment on whether Telenor Mobil and NetCom together have collective dominance in this market. The assessment is contained in Chapters 5 and 6. Certain structural conditions in the market make it possible for the operators to participate in tacit collusion.

6 Analysis of the market for access and call origination on public mobile telephone networks

On the other hand, there are considerable imbalances in market share, the mobile market is innovation-driven and both Telenor Mobil and NetCom provide access at the wholesale level to external providers. Telenor Mobil and NetCom probably have greater incentive to compete against each other on price and position themselves in the market than to engage in tacit collusion. This is true of both the retail and wholesale levels. In NPT’s opinion, TeliaSonera’s purchase of Chess/Sense is furthermore also an indication that there is no tacit collusion in the market. On the basis of the above assessments compared with guidance from European law and the Guidelines for market analyses, NPT has not been able to find specific facts for claiming that tacit collusion is taking place between Telenor Mobil and NetCom, neither at the retail nor at the wholesale level. Based on this analysis NPT has reached the conclusion that Telenor ASA alone has significant market power in the market for access and call origination on public mobile telephone networks.

7 1 Background and legal framework for the market analysis

1. This document contains the market analysis that the Norwegian Post and Telecommunications Authority (NPT) has carried out on what is considered to be the relevant wholesale market for access and call origination on public mobile telephone networks in accordance with applicable regulations for electronic communications. Both the product market and the geographical market are defined, and the relevant market analysed. The market analyses will provide the basis for applying sector- specific measures in the various markets in which an operator/operators with significant market power is/are identified. 2. The document has been circulated for comment, and the analysis expresses NPT’s assessment of the situation in the relevant market. 3. NPT has taken as a basis the 18 markets defined by the EFTA Surveillance Authority (hereinafter referred to as ESA) as relevant for sector-specific regulation. 4. However, the market and its analysis are not fixed once and for all, but will be subject to regular reassessments. In markets with frequent and comprehensive changes such reassessments will of course have to be carried out relatively frequently. This analysis has a time horizon of two to three years. The market analysis is therefore limited in the extent to which it is forward-looking, cf. the Guidelines, paragraph 20.

1.1 Background

5. In March 2002 the European Union (EU) adopted four new directives that are to provide the regulatory framework for electronic communication networks and electronic communication services in future. A fifth directive was also adopted in October 2002. The directives, which are relevant to the EEA, came into force with effect for Norway from 1 November 2004, from which date they were incorporated into the EEA Agreement and made applicable to the EEA. The five directives are: • The Framework Directive - Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services; • The Access Directive - Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities; • The Authorisation Directive - Directive 2002/20/EC on the authorisation of electronic communications networks and services; • The Universal Service Directive - Directive 2002/22/EC on universal service and users’ rights relating to electronic communications networks and services; and • The Privacy and Electronic Communications Directive - Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector. Analysis of the market for access and call origination on public mobile telephone networks

6. The new regulatory framework is to lay the foundations for harmonisation of regulations in the EU/EEA, limit entry barriers and create conditions for sustainable competition for the benefit of users. 7. As described in the document “Methodology for market analysis”1 (the Method Document), the work on market analysis may be divided naturally into three phases: 1. Define relevant markets by defining relevant product markets and defining geographic markets. 2. Carry out market analyses of each of the relevant markets, with a view to revealing the extent to which any provider has significant market power, as well as reaching a decision on whether there are or are not providers with significant market power in each of the relevant markets. 3. Impose obligations on those providers identified as having significant market power. 8. This document contains NPT’s assessments in Phases 1) and 2). The document was first circulated for consultation on 9 December 2003, and NPT then received comments from the Norwegian Competition Authority, NetCom AS, Sense Communications International AS, Telenor ASA, Tele2 Norge AS and Ventelo Norge AS. These comments entailed certain changes in the analysis. In particular, the replies have caused NPT to undertake a more thorough analysis of whether a situation of collective dominance can be said to exist in markets. 9. In the period 24 May 2005 to 29 June 2005, a new national consultation was conducted on the market analysis along with the notification of decisions for the market. Relevant comments on the market analysis have accordingly been incorporated and the analysis has been updated (see Annex 2 for a summary of the aforementioned consultation).

1.2 Legal framework for the market analysis

10. In the context inter alia of the EU’s five directives mentioned above, the Norwegian Storting (parliament) has passed the Electronic Communications Act2, which came into force on 25 July 2003. The Act’s definition of significant market power is, in accordance with section 3-1, as follows: “A provider has significant market power when the provider individually or jointly with others has economic strength in a relevant market affording the provider the power to behave to an appreciable extent independently of competitors, customers and consumers. Significant market power in one market may result in a provider having significant market power in a closely related market.” 11. The term “significant market power” in the Act on Electronic Communications is very close to the competition law standard “dominance”. It follows from Norway’s obligations under the EEA Agreement that identification of providers with significant market power is to be

1 “Metode for markedsanalyse” (Methodology for Market Analysis), 6 January 2005, NPT. 2 The Act on Electronic Communications (Ekomloven) is available at http://www.lovdata.no/all/hl- 20030704-083.html.

9 Analysis of the market for access and call origination on public mobile telephone networks

carried out in accordance with the guidelines and recommendations prepared by ESA under the new framework directive for electronic communication services: • Guidelines on market analysis and the assessment of significant market power (hereinafter referred to as “the Guidelines”) 3 • Recommendation on relevant markets (hereinafter referred to as “the Recommendation”)4 12. The documents are available on NPT’s website www.npt.no under the menu selection SMP. 13. In accordance with the Guidelines a market analysis is to provide the basis for the assessment of relevant markets and of significant market power and the assessment is to accord with competition law methodology. The Guidelines and the Recommendation, together with the provisions of the Electronic Communications Act, particularly §§ 3-1 to 3-3, will therefore form the legal framework for the market analysis. However, the Guidelines are not exhaustive and therefore in its methodology document NPT has elaborated on the criteria for the market analysis on certain points. If the Guidelines and the Recommendation are amended, NPT will amend this document accordingly. It is the current version of the methodology document that provides the basis for the market analyses that NPT undertakes.5 14. In accordance with the Act on Electronic Communications, ex ante regulation of providers with significant market power is only to be used where this is necessary in order to achieve sustainable competition in the relevant or adjacent markets. In the Norwegian market regulatory obligations may only be imposed on operators with significant market power in those markets in which ESA or NPT has decided that sector-specific regulation is necessary. In each of these relevant markets NPT must assess the extent to which sustainable competition exists. Sustainable competition in this context means that there is no operator in the relevant market who, individually or jointly with others, has significant market power. See more about this under “General – Market Definition”, section 1.3. 15. The document “Methodology for market analysis” prepared by NPT (the methodology document) is not legally binding, but expresses NPT’s understanding of the guidelines to which NPT is obliged to adhere. The market analyses will therefore be carried out in accordance with the viewpoints and assessments that are expressed in the methodology document. Should there prove to be discrepancies between the methodology document and the Guidelines or the Recommendation, the methodology document will yield. 16. The document “Methodology for market analysis” in no sense regulates the Norwegian Competition Authority’s assessments in accordance with the Competition Act. Even if NPT’s assessments in accordance with the methodology document will largely be based on competition law methodology, and will thus be closely aligned with ordinary competition law, NPT’s assessments will be motivated by the requirement for general ex ante regulation, whilst the competition authorities’ assessments are as a rule ex post in connection with actual cases. The Competition

3 EFTA Surveillance Authority Guidelines 14 July 2004. 4 EFTA Surveillance Authority Recommendation 14 July 2004 with the Commission’s Explanatory Memorandum 2003/311/EC. 5 The updated version of NPT’s methodology document can be found at www.npt.no.

10 Analysis of the market for access and call origination on public mobile telephone networks

Authority’s and NPT’s assessments in accordance with the two sets of rules may therefore differ even within the same or overlapping markets.

1.3 General – Market Definition

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

The product market 18. The Recommendation states that the description/definition of the product market shall be based on an assessment of demand and supply-side substitution. A relevant product market is made up of products or services that are sufficiently substitutable for users. 19. Demand-side substitutability exists when two or more products in the market are, in the perception of the end user, mutually exchangeable or substitutable on the basis of characteristics, price and area of utilisation. 20. Supply-side substitutability exists when providers of other (non-substitutable) products, as a response to a marginal price change in the short term, can change their production or distribution and offer substitutable products without incurring significant additional costs or substantial risk. 21. An acknowledged method of analysing substitutability is the so-called “hypothetical monopolist test” (SSNIP), where one endeavours to find the best- defined market in which a hypothetical monopolist can exercise market power6. The test is done on the basis of a small but significant (in practice 5-10 %) and non- transitory price increase for the relevant product, based on the assumed price level in a market with effective competition. All other prices are assumed to be unchanged. Then one assesses the effect of the price increase in the relevant market and assesses the total effect on the producer’s revenue as a result of the price increase. It is very important to determine how profitable such a price increase is for the producer. 22. The Recommendation does not make use of the SSNIP test an absolute requirement in market definition for the market analyses. In any case, such a test by itself would not be decisive. The description of the SSNIP test in the Recommendation should be understood as a description of a procedure and a set of criteria for assessing market definition. In the individual analyses it will be natural and practical to base a definition on the terms and the procedure that the SSNIP test describes even though the method cannot be used in its formal numerical form. 23. A further assessment criterion used in market definition is whether there are joint pricing constraints between products. In such cases it can be expected that both providers and those demanding the products largely view pricing of the products as one, and that it is therefore the total price that is significant for demand. Such joint pricing constraints can indicate that the products are in the same market, even though in principle neither demand nor supply-side substitution indicates this.

6 “Small but Significant Non-transitory Increase in Price”. See the Guidelines, paragraph 40.

11 Analysis of the market for access and call origination on public mobile telephone networks

The geographic market 24. Once the relevant product markets are determined, the geographic market is defined. The outer geographic borders for the relevant product market will as a rule be determined by the extent of the network and the jurisdiction of the legal regulation of the market. The extent to which a more detailed geographic definition of the market has to be carried out will rest on an assessment of the substitutability of the relevant products and services on the supply and the demand side, with a small but significant non-transitory price increase as described above. 25. The relevant geographic market is that area in which the relevant products and services are provided on sufficiently similar or homogeneous competitive terms. In assessment of substitutability on the demand side one should take account of preferences and geographic purchase patterns, if such information is available. With this as the basis the markets can be defined regionally within the national frontiers, nationally or trans-nationally. NPT can only define regional or national markets. 26. Assessment of the relevant geographic market will be somewhat different depending on whether the assessment is made ex post or ex ante. A definition of geographic markets ex ante must inevitably have a wider basis and a more general approach than is taken with a definition ex post. An ex post definition is based on an actual event the extent of the effects of which one can chart, whilst the forward- looking assessment must be based to some extent on different circumstances. This will therefore also characterise the scope of the assessment of the relevant geographic market. 27. In accordance with the Electronic Communications Act, § 1-3, cf. Regulation of 4 July 2003 No. 882, the Electronic Communications Act applies to Svalbard, Jan Mayen, the dependencies and Antarctica. However in regard to Svalbard, exceptions have been made for Chapter 3 (significant market power), Chapter 4 (access) and § 9- 3 (consultation procedure). However, electronic communications on Jan Mayen, the dependencies and Antarctica are assumed to have very little significance for the market analyses NPT carries out in accordance with the Electronic Communications Act.

Definition of divergent relevant product markets/additional criteria 28. It may become relevant to define markets that diverge from those markets that have previously been defined in the Recommendation. In that case the consultation procedure under section 9-3 of the Electronic Communications Act is to be followed. When the relevant product market is defined, the following additional criteria, in accordance with section 3.3 of the Recommendation are to be present for the market to qualify for sector-specific ex ante regulation in the electronic communications area: 1. There are structural or regulatory entry barriers in the relevant product market. 2. The market has characteristics such that it will not sufficiently tend towards sustainable competition7.

7 Here the Recommendation uses the term “effective competition”, which may best be translated into Norwegian as “virksom konkurranse”. The Guidelines define this as a market in which operators with significant market power are absent, cf. paragraph 19. This cannot be interpreted in an antithetical manner, i.e. the presence of a provider with significant market power will prevent the market from

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3. Ordinary competition law does not sufficiently address the objectives behind sector-specific regulation.

2 Description and definition of the relevant product market

2.1 Market definition in the Recommendation

29. In its definition of the relevant market, NPT’s starting point is the description of the relevant market in the Recommendation and the Explanatory Memorandum. After a brief review of the relevant market in Norway, NPT undertakes, inter alia, assessments of demand-side substitution possibilities at the retail level. The market is therefore defined first at the retail level, in accordance with the Explanatory Memorandum.8 Thereafter, the effects of these conclusions on the definition of the relevant market at the wholesale level are reviewed. NPT also considers whether factors particular to Norway may require a market definition different from the one in the Recommendation. 30. The relevant product market corresponds to Market 15 in the Recommendation: “Access and call origination on public mobile telephone networks.”9 The following contains a brief summary of the market definition for this market, cf. the Recommendation and Explanatory Memorandum. 31. The Explanatory Memorandum discusses the retail and wholesale markets in the mobile area. Several separate mobile markets can be defined at the retail level, including markets for connecting to the mobile network and outgoing and incoming calls. 32. It also mentions that any market segments for access, origination and termination in the retail market should be analysed as one, inter alia because customers normally want access to mobile networks not only to make and receive calls (voice) but also to send and receive text messages and use other mobile services. According to the Recommendation it is uncertain whether residential customers and businesses are in the same market at the retail level. However, substitutability on both the demand and supply sides is deemed to be relatively high. Connection to mobile networks in the form of pre-paid card or subscription and post paid subscription is regarded as being sufficiently substitutable on both the demand and supply sides to be in the same market, cf. also the Explanatory Memorandum. Retail customers also demand mobile services when they are abroad. Access abroad is provided through becoming more competitive. Proposition No. 58 to the Odelsting (2002-2003) p. 99 states: “If none of the providers has significant market power then there is assumed to be sustainable competition in the market.” While the meaning of the two terms is not exactly the same, NPT therefore assumes that the terms will coincide for this purpose. 8 In accordance with the Explanatory Memorandum, the starting point for the definition and identification of markets is a characterisation of retail markets over a given time horizon, after which it is appropriate to identity relevant wholesale markets (cf. section 3.1 of the Recommendation’s Explanatory Memorandum). 9 The relevant market from the Recommendation: “Access and call origination on public mobile telephone networks, referred to (separately) in Annex I (2) of the Framework Directive in respect of Directives 97/33/EC and 98/10/EC.”

13 Analysis of the market for access and call origination on public mobile telephone networks international roaming. From a demand perspective, international roaming must be regarded as constituting a separate retail market. Nevertheless there will be supply- side substitution, which according to the Recommendation indicates that it would be appropriate to define a broader outgoing calls market at the retail level that includes national, international and roaming calls. 33. It follows further from the Recommendation that providers of mobile phone calls at the retail level also require access to the mobile network and the capacity to offer outgoing and incoming phone calls to retail customers. Thus a retail customer’s demand for subscription/access and outgoing calls corresponds at the wholesale level to access and call origination on the mobile network. Consequently, a major input factor for mobile telephony and other mobile services is mobile networks. In principle, access to mobile networks and outgoing calls (call origination) are non-substitutable services on the demand or supply sides. Using existing technology, they are, however, offered collectively by the network operator under the same pricing constraints.10 The Recommendation therefore concludes that access and call origination are in the same market at the wholesale level. 34. The Recommendation sets up three different wholesale markets in the mobile area: The market for access and call origination on public mobile telephone networks (Market 15), voice call termination on individual mobile networks (Market 16) and the wholesale national market for international roaming on public mobile networks (Market 17). The Recommendation has no relevant retail markets in the mobile area. 35. No separate relevant markets for SMS and/or data services are laid out in the Recommendation. 36. The Explanatory Memorandum states that the market for access and call origination on public mobile telephone networks is unlikely to be included in future revisions of the Recommendation.11 However, it should be pointed out that NPT will continue to undertake specific assessments of the competitive situation in Norway before the Recommendation is either followed or departed from.

2.2 Market for access and call origination on mobile networks in Norway – overview and history

2.2.1 Introduction 37. In this chapter, NPT provides a short overview of the Norwegian mobile market, giving special attention to the wholesale market for access and call origination on mobile networks. Among other things, it provides an overview of the major operators in the market on both the supply and demand sides. 38. The relevant market is a market at the wholesale/network level. A more precise definition of the market is given in section 2.3. 39. The Explanatory Memorandum (p. 7) states that the starting point for the identification and definition of markets is a characterisation of retail markets over a given time horizon. When the markets involving supply to and demand from end users have been identified, these will form the background for identification of the

10 Both operators and those demanding services increasingly view the pricing of individual elements as one; it is this total price that is significant for demand of the “package”. 11See Explanatory Memorandum, section 4.3.1, “Access and Call Origination”.

14 Analysis of the market for access and call origination on public mobile telephone networks wholesale markets, which are markets involving the demand for and supply of products offered by third parties in the retail markets. This means that, in the analyses of the wholesale markets, NPT has taken into account the associated retail markets.

2.2.2 Overview 40. In the early 1980s, Televerket (now Telenor ASA, hereinafter referred to as “Telenor”) established the NMT 450 network and then later also NMT 900. At the end of 1991 Telenor and NetCom AS (hereinafter referred to as “NetCom” 12) were granted licences to construct, own and manage the GSM 900 mobile network. In the autumn of 1993 the first commercial GSM services were launched. NetCom and Telenor were granted licences for DCS 1800 in 1998. In December 2000, Telenor and NetCom were granted licences for UMTS mobile networks. 41. The first agreement governing access to mobile networks (a resale agreement, also referred to as a service provider agreement) was entered into at the end of 1999. The two parties to the agreement were Telenor Mobil and Sense. Today, just under 20 companies offer mobile telephony to the residential and business market through resale agreements with Telenor Mobil, NetCom or both.13 42. From 2000 until December 2003, Tele2 Norge AS (Tele2) offered mobile services based on a service provider agreement with Telenor Mobil. In September 2002 Tele2 signed an MVNO agreement with Telenor Mobil. The agreement gives Tele2 access to Telenor Mobil’s 2G and 3G networks in Norway while simultaneously providing Telenor access to Tele2’s mobile network in Sweden. Since December 2003 Tele2 has offered mobile services based on the MVNO agreement. In the autumn of 2005, TDC Song and Ventelo entered into an agreement on MVNO access to Telenor’s mobile network. 43. In January 2002 Teletopia Mobile Communications AS (Teletopia) was granted a licence to construct, own and manage a public telephone network using frequencies in the 1800 MHz band. At the same time BaneTele was issued a licence for frequencies in the 900 MHz band. This licence was later transferred to Harald A. Møller AS (MøllerGruppen). 44. Furthermore, in September 2003, Hi3G Access Norway (“3”) was given permission to use frequencies set aside for a third-generation mobile communications system (3G) in Norway. 45. In December 2004, Nordisk Mobiltelefon AS was granted permission to use frequencies in the 450 MHz band, and has begun to build mobile networks based on CDMA technology.

2.2.3 Retail market 46. Service providers offer end users in the residential and business market access to mobile networks and services through pre-paid cards/subscriptions and post-paid subscriptions. The price components normally found consist of a registration charge, a monthly charge, starting price and minute price per call as well as a unit price per SMS/MMS message and a price per megabyte for data transmission. In the case of

12 NetCom as is now a wholly owned subsidiary of TeliaSonera AB (TeliaSonera). Because this market analysis covers the mobile market in Norway, references hereinafter will be to “NetCom”. 13 An overview of providers of mobile services can be found at www.npt.no under the menu selection SMP.

15 Analysis of the market for access and call origination on public mobile telephone networks pre-paid cards/subscriptions no subscription charge applies, but in return the minute price is often somewhat higher. For both forms of access it is common practice to operate with a registration charge of NOK 0-300.14 47. End users can access mobile services such as voice telephony, SMS, MMS and other data services. These services are generally offered through the same subscription, i.e. “bundled”. Mobile data services, such as so-called mobile Internet, as well as a range of various content services have also become available in recent years. In addition, the end user has access to international roaming, which means that the individual user can use their mobile telephone to make and receive calls as well as use certain data services while staying outside the country in which they have established a subscription. 48. At the end of June 2005, there were just over 4.8 million mobile customers in Norway, equivalent to a mobile density of about 104 %. Even so, it must be emphasised that the actual number of end users is somewhat lower because some end users have more than one subscription and/or pre-paid card. There has been rapid growth in mobile telephone density in Norway, from approximately 47 % in 1998 to 75 % in 2000, 102 % in 2004 and 104 % at the end of the first half of 2005. Growth has slowed somewhat in recent years. Increased use of “machine-to machine” subscriptions (used for example to preheat holiday cabins and for point-of-sale terminals) has served to push mobile telephone density to over 100 %.

Turnover 2004 Revenue originated traffic

426 Revenue terminating traffic 1 507

Revenue SMS 2 287 7 255 Subscriptions and registration 1 844 Other revenues

3 337 International roaming

Figure 1: Total revenue in the mobile market in 2004 including international roaming and termination. Figures given in NOK million. (Source: “The Norwegian Telecom Market 2004,” NPT)

49. As shown in Figure 1, total revenue in the mobile market in 2004 was about NOK 16.7 billion including international roaming and termination, excluding VAT.

14 A comprehensive summary of retail prices in the residential market can be found at www.telepriser.no.

16 Analysis of the market for access and call origination on public mobile telephone networks

2.2.4 Supply-side operators in the relevant market

Existing suppliers in the GSM market 50. The supply side of the wholesale/network level in the mobile network is currently made up of Telenor Mobil AS (hereinafter Telenor Mobil15 or just Telenor) and NetCom.Both Telenor Mobil and NetCom have virtually nationwide GSM networks (GSM 900/1800). Both of these companies operate as network operators, service providers and content providers, and must therefore be regarded as vertically integrated companies. Both companies are currently obliged to allow access to their GSM networks. This is due to the fact that the companies have been deemed to have significant market power in the GSM market, cf. Telecommunications Act § 2-1 first paragraph, cf. Public Telecommunications Network and Services Regulations Chapter 4 and the Electronic Communications Act § 13-2. 51. Telenor Mobil is a wholly owned subsidiary of Telenor ASA (Telenor). Telenor owns most of the infrastructure for electronic communication in Norway, including the fixed access network, transmission capacity etc.17 Telenor has interests in 12 mobile companies in Europe and Asia, owning, among others, Sonofon in Denmark and Telenor Mobil Sverige AB in Sweden. Telenor also recently purchased Vodafone’s mobile operations in Sweden. 52. NetCom was established at the end of the 1980s and in November 1991 became the first private telephone operator to be granted a GSM licence. NetCom is owned by TeliaSonera AB. TeliaSonera, which is the largest telephone group in the Nordic countries, also has mobile enterprises in Sweden (Telia), Finland (Sonera) and Denmark (Telia). TeliaSonera’s operations cover the majority of areas in the electronic communication sector.18

UMTS 53. At the present time there are three companies holding UMTS permits/licences in Norway: Telenor Mobil, NetCom and “3”. Telenor Mobil, NetCom and “3”. 54. In December 2000 Telenor Mobil and NetCom were granted licences to construct, own and manage a public UMTS telephone network together with Broadband Mobile ASA and Tele2. 55. Due to Broadband Mobile’s bankruptcy in the autumn of 2001 and the subsequent withdrawal of its licence by Ministry of Transport and Communications, and Tele2’s return of its licence for the construction and management of a third- generation mobile network in November 2002, the two available 3G licences were auctioned in the summer of 2003. In accordance with Report no. 18 (2002-2003) to the Storting (parliament), supplementary report to Report no. 32 (2001-2002) to the Storting on the situation in the Norwegian mobile market, cf. Recommendation No. 192 (2002-2003) to the Storting, the minimum requirements for coverage area and speed of construction were reduced in relation to the first round of licences. New

15 Telenor Mobil is a wholly owned subsidiary of Telenor ASA. Because this market analysis covers the mobile market in Norway, references hereinafter will usually be to “Telenor Mobil”. 16 NetCom as is a wholly owned subsidiary of TeliaSonera AB (TeliaSonera). Because this market analysis covers the mobile market in Norway, references hereinafter will be to “NetCom”. 17 A description of Telenor can be found, inter alia, at http://www.telenor.no/om/. 18 A description of TeliaSonera can be found at http://www.teliasonera.se/channelfront1/0,2855,l-se_h- 12453,00.html

17 Analysis of the market for access and call origination on public mobile telephone networks holders of 3G licences are now obliged to give 3G coverage to 30 % of the population within six years of the granting of a licence.19 In addition, the requirement to pay a minimum price of NOK 200 million per concession/licence has been withdrawn. 56. Only “3” submitted a bid (NOK 62 million), and on 20 September 2003 was granted permission to use frequencies reserved for 3G in Norway. 57. UMTS expansion has been delayed in many parts of Europe. The main reasons for this are the general economic downturn in the period following the granting of licences in Europe and delays in the process of developing a common UMTS standard. This in turn has caused delays on the equipment side, both in terms of network equipment and also handsets. 58. In conjunction with the hearing of Report no. 32 (2001-2002) to the Storting and Report no. 18 (2002-2003) to the Storting, Telenor Mobil and NetCom were therefore given an extension of 15 months for the construction of the UMTS network without having to pay compensation charges to the State. 59. Telenor started commercial operation of its UMTS network on 1 December 2004. NetCom opened its UMTS network in February 2005, initially only for data traffic.20 60. “3” already has a strong presence in the Nordic countries through operations in both Sweden and Denmark. The company has around 9 million customers (as of August 2005) in Australia, Austria, Italy, Sweden, the UK, Denmark, Ireland and Hong Kong. The company reported in August 2005 that it had just over 400 000 customers in Scandinavia.21

450 MHz band 61. As a result of the auction in June 2004, the frequency band that until 31 December 2004 was used for NMT 450, has been assigned to the Nordisk Mobiltelefon AS (Nordisk Mobiltelefon). The frequency assignment contains certain requirements for geographic coverage. Coverage is to be offered mainly in areas that currently lack or have poor quality GSM coverage. The network is also required to support services corresponding to the services usually associated with mobile telephony. The rollout according to the minimum requirements was to be completed by 15 September 2005, and access to the public mobile telephone network shall be offered. 62. Nordisk Mobiltelefon aims to establish a third-generation mobile network based on the CDMA450 standard. 63. In addition to basic voice services, CDMA450 supports data services, including all typical supplementary services such as SMS, MMS, e-mail, wap/web- browsing etc. The standard is available in several versions. CDMA450 1X is often described as a “2.5G” technology and is being compared to GSM/EDGE. CDMA450 EV-DO (Data Only) is being established in parallel with 1X and provides a data transfer capacity that is 1.5 to 2 times higher than UMTS. CDMA450 networks have

19 In the previous offering the minimum coverage requirement was set at 12 specific densely-populated areas. Paragraph 4.2 of the offer document states that “90 per cent of the population in each of the 12 densely-populated areas shall be covered within five years of the granting of the licence.” 20 Updated information on the companies’ coverage areas for their UMTS networks can be found on Telenor’s and NetCom’s websites. 21 See http://202.66.146.82/listco/hk/hutchison/interim/2005/intrep.pdf

18 Analysis of the market for access and call origination on public mobile telephone networks been established in 20 countries, and regulatory authorities in a number of other countries, including Brazil and India, are considering the establishment of 3G networks in the 450 MHz band. 64. The current limited size of the market is considered to be one of the largest obstacles to the spread of the standard. Handset prices are relatively high and the selection is limited. The advantage of the standard is that it makes it possible to establish 3G networks with far lower capital and operating costs than UMTS. 65. Despite all the attention the standard has received, NPT deems it unlikely that Nordisk Mobiltelefon will, to an appreciable degree, compete with existing GSM/UMTS providers for ordinary end users within the time horizon of this analysis. As of 1 November 2005, 55 base stations have been completed in Norway and the network is operative. Nevertheless, the company has not launched any services commercially. Moreover, Nordisk Mobiltelefon’s initial goal is to sell data traffic in rural areas and deliver telephony to niche users such as hunters and fishermen.23 To begin with, the handsets will therefore not be compatible with the GSM and UMTS networks, ruling out roaming, among other things. End users will need two mobile telephones if they want national coverage and/or use the telephone in Europe. In NPT’s view, this will probably lead to ordinary end users not viewing the voice telephony service as a substitute for GSM/UMTS over the lifetime of this analysis.

2.2.5 Demand-side operators and products at the wholesale level in the Norwegian mobile market 66. Operators on the demand side can basically be divided into two groups: operators with their own mobile network (including radio network) and operators without their own mobile network. In principle, the products network owners Telenor and NetCom offer these operators can be divided into four groups: co-location agreements, agreements on national roaming, agreements on Mobile Virtual Network Operator (MVNO) access and service provider agreements. There is no sharp divide between the three latter forms of access.

Operators with their own network infrastructure/radio infrastructure 67. Newer operators that have or may get their own radio infrastructure include the network operators Teletopia and MøllerGruppen on GSM, “3” on UMTS and Nordisk Mobiltelefon on CDMA 450 technology. In the long term these operators could also become providers in the wholesale market, but are regarded for the time being as demand-side operators. 68. Teletopia has rolled out a GSM 1800 network in Oslo and states that the network provides coverage for 180,000 people in the Oslo area. The other operators currently do not offer services in the retail market. 69. These operators can demand access to the existing GSM and 3G networks, inter alia in the form of national roaming, co-location and/or other infrastructure sharing.

22 See www.emc-database.com. 23 See, inter alia, information on the company’s website, www.nordiskmobiltelefon,no.

19 Analysis of the market for access and call origination on public mobile telephone networks

Telenor’s agreement on national roaming 70. The purpose of national roaming is to give mobile operators with limited radio infrastructure the possibility of using other mobile operators’ radio infrastructure, so as to be able to offer their own end users better coverage. 71. Currently only one agreement on national roaming exists: the one between Telenor and Teletopia. The agreement makes it possible for Teletopia’s own customers to use their mobile phone outside Teletopia’s coverage area. The agreement covers 2G voice telephony, SMS and data transfer. It is possible to negotiate other services. 72. Telenor requires fixed tariffs for voice, SMS and data traffic. Teletopia is responsible for billing end users, customer service, and issuing SIM cards. The agreement does not contain any mechanisms that prevent an operator from switching to another network.

Resellers/service providers without their own radio network 73. Service providers without their own radio network offer end users access to the mobile network and services. In addition to the vertically integrated network operators Telenor Mobil and NetCom, the service provider sector comprises those companies which have entered into service provider agreements (also called resale agreements24) with the network operators and/or MVNO agreements. Service providers market and sell subscription/pre-paid cards in their own name at their own prices. They are also responsible for customer service and billing their own customers. The network operator carries out almost all production of technical services for resellers. MVNOs can carry out more of their service production themselves. Telenor’s MVNO agreements 74. In September 2002, Tele2 signed an agreement with Telenor Mobil, giving the company MVNO access on Telenor’s GSM and UMTS networks in Norway. On 25 October 2005, TDC Song announced that they had signed a similar agreement. Ventelo did the same in a press release dated 8 November 2005. Both of these providers will begin marketing mobile services to business customers in the first half of 2006. 75. An MVNO has all the technical systems that are necessary for interconnection with other network operators, but in contrast to providers requesting national roaming, it does not have its own frequency resources or radio network. As an MVNO, the provider will have its own International Mobile Subscriber Identity Code (IMSI code), its own network code (MNC) and offer its own subscription (SIM card) and services to end users. An MVNO can also become a provider in the wholesale market by lining up its own service providers. 76. MVNO agreements provide a virtual provider access to necessary radio resources in the network owners’ mobile network. The contractual party is responsible for all other input factors such as customer service, billing, SIM cards and parts of the infrastructure.

24 As providers with significant market power according to earlier regulations, both Telenor Mobil and NetCom are obliged to have reference resale agreements in accordance with Public Telecommunications Network and Services Regulations § 3-3. The agreements can be accessed on the companies’ websites.

20 Analysis of the market for access and call origination on public mobile telephone networks

77. According to Telenor’s reference offer, an MVNO must cover an access fee of NOK 20 million, divided into NOK 4 million per year for a five-year period. Beyond this Telenor operates with separate prices for voice traffic, SMS and data services. MVNOs can obtain discounts based on the average monthly volume of voice traffic. 78. If the MVNO cancels the agreement, Telenor is entitled to demand that the company pay an exit fee for documented costs relating to the loss of expected traffic. Service provider agreements 79. After NetCom and Telenor Mobil began permitting agreements with service providers in 1999/2000, a number of service providers were established in the market. In the autumn of 2000, up to 20 companies had resale agreements with the network operators. In the years that followed consolidation took place among service providers through bankruptcies and acquisitions/mergers. However, in 2004 a number of new service providers were established. As of November 2005, just under 20 operators were operative service providers in Telenor Mobil’s, NetCom’s or both networks.25 80. The service providers focus on different customer segments, and mobile telephony is included to varying degrees as part of a larger range of products. Certain service providers offer mobile telephony exclusively to the business market, while the other service providers offer mobile telephony in the residential and SMB market. These operators combine to a greater or lesser degree mobile telephony with other services (for example fixed telephony, Internet access, and/or electricity). Some operators also link their services with membership in various clubs and organisations. 81. A service provider agreement gives providers without their own network a non-exclusive right to offer, market and deliver services to end users through pre-paid cards or subscriptions. The offering is based on services in Telenor’s or NetCom’s network. The end user has solely a contractual relationship with the service provider. All traffic is routed according to the net operator’s interconnection and roaming agreements with others. 82. Both Telenor and NetCom require an exit fee if the service provider cancels the contract. The purpose is to indemnify network operators for loss of traffic. In Telenor’s contract the amount is calculated as compensation for lack of use of the network capacity due to a decline in the number of subscribers. When a service provider cancels, a condition of the exit fee is that the capacity must have been obtained at the request of this service provider, and must not have an alternative use. In the “Telia Mobile Host” (NetCom) contract, the service provider must pay a minimum of six times the average invoiced amount per month. The cancellation clause also takes effect if a service provider comes under the control of another company. CPA agreements 83. Besides ordinary services such as voice calls and SMS, Telenor offers content providers several different products. They include: • CPA SMS: gives the content provider the opportunity to be paid for mobile- originated text messages • CPA WAP: charges retail customers for content services delivered via mobile Internet to a mobile phone

25 An overview of registered providers can be found at http://www.npt.no/iKnowBase/FileServer/aktoroversikt_juli04.xls?documentID=26066.

21 Analysis of the market for access and call origination on public mobile telephone networks

• CPA MMS: provides access to a third-party interface that entitles the supplier to receive and transmit MMS content services • CPA WEB: provides the opportunity to charge for content services on SMS or WAP and simultaneously make it is possible for end users to gain access to services delivered via interfaces other than the GSM mobile terminal.

84. NetCom offers comparable services, but the various basic products have names and content that are somewhat different from those offered by Telenor.26 In material terms, Telenor Mobil and NetCom offer somewhat the same overall services. 85. The content provider is billed both for traffic generated in the network of end users and for one-off costs. The prices vary somewhat between Telenor and NetCom. The traffic costs on the network depend on the service in question, and whether or not it is on-net. The operators require non-recurrent fees for costs related to implementation of services and support systems, activation of number series, reports etc. NetCom also has a non-recurrent fee to provide access to its network.

2.3 Definition of the product market - details

86. Based on the Recommendation’s definition of the relevant market and the overview in the previous chapter, NPT will assess in the following section which market definition applies to the Norwegian situation. However, it should be pointed out that the Norwegian mobile market in general is not significantly different from that found in the rest of Europe with respect to the services that are offered, use of mobile telephones, technology etc. By the same token, one cannot expect the definition of the relevant market to be substantially different from that found in most other countries in the EU/EEA. 87. NPT will also assess more closely a number of special issues relating to the market definition, for example the extent to which SMS and 3G voice telephony should be included in the relevant market. 88. According to the Recommendation, the relevant market is as mentioned a wholesale market. Since both Telenor Mobil and NetCom are vertically integrated companies and thus also operate as service providers, the relevant market also encompasses the network operator’s internal sale of wholesale services to its own units. 89. Since the competitive conditions on the retail level are relevant with regard to whether market power exists at the wholesale level, it is necessary, in addition to the wholesale level, to examine the market definition and criteria for significant market power related to the retail level. For the definition of the relevant product market, this means that the evaluation of the relevant retail market will come before the evaluation of the relevant wholesale market, since demand at the wholesale level is derived from demand for retail products and services.

26 NetCom’s basic products are CPA Total, CPA SMS Innhold, CPA WAP Billing/ WAP Push, CPA SMS Bulk and CPA Event.

22 Analysis of the market for access and call origination on public mobile telephone networks

2.3.1 Access and call origination 90. As mentioned above, end users purchase subscriptions/pre-paid cards, i.e. connection to the mobile network, to make and receive calls (and to send/receive text messages etc.). From the end users’ point of view there is thus no substitutability between connection to mobile networks and the actual calls; these services are if anything complementary. Nevertheless, these services cannot be seen to be independent of one another since end users must have both components at the same time. Access to mobile networks and the opportunity to call are therefore always offered together (bundled) to end users. 91. At the wholesale level operators generally want access to the mobile network and capacity for call origination, in order to offer these collectively to end users. Thus a customer’s demand for subscription/access and outgoing calls corresponds at the wholesale level to access and call origination on the mobile network. Access and call origination are therefore offered strictly bundled at the wholesale level too. In contrast to the fixed network, access and origination are not offered separately through, for example, carrier selection or carrier pre-selection.27 This means that providers at the wholesale level face the same constraint at the retail level with respect to pricing of access and call origination. One can also say that the competitive conditions are the same both with respect to access to mobile networks and call origination. Both access to mobile networks and call origination are therefore covered by the relevant market. 92. There are various means of accessing mobile networks at the wholesale level: access can be offered through the use of carrier selection or carrier pre-selection (these forms of access are, however, not currently in use in the mobile network in Norway), access to the network for operators without their own mobile infrastructure (third- party operators such as external service providers/MVNOs), access to radio networks for operators with their own mobile infrastructure (national roaming), and various forms for sharing other infrastructure, for example co-location. The most common means of access is, however, the access which the network operator gives to its own service provider. Irrespective of the means of access utilised, access and call origination on public mobile telephone networks are essential in order to reach retail customers and thus be able to offer mobile services to the general retail market. 93. In the retail market mobile telephony is basically the same service whether offered by a network operator or a third-party operator. New network operators who use national roaming via another network operator in areas where they lack coverage, also offer the same service. Mobile services in the retail market are therefore independent of how the “access” product for respective originating calls is obtained in the wholesale market. In the retail market preferences may exist for the telephony services of certain providers dependent on such criteria as price, quality, additional services, subsidising of handsets etc. 94. In respect of the above, two separate categories of external customer can be found in the wholesale market: third-party operators and new network operators demanding different forms of infrastructure sharing. Two different forms of supply are involved here, dependent on the different needs of the buyers, namely that one has its own network while the other does not. Yet both of these offerings involve both access

27 Section 4.3.1 of the Explanatory Memorandum points out that the lack of separate services for access and origination within the mobile market suggests that the two are to be covered by the same market at the wholesale level. It is nonetheless noted that this could change in the future and that a situation more like the one existing in the fixed network can arise.

23 Analysis of the market for access and call origination on public mobile telephone networks and call origination on the mobile network. On the demand side it is unclear to what degree the products can be considered substitutable, as this is partly dependent on whether the particular operator has already entered the market or not. In the case of an operator that has not made large investments with respect to form of access, however, the products can to some extent be substitutable. Experience from the Norwegian mobile market, where providers such as Tele2, TDC Song and Ventelo have moved between the different forms of access, also indicates that there are substitution possibilities. Therefore it is NPT’s view that the market for access and call origination on the mobile network includes both service providers/MVNO and various forms of national roaming. For production of all these access products, the input factors are network infrastructure such as base stations, masts, switches and frequencies. 95. Content providers demand access to the mobile network to deliver content services such as ring tones, news, games, etc. to end users. Such content services delivered to retail customers are not substitutable with originated voice calls at the retail level. Nor is there any substitutability at the wholesale level, and access for content providers thus falls outside the relevant market.

2.3.2 Definition of access and origination on the fixed line network 96. With respect to connection to networks, there is relatively limited demand-side substitutability at the retail level between telephony on mobile and fixed networks. Even though it is likely that a small, but significant non-transitory price increase in mobile telephony will lead to some transition to fixed network telephony, it cannot be assumed that the services are complete substitutes.28 This will apply to both traditional fixed telephony and VoB connected to fixed points of interconnection. One of the main reasons is of course that by definition, mobile telephony - in contrast to fixed telephony - provides the opportunity for mobility. Thus in many cases the fixed line network offers no possible substitute for the use of mobile telephony. This limited demand-side substitutability is also found at the wholesale level. However, there will be a significant degree of substitution from landline to mobile phone use. Many people, especially younger users, are rejecting landlines in favour of mobile phones.29 This tendency will increase over time as broadband services for accessing the Internet become more widely available. 97. Nor can a major degree of supply-side substitution be expected at the wholesale level. A fixed telephony provider cannot quickly and cheaply change its production to offer mobile telephony. There will be relatively strong entry barriers in the market, including those connected to the large sunk costs attributed to building mobile networks, cf. section 4.3.2. 98. Based on the assessment above NPT therefore finds that national fixed telephony services are not a part of the relevant market in question. This is in accordance with the market definition in the Recommendation.30 Fixed telephony is,

28 TNS Gallup’s customer survey for NPT showed that approx. half of users would use landlines more if mobile prices increased by 15 øre per minute. 29 TNS Gallup’s survey for NPT showed that 15 % of the population over 15 years of age only have mobile phones. In the 15-35 age group, nearly 30 % had only mobile phones, with just barely 3 % of this age group reachable only by landline. 30 Paragraph 66 of the Guidelines states: “As regards the provision of mobile communications services, the Commission has found that, from a demand-side point of view, mobile telephony services and fixed telephony services constitute separate markets.”

24 Analysis of the market for access and call origination on public mobile telephone networks on the other hand, assessed in Markets 1-6 (retail markets) and Markets 8-10 (wholesale markets).

2.3.3 VoB 99. VoB is a telephone service that uses VoIP technology31 to transfer voice calls via IP networks. VoB facilitating end-to-end connectivity is subject to regulation under the Electronic Communications Act.32 When VoB is used via radio access (WMAN, WIMAX, UMTS or similar) and gives end users the possibility to move seamlessly between different access points, it may be called mobile VoB (wireless VoIP). However, to use such VoB, the end user must have a handset that is capable of wireless connection to the Internet and supports VoIP technology, among other things. Such handsets may be compared to small computers. 100. It must be assessed whether mobile VoB is part of the relevant market for access and call origination on mobile networks. 101. The fact that mobile VoB is by nature mobile and can be used for voice calls can indicate that the service can be a part of the market. All the same, the main objection to including mobile VoB in the market is that use of such VoB virtually does not exist today. Firstly, suitable end user equipment barely exists on the market. Secondly, so far the necessary radio access network has not been sufficiently extended to ensure that a mobile broadband phone service provides the coverage an end user would expect of a mobile phone service. From an end user perspective, VoB will not be a substitute for traditional mobile telephony. Nor is it likely that this situation will change significantly within this analysis’ time horizon of two to three years. 102. There is furthermore no substitution between traditional mobile telephony and VoB on the wholesale side. Although it has been estimated that the entry barriers for providers of VoB are relatively low, offering mobile VoB would as a rule require a substantial restructuring of market strategy and competence. Within the time perspective of this analysis NPT does not expect that such restructuring is realistic. 103. Besides mobile VoB (wireless VoIP), VoB can to a certain extent provide mobility through nomadic use. Nomadic use means that it is possible to connect via different physical fixed access points. Nomadic broadband telephone services may therefore potentially obtain access to incoming and outgoing voice communication from any point for Internet access throughout the world. During a call, however, the end user will be connected to a given location. The mobility provided by nomadic VoB is therefore incomplete. 104. It is debatable whether nomadic VoB can be a substitute for traditional mobile telephony. However, the lack of physical mobility for the end user makes such substitution irrelevant. 105. All told, these arguments indicate that VoB cannot be deemed a substitute for traditional mobile telephony via GSM or UMTS networks. NPT therefore concludes that VoB is not part of the market for access and call origination on public mobile telephone networks.

31 VoIP (Voice over IP) involves digitisation and compressing of voice calls to IP packages. These IP packages are transmitted via IP networks. The Session Initial Protocol (SIP) is used to find the correct addressee and set up and disconnect the actual call. 32 See NPT’s “Regulation of VoB” of 15 April 2005.

25 Analysis of the market for access and call origination on public mobile telephone networks

2.3.4 Differentiation between business and residential customers 106. NPT shares the view contained in the Recommendation that it is uncertain at the retail level whether households and businesses will be in the same market for mobile services. Providers approach the two segments with different product solutions (for example types of subscription), and the business and residential markets have to some extent different operators/providers. It is also likely that the competitive conditions are different in the two segments. These factors indicate that they are in fact two separate markets. On the other hand, the possibility, for example, of supply-side substitution, would indicate that this is indeed the same market. As an example, it would not be difficult for a provider that had previously only targeted business customers to change its focus to residential customers in response to a small, but significant non-transitory price increase in this customer segment. 107. The point is also made that products intended for the business market are also offered to residential customers, and products intended for the residential market are to a certain extent also offered to the business market (especially SMBs). Business customers with mobile subscriptions also make significant private use of these. 108. No differentiation is currently made between residential and business customers in the case of access at the wholesale level. External service providers buy call minutes from the network operators and decide themselves how to target various segments in the market. 109. Based on these findings NPT has come to the conclusion that residential customers/households and business customers are in the same market at the wholesale level.

2.3.5 Pre-paid cards/subscriptions and post-paid subscriptions 110. Pre-paid cards or subscriptions and post-paid subscriptions can also be regarded as parts of the same market. A high degree of substitutability can be deemed on both on the supply and the demand sides at the retail level. 111. The resale agreement covers both access for pre-paid cards/subscriptions and post-paid subscriptions. While there is some difference in prices and services for the two product types, it is not sufficient for them to be deemed to be in different markets.

2.3.6 SMS (Short Messaging Service) 112. The Recommendation makes a general distinction between voice telephony and data services. No separate relevant markets are defined for data services in the mobile area, and the same is true for SMS at both the retail and wholesale levels. Nevertheless, it remains unclarified whether SMS is included in the market for access and call termination on public mobile telephone networks, as defined and described in the Recommendation. 113. Even if there are several basic differences between originated SMS messages and originated voice telephony, for example that SMS only allows the exchange of relatively short messages as well as the possibility that the message can be delayed, it is clear that for many user groups and in many cases SMS can be a substitute for voice telephony. Statistics for 2004 show that SMS use in Norway was considerable. In 2004, customers sent 69 messages per month33, which in isolation may indicate that to

33 By comparison, the statistic from Denmark is 37, Finland 31 and Sweden 17.9. Source: NPT, PTS, ITST (NITA) and Statistics Finland.

26 Analysis of the market for access and call origination on public mobile telephone networks a certain extent Norwegian end users regard SMS as a viable substitute for voice telephony. 114. In the autumn of 2004, NPT, in conjunction with TNS Gallup, conducted a survey among a sample of Norwegian consumers. The survey showed that to a certain degree SMS is used as a substitute for short phone calls. High calling charges in particular were cited. In response to a direct question, however, only one-third would have sent more text messages if the mobile calling charge went up 15 øre. On the other hand, such a price increase would have caused around half to make more landline calls. On this basis it is reasonably clear that most end users do not view SMS as a substitute, but rather a supplement to voice telephony. 115. At the same time it is usual for SMS to be sold as part of a joint service package to the retail customer, i.e. “bundled” together with access (subscription/access) and voice telephony. One effect of this is that the pricing of SMS is viewed together with the pricing of the subscription (fixed charge) and voice telephony. Certain services to end users also advertise a certain number of free or very inexpensive text messages, which indicates that SMS is included in an overall product package for the end user. 116. The bundling also applies at the wholesale level. Purchasers of wholesale services demand access and origination of both voice calls and SMS messages in order to offer their retail customers an attractive service. It is difficult to see that a mobile service without SMS would sell among end users.34 Nor is there any possibility at the wholesale level to purchase origination of voice calls and SMS messages from various operators in order to combine them into a retail package. Thus there are grounds for regarding originated SMS messages as being in the same market as access to mobile networks (subscription) and originated calls on mobile networks.35 117. Terminated SMS messages, in the form of text messages or commercial content messages (logos, weather reports etc.) fall outside the relevant market. In NPT’s opinion, neither substitution nor other factors such as common pricing constraints indicate that the relevant market should be broadened to also include terminated SMS messages. 118. In NPT’s view the relevant market does include originated SMS messages, particularly on the basis that subscriptions, voice telephony and originated SMS messages are sold bundled in the retail and wholesale markets, and that the pricing of these services is viewed together.

2.3.7 Voice telephony on the 3G network 119. It must be discussed whether the market shall also include voice telephony on the 3G network (for example UMTS36 networks). The question is relevant both in assessing the potential competition in the market and assessing the future development of the mobile market.

34 At www.telepriser.no there are no mobile phone service providers who do not offer SMS. 35 It may be noted that the regulatory authorities in Ireland (Comreg), Sweden (PTS) and Finland (Ficora) have arrived at the same result. However, the Danish regulatory authority has elected to exclude SMS, together with other data services, from the market. 36 Universal Mobile Telecommunications System, a type of third-generation (3G) mobile network. UMTS and 3G will largely be used interchangeably.

27 Analysis of the market for access and call origination on public mobile telephone networks

120. Both Telenor and NetCom have launched commercial voice and data services on their 3G networks. 121. Taken in isolation, voice telephony on GSM and UMTS networks are probably good substitutes seen from the demand-side at the retail level. There may be differences in quality and so on, but NPT assumes that they are small and will not be a decisive parameter for demand. Which network used for calls will be of no consequence to the end user, and most are not likely to notice any difference. In addition, a single call will switch at different times from GSM to UMTS and vice versa. According to Telenor’s website, voice calls will take place on the 3G network where it has coverage, and otherwise on the 2G network. Besides, Telenor’s prices for voice services are the same on the 2G and 3G networks. From a consumer perspective it is quite clear that 2G and 3G networks are substitutes with respect to voice transmission. In combination, these are strong arguments for voice telephony on both technical platforms being in the same market. 122. However, the 3G network will provide access to other data services in addition to voice telephony than are available on today’s 2G network. For example, the services can consist of TV via mobile phone, seeing who you are talking to when you call, sending video messages and using a mobile phone as an Internet modem. In addition, it will be possible to provide existing data services at higher transmission capacity and therefore better quality in 3G than in 2G. This considerable increase in capacity for data transmission is likely to be the biggest difference between the 2G and 3G networks. 123. There is much evidence to suggest that at least some data services available through the different technologies will not necessarily be in the same market. In countries where 3G networks have been introduced, there have been examples where operators without a 2G network have priced voice telephony together with new data services (i.e. bundled in subscription packages). In such cases the bundling aspect would suggest that voice telephony in 3G would be in the same market as 3G data services and outside of the market for voice telephony in the 2G network. On the other hand it is, however, deemed unlikely that operators with a 2G network, such as Telenor Mobil and NetCom, will price and bundle their services in the same way. As of today, such differentiated pricing has neither been implemented nor reported. Furthermore it is also still unclear how the market for 3G data services will develop, including which services will be offered and how great the demand for such services will be in the future. 3G data services are still in their infancy in Norway. 124. The result of the above discussion is that there are still too many uncertainties in connection with establishing whether voice calls on 2G and 3G networks are the same or separate products. In isolation, the substitution between voice calls on 2G and 3G networks strongly indicates that it should be treated as a single market, and NPT is therefore of the opinion that voice telephony on 2G and 3G networks is in the same market. In any case, it is NPT’s assessment that this will not affect the result of the actual analysis and the designation of operators with significant market power.37

37 It is noted that regulatory authorities in Sweden, Denmark and Ireland have arrived at the same conclusion in their analyses.

28 Analysis of the market for access and call origination on public mobile telephone networks

2.3.8 Other data services 125. In addition to voice telephony, retail market access to the mobile network in the form of mobile subscription/pre-paid cards can be used to gain access to other mobile data services, such as mobile Internet through various mobile data carriers (GPRS, HSCSD, UMTS). As mentioned, data services are expected to become widely available as 3G networks come into service, since these networks have considerably greater capacity than GSM networks. 126. At the retail level there is currently little or no demand-side substitutability between voice telephony and SMS on one side, and other mobile data services on the other. In part this is because data services so far are not very widespread, but more important is the fact that they are not regarded as being able to replace voice calls. The majority of the relevant data services will largely supplement instead of substitute voice telephony. 127. However, end users’ assessment of substitutability may change quickly when new services are launched. Mobile data services are discussed in the Explanatory Memorandum, and the conclusion was drawn not to define any relevant markets for such services. The use of such services is currently relatively limited, despite the fact that a large proportion of handsets on sale have the necessary functionality. Furthermore such mobile data services are in an early phase of development, which makes it difficult to establish a more detailed definition of these services. Due to this lack of clarity NPT has chosen to exclude figures for such data services from calculations of market share etc. in this analysis. In NPT’s opinion, this does not affect the result of the actual market analysis.

2.3.9 International roaming 128. International roaming at the retail level means that the individual user can use their mobile telephone to make and receive calls, text messages and certain other data services while staying outside the country in which they have established a subscription. 129. From a demand perspective, international roaming, according to the Recommendation, is assumed to constitute a separate retail market. 130. However, on the supply side there may be substitution in the form of that other national providers of mobile telephone services, in response to a price increase by a hypothetical monopolist, enter into agreements with foreign mobile operators in order to be able to offer the retail product international roaming. According to the Recommendation, this indicates that it is possible to define a broader outgoing calls market at the retail level that includes national, international and roaming calls. 131. The wholesale product international roaming is requested by foreign network operators. According to the Recommendation, there appears to be very few possibilities for demand or supply-side substitution for the wholesale product international roaming. From a demand perspective neither access for service providers nor access to the fixed network are regarded as substitutable services. Indirect access by means of carrier pre-selection or carrier selection will not be able to constitute efficient supply-side substitutes. The Recommendation furthermore points out that service providers and MVNOs will not be able to change their own production to offer the wholesale product international roaming in response to a small but significant non- transitory price increase from a hypothetical monopolist. In addition, the wholesale product international roaming is currently sold only to mobile operators that have a

29 Analysis of the market for access and call origination on public mobile telephone networks licence/permission to construct and operate mobile communications networks. Mobile operators do not sign agreements on international roaming with service providers or MVNOs. 132. On this basis, the Recommendation concludes that international roaming is a separate market at the wholesale level, and is assessed separately. NPT shares this view.

2.4 Conclusion

133. In NPT’s assessment, the market includes the following: • access and call origination (outgoing voice telephony) on public GSM networks and 3G networks at the wholesale level • access by pre-paid card/subscription and post-paid subscription • access for residential customers/households and business customers • originated SMS messages 134. In NPT’s assessment, the market does not include the following: • access and call origination on fixed networks • mobile VoB • international roaming

3 Definition of the relevant geographic market

135. In accordance with the Guidelines, paragraph 57, the geographic market may be defined as that area in which the relevant product is offered on approximately similar and sufficiently homogeneous conditions of competition. The degree of substitutability both on the supply and the demand side may be taken into consideration in the assessment of the geographic market and, as a part of such a substitutability assessment on the demand side, preferences and geographic purchase patterns should be taken into account. However, the Guidelines, paragraph 60, point out that geographic markets in the electronic communication sector have traditionally been defined by reference to the relevant network’s area of coverage as well as the effective boundaries (jurisdiction) of the legal regulation of the market. 136. The competitive conditions in the mobile market are more or less the same throughout Norway. Until now, end user and wholesale prices have also been the same throughout Norway. Furthermore, Norway is the geographic jurisdiction of the Electronic Communications Act. The GSM 900 licences of Telenor Mobil and NetCom state that the networks shall be developed into “nationwide networks“.38 Today, Telenor Mobil and NetCom therefore have a GSM network (GSM 900/DCS 1800 network) covering extensive areas of the whole country, but not outside Norway. The UMTS concessions/licences which have been granted, as well as Teletopia’s and

38 “Licence for a GSM type mobile telephone network” for Telenor AS and NetCom GSM as, paragraph 2.1

30 Analysis of the market for access and call origination on public mobile telephone networks the MøllerGruppen’s GSM licences, and Nordisk Mobiltelefon’s NMT450 licence, also apply within Norway. 137. Based on its DCS -1800 licence, Teletopia launched the country’s third mobile network in October 2003. Today, the company offers mobile services based on its own coverage in the Oslo area and based on a national roaming agreement with Telenor Mobil outside Greater Oslo. For this reason Teletopia has chosen to have different prices for calling and sending text messages within and outside Greater Oslo. In consequence of such geographical price differentiation from Teletopia or future providers, the competition conditions in the mobile market may be different in relation to network reach. In the longer term this may necessitate the division of the market into smaller regional and local markets. NPT has few facts for determining how this market will develop, and it is the view of NPT that it is therefore too early to assess a further division/segmentation of the geographic market. 138. Neither ESA nor the Commission have identified any cross-border market for access and call origination on the mobile network. However, claims have been made by certain quarters that it might be relevant to define a joint Nordic market. Many providers on both the demand and supply sides of the market operate in several countries. Telenor, NetCom and Tele2 all have clear interests in the other Scandinavian countries. Telenor is an MVNO and recently purchased Vodafone’s operation in Sweden and owns Sonofon in Denmark. NetCom is owned by TeliaSonera, the largest mobile company in both Sweden and Finland, and also operates in Denmark. Tele2 Norge is owned by Tele2 AB, Sweden’s second largest mobile operator. The company is also engaged in mobile operations in both Denmark and Finland. Moreover, Tele2 has introduced equal retail prices for domestic calls in Norway, calls to Sweden and roaming when customers are in Sweden. These factors may indicate that the Nordic countries can be regarded as a single mobile market. 139. NPT does not have the opportunity to define transnational markets. This competency resides with ESA. In any case, however, many factors indicate that the market will be nationally defined. 140. In an assessment of demand-side substitutability, it is highly doubtful whether a sufficient number of end users in Norway will regard access to the mobile network of another Nordic country as a substitute for a Norwegian network. It is conceivable that people who travel frequently to other Nordic countries or live close to a border may to a certain degree view other Nordic mobile services as an alternative. Even so, it must be expected that the majority of mobile users do not view foreign networks as a genuine alternative for sustained use. Pricing at the retail level both for use within a country and for international roaming makes it unattractive for customers living permanently in Norway to purchase services in other countries over time. At the wholesale level a higher degree of Nordic overlapping is conceivable, but NPT does not have enough documentation to assume that access and origination in other Nordic countries is a substitute for access and origination in Norway. 141. With respect to supply substitution the question is whether operators in the other Nordic countries would consider entering the Norwegian retail market in response to a small, but significant non-transitory price increase on the part of the Norwegian providers. In NPT’s opinion, even if one operator in one of the other countries, for example “3”, could conceive of setting up operations in Norway, such a price increase would not be sufficient or decisive.

31 Analysis of the market for access and call origination on public mobile telephone networks

142. Based on substitution assessments, NPT can therefore not find any basis for a Nordic definition at this time. From the perspectives of both end and wholesale users, the fact that the networks of the major providers Telenor and NetCom only cover Norway also indicates that the market is defined as Norway. The question of a Nordic defined market will likely be more relevant in the next analysis and will then have to be rediscussed. 143. Based on the above, the market is defined as Norway.

4 Analysis of the market - single dominance

4.1 Introduction

144. In this chapter, the relevant market is analysed based on criteria for significant market power in the form of single dominance, to find out whether there is an operator with significant market power. The analysis criteria are obtained from the Guidelines and NPT’s methodology document. Among other things, access to frequency resources was also assessed in addition to the aforementioned criteria. 145. In respect of the overview and context NPT has divided these aforementioned criteria into three groups in this analysis: 1. Market share, profitability and structural indicators 2. entry barriers and 3. other criteria/indicators. 146. The placement of each of the criteria into the three groups is not straightforward. For example, it is not clear from the Guidelines what should be regarded as an entry barrier and what should be categorised as other criteria/indicators. Many of the criteria are also closely linked, for example sunk costs, economies of scale and access to financial resources. This entails some overlapping of the factors reviewed in conjunction with the individual criteria. Such factors will not impact the outcome of the analysis. The conclusion of the analysis will not be affected by any “double counting” of factors. 147. The relevant market is a wholesale market (an “upstream market”), cf. the market definition in Chapter 2. However, NPT devotes a relatively large portion of the analysis to the situation in the retail market (“downstream market”) for mobile services. The reasons for this include the fact that competition at the retail level reflects, to a significant degree, competition at the wholesale level/network level. Furthermore, the factors that are important for establishment as a network operator can be found at both the retail and network levels. An example of such a factor at the retail level is switching costs for consumers, while access to frequencies is related to the network level. 148. Agreements entered into between parties on commercial terms are found in the relevant market, but the market is also distinguished by the fact that access and terms of access are a result of sector-specific rules and regulations. Many of the conditions seen in the market today, for example access agreements, prices, market share of the various operators etc., as well as the development of these indicators, are affected by

32 Analysis of the market for access and call origination on public mobile telephone networks the fact that the market is to some extent subject to regulation. This must be taken into consideration when assessing competition and the market power of the providers. 149. In Chapter 5 the market is analysed on the basis of criteria and indicators for collective dominance obtained from the Guidelines. These criteria are assessed together in Chapter 6, and an operator/operators with significant market power is/are designated.

4.2 Market share, profitability and structural indicators

4.2.1 Market share 150. Assessment of market share is a natural starting point for analyses of significant market power, cf. the Guidelines, paragraph 76. A provider’s market share should exceed 40 % before this factor indicates significant market power. If the market share is over 50 %, it would be exceptional were the provider not to be considered to have significant market power. Paragraph 76 of the Guidelines states: “According to established case-law, very large market shares – in excess of 50% - are in themselves, save in exceptional circumstances, evidence of the existence of a dominant position.” 151. If an undertaking has a high market share that has been stable over time, there is a legal presumption that the undertaking has significant market power.39 152. As a rule providers with less than 25 % market share are not considered to have significant market power. 153. However, market share alone is insufficient for determining whether a provider has significant market power, but must be viewed in context with the other relevant assessment criteria, cf. the Guidelines, paragraph 79. 154. Characteristics of the relevant market will be decisive for choosing the methods for measuring market share, cf. the Guidelines, paragraphs 77 and 78. For the relevant market NPT has chosen to look at three market share measurements: number of customers, traffic volume and revenue, all of which can provide useful information in calculating market size and share40 in the relevant wholesale market. 155. Table 1 illustrates market share for the two network operators Telenor Mobil and NetCom measured by: (a) number of customers connected to the two networks, (b) originated voice telephony minutes and (c) revenue in the retail market from subscriptions, originated voice telephony minutes and originated SMS messages. All three measures of market share include figures from external service providers (resellers and Tele2). The reason for this is that market share should be an indicator of the market power of Telenor Mobil and NetCom as network operators - excluding the figures of resellers would therefore give an unbalanced picture of the situation.

39See the Guidelines, paragraph 76. 40 Paragraph 77 of the Guidelines states: “In the case of bulk products preference is given to volume whereas in the case of differentiated products (i.e., branded products) sales in value and their associated market share will often be considered to reflect better the relative position and strength of each provider.”

33 Analysis of the market for access and call origination on public mobile telephone networks

Telenor Mobil NetCom

a) Number of customers 68 % 32 % b) Originated voice telephony minutes 71 % 29 % c) Revenue from subscription charge and originated voice telephony and SMS 66 % 34 % messages Table 1: Market share at the end of June 2005 related to the relevant market. The statistics include customers, traffic and revenue of re-sellers and Tele2. (Source: “The Norwegian Telecom Market, first half of 2005,” NPT)

156. The figures for the number of customers include both subscription customers and pre-paid card customers. From Table 1 we see that Telenor Mobil has 68 % of the customer base in its network and thus has a market share far above what the Guidelines (paragraph 76) refers to as “save in exceptional circumstances, evidence of the existence of a dominant position”. For its part, NetCom has a market share of 32 % of the customers and lies beneath a level usually required to have significant market power individually. 157. In the case of market share of originated voice telephony minutes, the figures give the same picture as the figures for the number of customers, but with a slightly higher market share for Telenor Mobil for originated minutes and slighter lower for revenue. This indicates that retail customers in Telenor Mobil’s network have more outgoing traffic than customers in NetCom’s network. 158. To achieve the correct picture of revenue at the wholesale level, it is necessary to include relevant internal prices, i.e. the prices for the sale of access/traffic from the network divisions to the internal service providers. Such internal prices are not available, and we must therefore use revenue at the retail level as an approximation. The figures for revenue at the retail level are affected by price differences due to product differentiation (for example branded products and subscription types), as distinct from net volume figures. Such characteristics are often primarily connected with the service provider level (i.e. the retail level) and not with the wholesale level. The use of revenue figures as a measure of market share thus also incorporates an implicit assumption that position (market power) in the retail market reflects position at the wholesale level. This assumption is not always met. Yet these figures should nevertheless give an indication of market power in the relevant market, i.e. the wholesale market. The bottom row in Table 1 shows market share of revenue in the retail market, calculated from the total traffic revenue (outgoing voice traffic) and revenue from originated SMS messages, as well as subscription revenue. Once again figures are included from Telenor Mobil and NetCom as well as re-sellers in the respective network. We see that Telenor Mobil has a somewhat lower market share of revenue compared with the two previous measures, but Telenor Mobil’s market share is still approaching 70 %.

Developments in market share over time 159. Table 1 above gives a picture of market share as it was at the end of June 2005. Despite the fact that various measures of market share today or in the near future are perhaps the most important indicators of market power, it is also important to look at developments in market share over time, cf. the Guidelines, paragraph 76. If an operator has had a large and stable market share in a given period, it will indicate that

34 Analysis of the market for access and call origination on public mobile telephone networks it has significant market power. On the other hand a varying market share over time indicates a lack of market power. 160. Table 2 below shows the market shares, measured by number of end users, of the two network operators Telenor Mobil and NetCom in the period 2002-2004. Telenor’s market share as network operator has sunk during the period, although the reduction must be characterised as moderate. Market share at the end of June 2005 was the same as at the end of 2004.

2002 2003 2004

Telenor 70 % 69 % 68 %

NetCom 30 % 31 % 32 %

Table 2 Market share for the network operators Telenor Mobil and NetCom in the period 2002- 2004. The shares are estimated on the basis of the number of own end users and the number of resale/MVNO customers connected to the two networks. Tele2’s retail customers are therefore included in the figures of Telenor Mobil. (Source: NPT’s telecom statistics)

161. Figure 2 shows the change in the number of end users and market shares of providers in the retail market in the period 1993-2004. The figure also includes NMT customers.41 Up to 2000 the figure also illustrates the change at the network level since re-sellers did not enter the market until that year. There are two notable development traits in the graph: Firstly, it is apparent that there was rapid growth in the number of end users until approximately the year 2000. Secondly, the figure shows that Telenor Mobil experienced a sharp decline in market share in the period 1993-95. From this point on the operator saw a more gradual decline in market share. At one stage in the mid-1990s, during the transition from NMT to GSM, NetCom had a larger market share of the GSM market than Telenor Mobil. After this point NetCom’s share of the GSM market declined up until a few years ago.

41 In NPT’s opinion it is reasonable to assume that GSM and NMT were long in the same market. NPT therefore believes that it is most correct to include statistics for NMT here.

35 Analysis of the market for access and call origination on public mobile telephone networks

100 % 3 000 000

90 % Telenor Mobil 2 500 000 80 % NetCom 70 % 2 000 000 Others 60 % Market share Telenor 50 % 1 500 000 Mobil 40 % Market share NetCom 1 000 000 30 % Market share Others 20 % 500 000 10 %

0 % - 199319941995199619971998199920002001200220032004

Figure 2 Change in the number of end users and market share of mobile phone service providers in the period 1993-2004. (Source: “The Norwegian Telecom Market 2004,” NPT)

Market share in the retail market 162. At the end of June 2005, Telenor Mobil’s share of the retail market was about 56%, measured in the number of subscriptions.42 At the end of the first half of 2001, Telenor Mobil’s market share was just under 64 %. Consequently, the operator has seen a decline in market share in the retail market, which can also be seen in Figure 2 above. However, Telenor Mobil has had a relatively stable market share in the retail market in the last couple of years. At the end of the first half of 2003, the company’s market share was 58 %, just two percentage points higher than at the end of the first half of 2005. Furthermore, the market share of the company remained unchanged from the end of the first half of 2004 until the same period in 2005. 163. At the end of the first half of 2005, NetCom’s market share in the retail market was about 27 %. This is a decline from approximately 28 % at the end of the first half of 2004, while it was 29 % at the end of the same period in 2003. NetCom has consequently lost market share in the retail market in the last couple of years. 164. After the first half of 2001, NetCom’s market share was about 25 %. However, the increase in market share from 2001 to date does not correspond with the decline in Telenor Mobil’s market share, which indicates that the external service providers have managed to win a substantial share of the retail market. 165. Figure 3 shows market shares of total revenue in the retail market. The chart includes revenue from originated SMS messages. Telenor Mobil has 54 % of the market, NetCom 29 %. The largest external service provider was Chess/Sense, with a market share of about 7 %. Chess grew rapidly in 2003-2004. Tele2, which is an MVNO, also has about a 5 % share of the total revenue in the retail market. This company has also shown substantial growth over the past year.

42Source: NPT’s telecom statistics.

36 Analysis of the market for access and call origination on public mobile telephone networks

5 % 7 % 5 % Telenor Mobil NetCom Tele2 54 % Chess/Sense 29 % Others

Figure 3 Market share of total revenue in the retail market in the first half of 2005 (excluding revenue from termination). (Source: “The Norwegian Telecom Market first half of 2005,” NPT)

166. The sharp growth seen by re-sellers and Tele2 in recent years is illustrated in Figure 2. After their services were launched in 1999/2000, these providers have taken about 17 % of the market, measured in the number of end users. It appears that Telenor Mobil in particular has lost market share at the retail level for this reason, at least until a couple of years ago. The service providers not only captured new mobile customers at the end of the phase when the number of mobile customers was rapidly growing, but also subsequently captured existing customers from Telenor Mobil and NetCom. 167. There are probably many reasons why the external service providers have taken customers from Telenor Mobil and NetCom. In particular it can be pointed out that most external service providers have acted as typical low price operators, particularly the last two or three years. Typically, they offer subscribers low fixed charges and call rates, often prepaid, without subsidised handsets.

Possible consequences of TeliaSonera’s acquisition of Chess/Sense 168. TeliaSonera AB recently purchased Vollvik Gruppen AS, which, among others, owns the service providers Chess and Sense. The Norwegian Competition Authority has approved the acquisition. 169. About two-thirds of Chess/Sense’s customers are currently on Telenor’s network. NPT assumes that a large share of these end users will gradually be moved to NetCom’s network. This means that Telenor Mobil’s market share at the network/wholesale level may be significantly reduced to around 62-63 %, while NetCom’s market share may increase similarly to 37-38 %. 170. After a possible acquisition and transfer of customers Telenor will still have a market share of over 60 % at the network level. With such a high market share, it would be exceptional for the provider in question not to be deemed as having significant market power.43 Furthermore, Telenor will still have a 56 % market share in the retail market, all else being equal.

43 See the introduction to this chapter and paragraph 76 of the Guidelines.

37 Analysis of the market for access and call origination on public mobile telephone networks

171. NPT would like to point out that any transfer of customers will take time, probably many months. Furthermore, there will be a risk that Chess/Sense will lose customers with such a transfer since the customers that are transferred will have to change SIM cards. 172. The fact that NetCom is increasing its market share is not a strong indication that the company’s market power vis-à-vis Telenor is increasing, or that Telenor has correspondingly lost power. The shift in market share is a result of an acquisition undertaken by Scandinavia’s largest telecom group, TeliaSonera, and not organic growth through competition for end users in the market.

Summary of market share 173. All three measurements of market share in the first half of 2005 give the same picture. Telenor Mobil’s market share gives a clear indication of significant market power for Telenor Mobil in the relevant market. NetCom does not have a market share which indicates significant market power. As a network operator, Telenor Mobil has over a period of time lost market share to NetCom, but the loss in recent years must nevertheless be characterised as moderate. Within a time horizon of two to three years it is improbable that Telenor Mobil will experience a loss of market share which brings the company under 50 %, or experience in consequence of competition such a significant loss that it will indicate that the company does not have significant market power. The entry into the market of new companies such as Nordisk Mobiltelefon and “3” is unlikely to significantly change the picture, at least in the next two to three years. 174. Based on an assessment of market share alone, it would appear that competition functions better on the retail level than between the networks. The external service providers and the MVNO Tele2 have now taken a significant share of the market, particularly after its considerable growth in the last two to three years. However, it should be noted that a significant proportion of the service providers’ and Tele2’s income is paid back to Telenor Mobil and NetCom in the form of payment for access to their networks, and that the network operators have termination income from the reseller’s customers. 175. Therefore NPT is of the opinion that the measure of market share indicates that Telenor Mobil has significant market power in the relevant market.

4.2.2 Profitability 176. Significant market power may be indicated if an undertaking operates with prices that are substantially higher than the underlying costs (in the extreme case monopoly pricing), or can raise prices without losing sales revenues. Furthermore, sustained earnings which appreciably exceed capital costs indicate that the operator has prices which are higher than would otherwise be possible in a market with effective competition. 177. However, allowance must be made for high profitability being the result of factors other than the absence of effective competition, for example economies of scale, efficiency gains or innovation. Correspondingly, low profitability is not necessarily an argument against an operator having significant market power. 178. In 2004 Telenor Mobil posted an operating profit before depreciation (EBITDA) of NOK 4,283 million, an increase from NOK 4,262 million in 2003. This corresponds to an EBITDA margin of 36.5 % in 2004, which is a reduction from

38 Analysis of the market for access and call origination on public mobile telephone networks

39.1 % in 2003 and 40.5 % in 2002.44 In the first half of 2005 the EBITDA margin was 35.1 %, down from 36.2 % in the same period in 2004.45 These profitability figures include results from international roaming and termination of traffic, but still indicate good profitability for Telenor Mobil’s operations in the relevant market. Over time profitability has also increased, even though the EBITDA margin weakened somewhat in 2002-2004.

1998 1999 2000 2001 2002 2003 2004 GSM (including 53 % 51 % 78 % 75 % 68 % 78 % 82 % interconnection) GSM (excluding 81 % 71 % 103 % 70 % 65 % 65 % 68 % interconnection)

Resale46 - - - 59 % 65 % 61 % 30 %

Table 3: Earnings (operating profit as % of capital employed) for Telenor Mobil’s GSM product and resale in the period 1998-2004. Interconnection in this context is traffic terminated on the mobile network. (Source: Telenor’s ONP reports plus supplementary data. Calculation of earnings excluding interconnection was done by NPT).

179. Table 3 shows the earnings for Telenor’s GSM services in the period 1998- 2004.47 The statistics include the wholesale product resale in the period 1999-2004. NPT sees that the company has had relatively high earnings in the period, far in excess of the cost of capital (imputed interest rate) that has been estimated at less than 15 %. Earnings increased from 1998 to 2000. The decrease after 2000 is due to several factors, including lower termination charges and lower retail prices as well as the fact that costs related to UMTS have been included in profitability calculations since 2002. From 2003 there was once again an increase in earnings, mainly due to an increase in income from terminated traffic. Earnings in the period 1998-2004 must, however, be seen in connection with the period of negative earnings at the beginning of the 1990s, such that lifetime earnings are not as high as the table would suggest. Products such as GSM are characterised by low profitability in the start phase, when large investments must be undertaken at a time with few customers and low use. Profitability will then usually improve over time and then often decline as the product is phased out. 180. According to the information given in addition to the ONP reports for 2001 to 2004, earnings for Telenor Mobil’s wholesale product resale increased from 2001 to 2003. However, earnings were nearly cut in half from 2003 to 2004. The reason for

44 Telenor’s Annual Report for 2004. 45 Telenor’s report for the first half of 2005. 46 The accuracy of these figures is in doubt. Telenor has commented on these figures, which are presented as supplementary information to the ONP report (for example in its letter dated 16 June 2003): “These figures are considered less accurate than the aggregated figures given in the ONP report according to the regulations governing product accounts. These figures have not been audited and are given as supplementary information.” 47 The services subject to licence do not include SMS and other data services. Moreover it should be noted that Telenor’s definition of its own GSM services subject to licence is not identical in the various ONP reports. For 2002-04, the costs etc. associated with the UMTS rollout are included, and international roaming is dealt with in a different manner in different years. These discrepancies in the definitions affect the profitability figures in the table, but the fluctuations are probably relatively moderate.

39 Analysis of the market for access and call origination on public mobile telephone networks this is a lower operating result which, according to Telenor, was due to price cuts, higher sales commissions for service providers, increased operating costs for UMTS and increased traffic costs due to higher traffic volume. It must be pointed out that the accuracy of these figures is in doubt. 181. In 2004 NetCom had an EBITDA of NOK 1,889 million48 (SEK 2,059 million), which was a decline from 2003 when EBITDA was NOK 2,189 million.49 This works out to an EBITDA margin of 32.7 % in 2004, as against 41.1 % in 2003. In the first half of 2005, the EBITDA margin was 36.9 %, against 32.6 % in the same period in 2004.50 182. In the last couple of years, NetCom has submitted regulatory accounts to NPT in which termination of voice calls is separated from other operations. The regulatory accounts for 2004 excluding the numbers for termination show earnings 51of 14 %. The comparative number for 2003 was 26 %, the calculation having been corrected for earnings on non-capital related costs. NPT emphasises that the accuracy of these figures is in doubt. The calculation nevertheless indicates lower earnings than Telenor Mobil shows. 183. The above information and assessments of Telenor Mobil’s and NetCom’s profitability can indicate significant market power for both companies, especially for Telenor Mobil. As noted in the introduction to this chapter, high profitability may be the result of factors other than a lack of effective competition. It is NPT’s opinion that profitability should therefore not be accorded determinative weight in this market analysis.

4.2.3 Overall size of the undertakings52 and experience in the field of mobile communication 184. If an undertaking, or the group of which the undertaking forms part, is significantly larger than the competitors, this may comprise a competitive advantage through, inter alia, economies of scale and scope (see also sections 4.3.2 and 4.3.3), access to financial resources (see also section 4.3.4), procurement, distribution and marketing. These advantages may appear outside the relevant market being analysed, but nevertheless could be of significance. 185. Furthermore, an undertaking with more operating experience in a market than its competitors can have advantages related to, for example, technological expertise (see also section 4.3.5), knowledge of the market and the regulatory framework. 186. As background for the assessment of these criteria, NPT refers to the description of the network operators Telenor and NetCom/TeliaSonera in section 2.2. Both Telenor and TeliaSonera are large telecom groups in a Nordic context. Both groups have proprietary interests in mobile phone enterprises in several other countries. Yet in a European context the groups are not especially large compared, for example, with mobile companies such as Vodafone or Orange.

48 NPT has converted EBITDA from SEK to NOK. The calculation is based on the average exchange rate for 2004, which according to Norges Bank was 91.74. 49 NetCom’s annual report for 2003. 50 TeliaSonera’s semi-annual report for January-June 2005. 51 Operating profit as a per cent of average capital employed. 52This criterion corresponds to “overall size of the undertaking” in the Guidelines, paragraph 79.

40 Analysis of the market for access and call origination on public mobile telephone networks

187. Both Telenor and NetCom/TeliaSonera have long experience in both first and second-generation mobile telephone systems in Norway/Nordic countries. However, the companies do not have more experience with GSM than most of the other large European mobile telephone companies. Nor can it be expected that Telenor or NetCom have any notable advantage in the case of experience relating to UMTS, in comparison with, for example, “3”. 188. In summary, NPT would establish Telenor and TeliaSonera are relatively large operators in the telecom markets, with considerable experience in the mobile field. However, NPT will not accord this factor much weight in this analysis.

4.3 Entry barriers

189. If it is too expensive or difficult to enter a market, one or more dominant operators could raise prices and still expect to keep its or their market share in the long term. With low entry barriers new providers will see the earnings potential in the market, and attempt to win customers from existing operators. The threat of potential competition from new operators will normally affect a dominant operator’s behaviour in the market, including price setting. 190. Entry barriers can be divided into two main types: (1) Structural entry barriers, which comprise various “natural” conditions (sunk costs, shortage of frequencies etc.), and (2) strategic entry barriers, which are created by the established operator(s) (exclusivity agreements, predatory pricing etc.) Possible entry barriers related to this relevant market are discussed below.53

4.3.1 Control of infrastructure not easily duplicated54 191. If a provider controls infrastructure that is difficult to duplicate, and this infrastructure represents an important input factor for the production of a service, this could be an indication of market power. Infrastructure can be difficult to duplicate for both technical and economical reasons. Such control of infrastructure can be an indicator of market power for the established providers and give rise to entry barriers for potential newcomers. The infrastructure can also give established providers the capability to transfer market power to horizontally or vertically closely related markets. The criterion must be viewed particularly in connection with the criterion for sunk costs, see below under section 4.3.2. 192. Both Telenor Mobil and NetCom have mobile networks that are virtually nationwide, covering more than 95 % of the population. Establishing such networks is a high-cost venture. Both companies are continuing to expand to give better coverage and capacity in their networks, inter alia by expanding services according to their UMTS licences. Telenor Mobil also improved its GSM coverage along the Norwegian coast and in the mountains before and after the shutdown of NMT. 193. Telenor Mobil has a mobile network with slightly better coverage than NetCom. Telenor (Televerket) built up its NMT mobile network in the 1980s. For this

53The Guidelines cover entry barriers in, inter alia, paragraph 81: “In fact, the absence of barriers to entry deters, in principle, independent anti-competitive behaviour by an undertaking with a significant market share.” 54 The criterion corresponds to “control of infrastructure not easily duplicated” in the Guidelines, paragraph 79.

41 Analysis of the market for access and call origination on public mobile telephone networks reason the company already had many masts/sites all over the country at the beginning of the 1990s, when the GSM network was to be built. This gave Telenor Mobil an advantage over NetCom in the development of the GSM network. Similarly, both Telenor Mobil and NetCom have an advantage over new 3G network operators in the nation-wide rollout of third-generation mobile networks. 194. As long as there are frequencies available for mobile communication, it is technically possible to duplicate the existing networks. The question is, however, whether it will be difficult to duplicate networks completely due to financial and market-related conditions. 195. Compared with other infrastructure for telecommunication, mobile networks require a smaller investment for comparable coverage, at least in towns and densely- populated areas. In such areas the investment needed to provide moderate coverage is not very high. Even so, a higher level of investment is necessary to achieve near-total coverage in city areas, i.e. inside buildings, tunnels etc. 196. The topography of Norway often makes it necessary for the provider to have a relatively short distance between GSM and UMTS base stations. In addition, Norway is a country with a large land area and road system and scattered population. This means that building infrastructure is more expensive in Norway than in most other European countries. The cost of a base station is usually several hundred thousand NOK, in addition to the costs of the actual network systems. It would be very expensive to duplicate Telenor Mobil’s or NetCom’s entire networks - and thereby achieve comparable coverage (without network access such as national roaming). A scattered and small population, and thus a relatively small traffic base, can make for very high unit costs in the case of a network with near-nationwide coverage (cf. also the criterion for economies of scale in section 4.3.3). 197. The costs associated with network expansion can be reduced through the sharing of infrastructure, i.e. co-location or other network sharing. The potential for savings can be significant, especially in areas of low population density. Co-location requires that new developers be allowed to place their equipment on existing masts, sites, cabins and the like. 198. Other network sharing (for example the sharing of Node B and/or transmission routes in the network) will require the operators to enter into agreements on the sharing of network components – or that obligations are imposed regarding access/sharing. This form of network sharing can also result in relatively significant savings for the operators. 199. In summary, it can be said that both Telenor Mobil and NetCom own mobile networks that are technically possible to duplicate. Yet it would be prohibitively expensive and time consuming to do so completely – and thus achieve coverage comparable to Telenor Mobil and NetCom. This indicates that the two largest existing network operators have market power in the relevant market.

42 Analysis of the market for access and call origination on public mobile telephone networks

4.3.2 Sunk costs55 200. An entry barrier in the mobile market is high sunk costs in connection with the development of necessary infrastructure. If an undertaking wishes to build a new mobile network in Norway, and the enterprise turns out to be a failure, it cannot expect to get back much of its invested funds. For example, compared with many other businesses, an undertaking can sell only some its infrastructure/means of production in a secondary market. The sunk costs will rise with the size of the network, i.e. coverage and capacity. Besides, such sunk costs are relatively high in Norway, due to its rugged topography and scattered population. 201. These sunk costs represent an entry barrier because the established operator(s) is/are not faced with such costs - they have already been paid. Therefore established operators face other (lower) relevant costs than a potential new operator. 202. The enforcement of requirements of coverage for new network operators will strengthen this entry barrier. This applies to both 2G and 3G networks. The biggest cost in terms of infrastructure – and thereby the biggest entry barrier to competing suppliers – is the requirement for extensive – in the most extreme case near nation- wide – parallel networks. On the other hand less stringent requirements of coverage allow the possibility of building a more limited network in the beginning, thereby reducing the risk involved with sunk costs and allowing subsequent gradual expansion as business progresses. Improved information on the potential for demand and earnings reduces the risk associated with sunk costs. 203. For example, the costs of marketing can also be high in the beginning. If a newcomer is to win a sufficient number of customers from the existing operators, extensive and expensive marketing, including possible subsidising of handsets, will probably be needed. Such costs can basically be considered to be sunk costs. The same is also true of the costs of building an organisation and expertise in Norway, for example. 204. Sunk costs can also be attached to research and development (R&D). Such service development-related costs can be a factor when large international operators start up operations in a new country. Even so, NPT believes that sunk costs in relation to R&D are of little significance as an entry barrier in Norway. 205. In summary, NPT believes that there are relatively high sunk costs connected with becoming established as an operator of mobile networks in Norway, and that this represents a considerable entry barrier. Less stringent coverage requirements in connection with the new mobile licences (both 2G and 3G) have, however, reduced the initial sunk costs to some degree. This has probably reduced the significance of sunk costs as an entry barrier.

4.3.3 Economies of scale56 206. Economies of scale exist when an increase in production brings a fall in unit cost. This is characteristic of production based on technology with relatively high

55 “Sunk costs” are described particularly in Footnote 86 to the Guidelines: “One of the most important types of entry barriers is sunk costs. Sunk costs are particularly relevant to the electronic communications sector in view of the fact that large investments are necessary to create, for instance, an efficient electronic communications network for the provision of access services and it is likely that little could be recovered if a new entrant decides to exit the market.” 56 The criterion corresponds to “economies of scale” in the Guidelines, paragraph 79.

43 Analysis of the market for access and call origination on public mobile telephone networks fixed costs and low variable costs. An undertaking can benefit from various forms of economies of scale. In areas with a high utilisation of the capacity on the existing network, it can make use of economies of density. With high utilisation of capacity, the average cost of production is low. 207. Economies of scale for established operators can act an entry barrier for new network operators. Established network operators have scaled their networks to achieve optimal utilisation. A new network operator will take time to build up its customer base and traffic and cannot expect to benefit from the same economies of scale as the established operators for many years. 208. It is likely that there are significant economies of scale attached to network activities in the production of mobile services in Norway. Significant economies of scale exist in the access network, which is made up of expensive elements such as base stations, masts and radio equipment. In areas with a small traffic base, network production can, in the most extreme example, be undertaken at the lowest cost with just one network. As Norway has a relatively small population, low population density and few large cities, it is especially difficult to exploit economies of scale with several nationwide mobile networks. 209. The established network operators can today benefit from economies of density in their networks. Telenor Mobil and NetCom already have relatively high volumes of traffic and good utilisation of their networks. It is nevertheless unlikely that Telenor Mobil and NetCom manage to exploit all the economies of density in their networks. 210. Even though economies of scale apply to mobile networks, they will scarcely be as significant as those applicable to fixed networks. All the same it should be possible to exploit most of these economies of scale in mobile networks in towns and densely-populated areas in Norway, even with the existence of several parallel networks. 211. Due to economies of scale, it can be expected that entry barriers will be larger in proportion to the coverage requirements associated with the new mobile licences. If there are reduced requirements in respect of coverage, for example only the obligation to expand in the largest cities, the entry barrier does not need to be insurmountable. In such cases new operators can first expand networks in towns and densely populated areas, and thus have greater opportunity to benefit from economies of scale. 212. At NPT’s request, Teleplan has analysed cost drivers in mobile networks in Norway. Teleplan has prepared a relatively detailed GSM model to be able to construct cost models for alternative rollout strategies, different market shares and traffic volume. The modelling is based on counties that are representative of different geographic and demographic data in Norway.57

57 Sør-Trøndelag, Hordaland, Finnmark, Oppland and Østfold.

44 Analysis of the market for access and call origination on public mobile telephone networks

Driftskostnader + avskrivning per minutt for radionett og kjernenett

Scenario 1: Kun sentrale strøk Scenario 2: Dekning i sentrale strøk og langs riksveier Scenario 3: 50% dekning utenfor sentrale strøk Scenario 4: 90% dekning utenfor sentrale strøk

2,00 1,80 1,60 1,40 1,20 1,00 0,80 0,60 0,40 0,20 0,00 5 % 10 % 15 % 20 % 25 % 30 % Andel abonnenter

Figure 4 Illustration of network costs of mobile networks with different market shares in the 5 – 30 % range and different rollout strategies. The horizontal axis shows market share in per cent, while the measurement unit for the vertical axis is NOK. (Source: Cost elements and cost drivers in mobile networks, Teleplan, March 2005) 213. Figure 4 shows operating costs and depreciation per traffic minute for radio networks and core networks for a provider with a market share of up to 30 % (“small operator”). The figure is based on accumulated statistics from the five counties, from which an average per minute has been computed to represent the average rollout throughout the country, given the model’s assumptions. There are four different rollout strategies ranging from rollout only in densely populated areas to 90 % coverage outside densely populated areas. The figure clearly illustrates economies of scale with falling unit cost curves and how the costs increase with more ambitious rollout strategies.

45 Analysis of the market for access and call origination on public mobile telephone networks

Driftskostnader + avskrivning per minutt for radionett og kjernenett

Scenario 1: Kun sentrale strøk Scenario 2: Dekning i sentrale strøk og langs riksveier Scenario 3: 50% dekning utenfor sentrale strøk Scenario 4: 90% dekning utenfor sentrale strøk

0,35

0,30

0,25 ' 0,20

0,15

0,10

0,05

0,00 30 % 50 % 70 % 90 % 100 % Andel abonnenter

Figure 5 Illustration of network costs of mobile networks with different market shares in the 30 – 100 % range and different rollout strategies. The horizontal axis shows market share in per cent, while the measurement unit for the vertical axis is NOK. (Source: Cost elements and cost drivers in mobile networks, Teleplan, March 2005) 214. Figure 5 shows the cost differences for a single provider with a market share between 30 and 70 %. The model and other assumptions for the estimates are the same as in Figure 4 above. For example, from Figure 5 we see that there are considerable cost differences between a provider who has around 30 % and one that has a market share of approx. 70 %. The absolute cost difference between a large and a small operator increases with more ambitious rollout strategies. In NPT’s opinion, the illustration shows it is likely that Telenor Mobil can benefit from significantly larger economies of scale than NetCom. 215. When several operators share infrastructure such as masts, cabins and radio infrastructure, the fixed costs which each operator must bear to have mobile coverage in a given area are reduced. Economies of scale can be significantly exploited by such sharing of infrastructure, and unit costs will be reduced for the operators. 216. There can also be economies of scale associated with sales, customer service, billing systems, administration etc., even though the significance of these is likely to be less than the economies of scale associated with the actual network. Both NetCom and Telenor Mobil are of such a size that they already should have benefited from most of the economies of scale connected with administration and so forth. A new network operator such as “3” may also be able to benefit from economies of scale from its first day of operation, especially in the case of administration, service development etc., where these costs can be shared with enterprises the company has in other countries. 217. All in all NPT believes that economies of scale in the Norwegian mobile market can represent a significant entry barrier. Expansion of mobile networks in

46 Analysis of the market for access and call origination on public mobile telephone networks

Norway entails high fixed costs and a relatively low demand base due to a small customer base. However, access to the existing infrastructure, at least in a transitional period, could reduce the impact of this entry barrier. In NPT’s assessment Telenor reaps the greatest advantages from size in the Norwegian mobile market. This is likely to strengthen Telenor Mobil’s market power compared with NetCom.

4.3.4 Economies of scope58 218. Economies of scope are reductions in unit cost when more than one service is produced using common means of production, for example common infrastructure or common administrative systems. Economies of scope are common in production of network services, when the capacity in the network can be divided into the production of several products. 219. Telenor owns most of the infrastructure for telecommunication in Norway, including the fixed line network, network for transmission capacity (leased lines) and infrastructure for broadcasting (Norkring). Telenor can benefit from much of this infrastructure in the production of mobile telephony. This can lower the costs of this production. However, the requirement of non-discrimination according to sector- specific regulation restricts Telenor’s capacity to provide better terms, including lower prices, to its own operations compared to those given other providers. This also limits Telenor Mobil’s possibilities to benefit from larger economies of scope than other mobile providers. 220. In mobile communications, there will be synergy gains in the production between Telenor’s GSM and UMTS networks, inter alia because the two systems largely have the same core network and the systems can use the same masts, cabins and the like. 221. In addition to the economies of scope in using this infrastructure, Telenor can also have advantages at the service provider level. The company can benefit from the synergy by sharing administration, marketing etc., with other Telenor operations, especially the fixed network business. 222. NetCom does not participate in the markets for fixed network telephony and broadcasting operations in the same manner as Telenor. But it is also possible for NetCom to benefit from the economies of scope between the GSM and UMTS networks. NetCom can also benefit from certain economies of scope through TeliaSonera’s business, including the joint use of group administration and R&D. 223. If economies of scope are significant, Telenor can achieve a lower unit cost than its competitors, both NetCom and other potential network operators. This may make it more difficult for them to match Telenor’s prices, both in the retail and wholesale markets. 224. All in all, it is likely that economies of scope are linked with the production of mobile services in Norway. NPT is of the opinion that economies of scale are of more significance as an entry barrier than economies of scope. Co-location and other sharing of infrastructure can also reduce the effect of economies of scope as an entry barrier, in the same way as for economies of scale.

58 The criterion corresponds to “economies of scope” in the Guidelines, paragraph 79.

47 Analysis of the market for access and call origination on public mobile telephone networks

4.3.5 Access to financial resources59 225. Access to financial resources is important to an operator’s ability to enter a market. This is of particular significance in markets that require major initial investment (high entry costs). Poor access to financial resources may constitute an entry barrier. In addition, everything else being equal, it will be expected that an operator with market power and good financial standing will be less exposed to competition than an operator with market power without good access to financial resources. Besides, an operator with market power and good access to financial resources will be better able to defend his market share if new competitors enter the market than an operator with market power without good access to financial resources. 226. It will be a very capital-intensive task to establish fully-fledged alternatives to Telenor Mobil’s or NetCom’s nationwide mobile network, without access to one or both of the existing networks in the form of, for example, national roaming. Moreover, in today’s capital market it is much more difficult to obtain sufficient necessary financial resources for large investments in this market. This can function as an entry barrier in this market, and also indicate significant market power for the existing operators. 227. Both Telenor Mobil and NetCom/TeliaSonera must be regarded as having relatively good access to financial resources through their respective groups. This will put them in a better position to defend their market share against the establishment of new network operators and points to significant market power for Telenor and NetCom. However, there are generally no grounds for claiming that Telenor and NetCom have better access to financial resources than large potential competitors. Telenor and NetCom have well-capitalised international challengers. “3” and other possible future newcomers can have the financial resources to partake in long-lasting “price wars” with the existing suppliers. The situation in today’s capital markets can, however, be regarded as a bigger disadvantage to new operators than to the established companies with a more limited need for investment. On this basis the difficulty in accessing financial resources at the present time can be seen as an entry barrier in the relevant market.

4.3.6 Technological superiority60 228. Technological superiority can create an entry barrier for new operators and a competitive advantage for existing operators, for example through lower production costs or greater product differentiation. 229. As a rule, in markets with a high degree of innovation the opportunity to exercise market power will be more limited than in markets with little innovation. Technological development can increase the degree of innovation in a market, which in turn can be of significance for potential competition in the market. Innovation resulting from technological development can therefore contribute to weakening an operator’s position in the market. 230. Neither Telenor Mobil nor NetCom can be said to have a significant technological superiority over the other large, international network operators. The

59The criterion corresponds to “easy or privileged access to capital markets/financial resources” in the Guidelines, paragraph 79. 60 The criterion corresponds to “technological advantages or superiority” in the Guidelines, paragraph 79.

48 Analysis of the market for access and call origination on public mobile telephone networks operators have mobile networks based on open, international standards. GSM technology can be regarded as mature. Nor can it be concluded that Telenor or NetCom have advanced further than “3” in relation to experience with and the development of UMTS. Moreover the mobile market is very dynamic, with rapid technological development. This reduces the impact of any possible technological superiority that Telenor Mobil and NetCom have. 231. In Norway the use of SMS has been high compared with most other European countries. This is true of both ordinary text messages (which are sent between people) and content services. In particular the widespread use of content services based on SMS has provided an advantage with regard to the phasing-in of more advanced data and content services. Widespread use in comparison to other countries cannot, however, be said to be a result of technological superiority, but is more likely due to other conditions (including co-operation between NetCom and Telenor Mobil on the use of numbers for SMS-based content services and that the operators have created favourable conditions for external content providers (through CPA) as well as the fact that growth is driven by demand. 232. Technological development, in the form of the growth of cheaper and more efficient mobile technology, can give new operators the opportunity to build less expensive networks than the existing operators were able to (all other conditions being equal). For example, it can be mentioned that there is a trend toward declining prices for radio infrastructure and that the high capacity of 3G systems can provide cost- effective production of voice telephony. In this manner technological development can also help to reduce entry barriers in the market. 233. All in all, NPT does not regard technological superiority as representing an entry barrier in the relevant market.

4.3.7 Barriers to expansion61 234. A market with large growth potential is as a rule more attractive to potential new operators than markets in which the total units sold and/or the number of customers has stagnated or is on the way down (known as “mature” markets). Operators considering entry into “mature” markets must generally aim to capture customers from the already established operators. If there are barriers to expansion in a market, these may therefore be looked upon as a possible entry barrier. 235. There is an extremely high mobile telephone density in the Norwegian mobile market, approximately 104 % according to NPT’s statistics for the first half of 2005.62 There are thus now around 4.8 million mobile subscriptions (pre-paid card and subscriptions) in Norway. Of these subscriptions many are used for alarms, control systems and other applications besides voice calls. Furthermore, a number of end users have two or more mobile subscriptions. The real coverage is therefore under 100 %. Total growth for subscription and pre-paid cards was 30 % in 1999, 22 % in 2000, 13 % in 2001, 4 % in 2002, 6 % in 2003 and 13 % in 2004.63 In the period 1999 to 2002, the rate of growth slowed, while there was an increase in 2003 and 2004. 236. Mobile density in the Norwegian market is consequently high, and growth is expected to flatten. Of course it will be possible for new operators to win customers

61 The criterion corresponds to “barriers to expansion” in the Guidelines, paragraph 79. 62“The Norwegian Telecom Market first half of 2005,” NPT. 63Source: NPT’s telecom statistics.

49 Analysis of the market for access and call origination on public mobile telephone networks from the established operators: among other things, relatively high churn64 numbers indicate this.65 However, winning customers in the current Norwegian mobile market may require very costly marketing and the like. Often the subsidisation of handsets will also be necessary. It is precisely the growth in telephone subsidisation that has resulted in the fact that many potential customers are bound by contracts to existing operators. This can have a lock-in effect on customers and reduce the ability of new operators to gain customers, cf. section 4.3.10. Telenor Mobil and NetCom can also be expected to adjust their behaviour if a new network operator were to enter the market and a new competitive situation arises. 237. Mobile technology is increasingly used in machine-to-machine communication, automatic information retrieval, warning/alarms, remote control etc. The traffic connected with this can be expected to increase. NPT has, however, little information on the potential for income from this market compared with more ordinary mobile use. 238. The vast majority of voice telephony traffic still originates in the fixed network, but mobile traffic is increasing. In 2004 mobile originated calls accounted for about 22 % of the total traffic, whereas in 2003 it accounted for approx. 17 %.66 Even though the number of customers cannot be much higher, NPT is of the opinion that there should be potential for significant growth in traffic from mobile networks, which can result in increased revenues. On the other hand NPT expects the downward trend in mobile prices to continue over the coming years. This itself can lead to lower revenues. 239. Mobile data services are in an early phase of development. Video telephony via mobile networks was introduced just a short time ago in Norway. For some, 3G may be an alternative to broadband access via the fixed network. It is precisely through such new data services that much of the increase in revenue is expected to come in the mobile market. The last couple of years have seen sharp growth in the use of MMS. Growth of such new services may make it more attractive to get established as a network operator, thereby increasing competition in voice telephony too. 240. The revenue statistics in Figure 6 below show the network operators’ sales of subscriptions, registration and traffic billed to their own customers in the period 1998– 2004. The growth in total revenue has been relatively strong. There has been a somewhat reduced growth rate for voice telephony (time metered traffic) while the revenue from SMS and additional/other services has been higher. There has been almost no growth in income from subscriptions and registration. A major reason is pre-paid cards, which were launched in 1997-98. The category of additional services includes such services as other “non-voice” traffic, GPRS and other services.

64 Telenor’s “Mobile Dictionary” gives the following definition of churn: “A term used mostly in the mobile industry about customers who leave or switch to another service provider. It is usually stated as a percentage of total customers. Norwegian mobile operators have at times had a churn percentage of over 20. The churn rate is the highest among cash card customers.” http://minmobil.telenormobil.no/default.asp?page=40&dictionary=22&letter=C 65 In a letter from Telenor dated 19 August 2005, NPT received churn figures from Telenor from first quarter 2001 to second quarter 2005. 66“The Norwegian Telecom Market 2004,” NPT.

50 Analysis of the market for access and call origination on public mobile telephone networks

14 000

12 000 Supplementary 10 000 services and others Subscriptions and 8 000 joining SMS traffic 6 000 Time metered traffic 4 000

2 000

0 1998 1999 2000 2001 2002 2003 2004 Figure 6 Sale of GSM services. NOK million excluding VAT. (NMT is included in the figures for 1998 to 2002.) (Source: “The Norwegian Telecom Market 2004,” NPT) 241. Table 4 below shows the average revenue per user (ARPU) for GSM customers per month for Telenor Mobil and NetCom, from 1999 to 2004. ARPU is a common key statistic used in the analysis of the mobile sector, for example when comparing companies’ profitability and analysis of profitability over time. If the average customer increases their mobile use, the impact of obtaining many customers is reduced. It is therefore relevant to assess the development of ARPU. ARPU statistics also include income from terminated traffic. It can be expected that termination income will also be an important factor when operators are assessing whether to establish themselves as network operators in a market. 242. The table shows that both companies experienced a reduction in ARPU from 1999 to 2000. This is probably due to reductions in prices and a change in customer composition in the period (including a higher proportion of pre-paid card users). ARPU climbed from 2000 to 2002. The main reason for this is probably increased traffic (voice telephony and SMS), combined with lower price reductions than in previous years (see section4.4.1 for price developments. In the same period the growth in the number of customers continued, even though the rate of growth was lower than in the 1990s. For Telenor Mobil, ARPU fell in 2002-2004. According to Telenor this is due to lower prices for calls and SMS. The number of subscriptions continues to grow. NetCom saw a decline in ARPU in 2003-2004, while the number of subscriptions has also been increasing for NetCom.

51 Analysis of the market for access and call origination on public mobile telephone networks

1999 2000 2001 2002 2003 2004 Telenor Mobil 341 338 340 346 339 323 NetCom 322 308 310 330 342 339* Table 4 ARPU (GSM) per month for Telenor Mobil and NetCom. *Starting 2004 TeliaSonera changed its calculation method to harmonise data from various countries. For 2002 and 2003 the calculations are updated so that the data are comparable. Data from 1999-2001 are thus not directly comparable with 2002-2004. (Source: Annual Reports from Telenor and TeliaSonera)

243. In third quarter 2005, Telenor Mobil’s ARPU per month was NOK 314, against NOK 328 in third quarter 2004. According to Telenor Mobil, the reduction last year is mainly due to reduced prices.67 NetCom had an ARPU of NOK 353 in third quarter 2005, up from NOK 350 in third quarter 2004.68 244. It is impossible for NPT to predict the future development of ARPU. It can be expected that continued price reductions will reduce income, while increased traffic will help to increase it. New services such as video telephony and mobile TV will help increase ARPU. NPT expects such new services to be crucial for the development of ARPU. 245. It will be considerably more difficult for new operators to acquire new customers than it was for Telenor Mobil and NetCom in the 1990s. There is still growth in terms of revenue, though the rate of this growth is now falling. Even though the churn figures are relatively high, it is costly to win customers through, for example, subsidising handsets. However, growth in revenue through new services is expected, even though it is still uncertain how the new sources of income will affect the overall picture. Furthermore, there is still considerable potential for taking voice telephony from the fixed line network, but in this case such growth in income due to increased traffic is likely to be counteracted by reduced prices. All in all, the picture is not straightforward, and it is difficult to draw a clear conclusion from this criterion. Yet the high mobile density in Norway – the fact that the maximum number of customers has nearly been reached – and the cost of winning customers from the existing providers, indicates that new operators face a certain entry barrier here.

4.3.8 Access to distribution and sales channels69 246. In markets in which the established operators have a well-developed distribution and sales network this may function as an entry barrier for potential new operators. This applies in particular in markets in which there are major costs associated with establishing distribution and sales channels, or where the established operators have concluded exclusive agreements with the largest/most important distribution channels in the market. 247. The widespread subsidisation of mobile handsets means that handsets and subscriptions are most often sold together. For a number of user groups it appears that mobile handsets are seen as a fairly technically complicated item, and it can thus be expected that the customer will want to see and perhaps have the phone demonstrated

67 Telenor’s report for third quarter 2005. 68 TeliaSonera’s, “Interim Report January-September 2005” 69 The criterion corresponds to “a highly developed distribution and sales network” in the Guidelines, paragraph 79.

52 Analysis of the market for access and call origination on public mobile telephone networks before buying. In order to reach retail customers in the residential market, it has therefore, at least until recently, been very important for the operators to have good physical distribution channels for their products. 248. Most traditional specialist dealers of telecommunications products, such as Telehuset, Telekiosken, Nordialog and Klart Svar, have via ownership or agreements relatively strong connections to either Telenor Mobil or NetCom. Telenor is the operator with the best distribution network though such dealers, and has had exclusive agreements with several important specialist chains. The Norwegian Competition Authority has, however, imposed a general ban on Telenor Mobil’s exclusive agreements in order to give Telenor Mobil’s competitors access to adequate distribution channels.70 NPT is of the view that Telenor’s exclusivity agreements and strong position on the distribution side has long been a contributory factor to Telenor Mobil’ strong position in relation to NetCom, but that this has changed after the Competition Authority’s intervention. Even so, through its ownership position in many of the dealer chains, Telenor Mobil will still be able to exert influence on whether the dealer chains distribute products and/or services that require a subscription with Telenor Mobil’s competitors. 249. White/brown goods businesses such as Elkjøp, Expert and Lefdal are also important distribution channels for Telenor Mobil and NetCom. New service providers have also began to use less traditional sales channels such as telemarketing and sale representatives/agents (so-called network sales). The Internet has also become an important distribution channel, both for the sale of only subscriptions and also for the sale of handsets combined with a subscription. For example, the service provider Chess uses mainly the Internet to sell subscriptions. 250. A range of operators in the mobile market offer pre-paid cards/pre-paid subscriptions. Traditional pre-paid cards are sold via kiosks, grocery stores and service stations. They can often be reloaded via mobile phone, Internet, landline, SMS or ATM. Pre-paid subscriptions are ordered and filled up on the provider’s website, with payment made via bank (on-line bank, telegiro) or credit card. 251. The relatively high number of dealers and retailers offering subscriptions/pre- paid cards as well as alternative channels such as the Internet, suggest that current access to sales and distribution networks does not represent a significant entry barrier in the relevant market. Telenor’s strong ownership position in the specialist chains does, however, strengthen the company’s position in the mobile market. It is essential that close attention is paid here and regulation used if necessary (ex post) if misuse of significant market power is discovered, cf. the Competition Authority’s ban on exclusive agreements.

4.3.9 Vertical integration71 252. A vertically integrated undertaking is characterised by having within its activities/ownership several production levels that are normally controlled by different undertakings. For example, a vertically integrated undertaking, through its position in markets for input factors (“upstream markets”) or in the retail markets (“downstream markets”), can keep competitors out, or behave in an anti-competitive manner towards existing competitors, and in this way strengthen its market power in the relevant

70 See the Competition Authority’s Decision 2002/219 of 14 October 2002. 71 The criterion corresponds to “vertical integration” in the Guidelines, paragraph 79.

53 Analysis of the market for access and call origination on public mobile telephone networks market. Among other things, competition in the retail market may be weakened as the result of vertical transfer of market power from the wholesale to the retail market. 253. Both Telenor Mobil and NetCom can be classified as vertically integrated companies since the companies own and manage the network (of key importance here is the radio infrastructure) and provide services to end users in the form of sales, marketing, customer support etc. This form of integration of network production and service production is, however, normal today in mobile operations, and it is likely that new network operators will also be vertically integrated in the same way. At the same time both Telenor Mobil and NetCom also have external service providers on their networks. A number of large, international network operators also have such external service providers on their networks, while others including “3” have not had external service providers as part of their strategy. 254. If one or both of the existing large providers has market power at the wholesale level, they may have the incentive and ability to weaken competition in the retail market through vertical transfer of market power. In NPT’s opinion, such vertical transfer of market power is not decisive for assessment of market power at the wholesale level, i.e. in the relevant market. The question is rather whether providers have the ability to transfer market power the other way, from the retail market to the wholesale market. NPT believes that the existing network providers will be able to have both the ability and incentive to transfer market power this way through, for example, predatory pricing, locking in of retail customers etc. However, NPT will not place decisive weight on this, inter alia because the assessment of such potential strategic entry barriers due to vertical integration can quickly become somewhat hypothetical. 255. The question of vertical integration is relevant for the whole value chain, from ownership of sites (masts, cabins etc.) to retail customer contact (sales, billing, customer service etc.). Distribution has been shown to be significant, especially due to the normal connection between handset and subscription. The importance of the sales and distribution network, which is itself an independent criterion for the assessment of significant market power, is discussed in section 4.3.8. 256. Telenor owns most of the trunk network used for transmission capacity (leased lines) in the country. Transmission capacity is a necessary input factor in the production of mobile services. In principle, Telenor would have an incentive to discriminate between Telenor Mobil and other network operators in sales of leased lines in the wholesale market. However, wholesale leased lines markets are markets that are relevant for ex-ante regulation under new rules (Markets 13 and 14). If NPT finds that Telenor has significant market power in these markets, the company can be made subject to certain requirements which, inter alia, would limit the possibility of discrimination. Telenor’s ownership of Norkring and that company’s infrastructure raise similar issues. Norkring’s transmitter stations are a significant input factor today in the production of mobile services in Norway.72

72 Norkring’s Internet home page states: “Norkring has more than 2,700 transmitter stations for terrestrial broadcasting spread over the entire country. We lease space on these stations for the installation of equipment for various services such as transmission services, mobile and the like. Our customers include Telenor Mobil, NetCom and Telenor Networks.” (http://www.norkring.no/htmldoc/innplasseringer.html).

54 Analysis of the market for access and call origination on public mobile telephone networks

257. This vertical integration can also include the production of content distributed via the mobile network. Among others, Telenor currently owns “djuice”, which offers content to mobile subscribers, while NetCom also delivers content. Nevertheless, external companies generally account for most commercial content. The external suppliers deliver content through the network operator’s CPA agreements, cf. section 2.2. NPT believes that the barriers to entry for content providers in Norway are still relatively small today, and that ownership and structure here are less significant for the establishment of new mobile networks. 258. In summary, it can be said that vertical integration between network production and service production can reduce competition at the retail level through vertical transfer of market power. However, NPT will not conclude that this form of vertical integration is a significant entry barrier in the relevant market, i.e. at the wholesale level. Telenor’s ownership of large parts of the underlying input factors (leased lines etc.) can be more significant. As long as competition is sufficient in the markets for these input factors, or if perhaps they are appropriately regulated, this need not function as an entry barrier.

4.3.10 Customers’ freedom of choice, access to information and possible costs of switching/lock-in effects 259. Retail or wholesale-level restrictions or costs associated with switching providers may act as entry barriers and increase the possibility for a provider with market power to behave independently in the market. Such restrictions may be of a practical, technical or financial nature. At the retail level, they may also be a result of consumers having greater confidence in existing and well-established operators in preference to new operators and being unwilling to take the risk that a switch could entail. 260. A lack of information in the market can also be restrictive, for example in switching operators: For customers to be able to make effective choices between providers in a market they must have access to information that makes it possible to compare the various offers. Complicated price structures and various bonus and discount schemes can restrict the opportunities for effective end user choice and may contribute to strengthening an already dominant operator’s position in the market. 261. Factors associated with the costs of switching/lock-in effects and access to information can therefore affect the opportunities for new operators to enter the market.

Access to information 262. End users in the mobile market are faced with a large number of different suppliers and products. In all, end users can choose between approx. 20 different mobile service providers, each offering from one to 11 different products to the residential market. 263. It can be a challenge for end users in the mobile market to compare different offers and prices since the various providers often operate with different product packages and to an extent also with different price structures. The relationship between fixed and variable price elements must be assessed along with the linking with other services such as fixed telephony, the Internet or non-telecom related products such as electricity. The widespread practice of handset subsidisation combined with lock-in periods serves to complicate the picture further. To help end

55 Analysis of the market for access and call origination on public mobile telephone networks users compare offers, various Internet services, such as NPT’s price calculator, telepriser.no, have been launched over the past few years. The Consumer Ombudsman has also imposed a requirement on the mobile industry to list minimum total prices in marketing of mobile phone subscriptions.73 264. The picture on the wholesale level is somewhat different. Here there are currently only two providers: Telenor Mobil and NetCom. Pursuant to the Public Telecommunications Network and Services Regulations these providers are obliged to have a reference resale offer available to the public. Currently both Telenor Mobil’s and NetCom’s reference resale offer is available on the respective companies’ websites. 265. NPT has therefore concluded that access to information today is not a significant anti-competitive factor in the Norwegian mobile market. However, the somewhat ponderous situation in the retail market with respect to subscription forms, prices etc., may render competition less effective.

Costs of switching/lock-in effects 266. Switching costs in the retail market must be seen as low to moderate. When customers switch service providers, the new provider bills the customer anything from NOK 0 to 300 for registration. The providers are free to set the registration charge. Furthermore, the introduction of number portability from 1 November 2001 helped to reduce switching costs further by allowing customers to keep the same mobile number when switching service provider. Some providers charge a higher registration charge if the customer wishes to port a number than if the customer receives a new number.74 From January to October 2005 just over 420 000 mobile numbers were ported. As of October 2005, there have been nearly 1.6 million portings of numbers since the scheme was introduced on 1 December 2001. 267. On the other hand the widespread use of lock-in periods creates a significant lock-in effect on the customer. Lengthy lock-in periods reduce churn, thereby making it more difficult for new providers to win end users. Lock-in periods are mainly used in connection with subsidisation of handsets or other special services. 268. Under an agreement initiated by the Consumer Ombudsman between the various mobile operators, a maximum lock-in period of 12 months currently applies as a requirement for residential customers. The Consumer Ombudsman pursues any violations of this agreement in reference to the fact that it would be unreasonable to require longer lock-in periods and thus be in conflict with the Marketing Act.75 If the customer should wish to leave the agreement before the expiration of the agreement, a fee is usually charged for the remainder of the lock-in period. However, the industry agreement mentioned above stipulated that cancellation fees shall be reduced according to how far into the lock-in period the customer has come, in the event the customer cancels the agreement before it has expired.

73 The consumer should be able to find out the entire total cost, including start-up fees, invoice fee, fixed monthly fees and other costs included in the total price. See http://www.forbrukerombudet.no/asset/1596/1/1596_1.pdf. 74 Existing providers can charge for porting out a receiving provider. This charge is regulated and shall not currently exceed NOK 85 (cf. NPT’s letter dated 22 October 2001). 75 See the Consumer Ombudsman’s website at: www.forbrukerombudet.no.

56 Analysis of the market for access and call origination on public mobile telephone networks

269. In addition, technical barriers exist, such as for example an operator-lock that also has a lock-in effect on the customer. An operator lock is a code which locks the telephone for a period of time (max. 12-18 months) and ensures that the mobile telephone can only be used with the SIM card from the provider from whom the telephone was purchased. In practice this means that the telephone will not work if a SIM card from another provider is inserted. Operator locks are used today by providers when a subsidised handset is sold with a pre-paid card. Customers who wish to use a SIM card from another supplier before the operator lock period has expired have to pay a fee. It is likely that end users largely equate the operator lock with a lock-in period, with the same lock-in effect. The guidelines that the industry and the Consumer Ombudsman have drawn up for use of lock-in periods therefore also apply to the use of operator locks. 270. The lock-in mechanisms and the high mobile density in Norway can appear to be barriers for establishing potential new operators. On the other hand, generational shifts in technology and subsidising of handsets provide better opportunities for new operators to enter the market. There is also relatively high churn in the market, despite the current lock-in mechanisms in place today, cf. section 4.4.3. The situation is therefore not unambiguous. 271. Those in need of services on the wholesale level in the relevant market, have today in practice only two suppliers to choose between, Telenor Mobil and NetCom. The fact that two networks exist implies per se a choice for wholesale customers, and sets the mobile sector apart from the situation in the fixed network. However, both of the infrastructure owners’ service provider agreements contain provisions regulating connection charges, termination/length of contract, volume guarantees, the possibility of transferring customers as well as rights to compensation (exit fee/exit ticket) when terminating the agreement, see section 2.2.5 above. Access charges, exit limitations etc. can, if terms are formulated in a burdensome manner, hinder effective competition at the wholesale level in the mobile market. The clauses can then limit the service providers’ ability to transfer their customer base to a different network operator. It also limits the individual service provider’s bargaining power vis-à-vis the network operator.76 Telenor has previously had to adjust its terms in the resale agreement with the service provider Sense Communications ASA, through a decision issued by NPT in 2002. This adjustment is now incorporated on a general basis in the resale agreement that Telenor offers service providers. Given the way in which the terms in Telenor’s agreement now read, NPT does not regard them to be unreasonable or have a major anti-competitive effect. Since the content of these obligations is assumed to have a bearing on the competitive situation, the potential for a negative effect on competition is also present if the regulatory situation is abolished and the terms are also amended to the detriment of service providers. 272. On the other hand, switching network operator will entail a number of practical consequences for the service providers, including the necessity of issuing new SIM cards to all their customers. This is both time-consuming and expensive, and can therefore cause the service provider, despite the fact that exit-restrictions have been

76 Telenor’s exit-restrictions in the service provider agreements have been the subject of negotiations between Telenor Mobil and Sense. In NPT’s decision of 7 October 2002, Telenor Mobil was ordered to change the terms concerning exit-fees, termination rights/length of notice period and volume guarantees.

57 Analysis of the market for access and call origination on public mobile telephone networks reduced, to regard it as in their own best interest to stay with the original network operator. 273. In summary, NPT believes that switching costs and lock-in effects will to a certain extent function as an entry barrier in the market. For re-sellers, there does not seem today to be substantial lock-in mechanisms harming competition at the wholesale level. This is at least partly in consequence of the existing regulation. The widespread use of lock-in periods and operator locks at the retail level has a certain lock-in effect and leads to increased switching costs. In Norway, however, the maximum lock-in period and operator lock is just 12 months. Once the lock-in period ends, further switching costs are considered to be low to moderate. Relatively high churn rates also indicate that the lock-in mechanisms at the retail level have limited negative consequences.

4.3.11 Product differentiation/Bundling of products77 274. A provider with a high degree of product differentiation, or heterogeneous products, can create customer loyalty, making it more difficult for competitors to enter the market. Strong brand names will have a corresponding effect. 275. Telenor Mobil and NetCom currently offer voice telephony, SMS and other data services to end users. These products/services are largely based on standardised technology supplied by international equipment suppliers. In addition, both operators offer a range of subscriptions aimed at different market segments, but such subscriptions are neither difficult nor expensive for other operators to develop. Neither Telenor Mobil nor NetCom can therefore be said to have a product spectrum that creates market power in the mobile area. 276. Bundling of products is a variation of product differentiation. An operator with market power in a relevant market can link (bundle) services or products in this market with services or products in another market, so that the operator can provide a bundle of services/products that are differentiated from the competitors’ offerings and can be copied by them to only a limited degree. In this way bundling of services/products can contribute to market power in one market creating competitive advantage in another market. Such competitive advantage may be relevant to the assessment of significant market power in the latter market. 277. Bundling of handset and subscription is a common form of tied selling used by many operators in the market. Since none of the operators are restricted from bundling products, NPT believes in principle that this does not create competitive distortions between operators. Utilising subsidisation of handsets does, however, demand a certain amount of financial strength. 278. It is especially relevant to examine the bundling of mobile and fixed line telephony products. It is NPT’s preliminary assessment that Telenor has significant market power (SMP) in each of the six retail markets on the fixed network (Markets 1- 6 in ESA’s Recommendation), cf. notification of decisions dated 15 September 2005. Some relevant examples of products/services where fixed network and mobile network services are bundled, are InTouch (forwarding from fixed to mobile), MobilAksess and Felles Faktura. Such products can strengthen Telenor Mobil’s position in the market.

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

58 Analysis of the market for access and call origination on public mobile telephone networks

279. For many business customers an important criterion for choosing a supplier of communications services is that the supplier can offer an integrated solution for all the communication services the business needs. Bundling of fixed and mobile telephony, Internet, data communication and/or user equipment is therefore often used in the battle for business customers. This is an important reason why it is difficult for service providers unable to offer such total solutions to win market share in the business market. Better and more efficient cost control, for example through “everything on one bill”, is often used as a sales argument for such total solutions. 280. Neither NetCom nor other service providers that bundle products for the fixed and mobile networks have a dominant position in the fixed network, which would be decisive here for assessing the effect on the market for access and origination on mobile networks. 281. At the same time more and more businesses are abandoning fixed telephony in favour of exclusive use of mobile solutions (for example NetCom’s “Wireless Business”). This could suggest that bundling of fixed and mobile services will be of less significance in the future. 282. Bundling of products with non-telecom related products such as electricity and insurance, is also taking place in the retail market today. The extent of this is, however, very limited. 283. All in all, it is NPT’s assessment that the criterion alone indicates that Telenor Mobil has a stronger position than NetCom in the relevant market, especially due to Telenor’s strong position in the fixed telephony market. However, NPT regards the criterion to be of limited significance provided that appropriate regulation of the fixed telephony market is undertaken.

4.3.12 Regulatory entry barriers 284. Regulatory entry barriers exist when market access is limited by regulatory conditions, for example official licences, resource restrictions or restrictions in regard to health, environment or safety (direct regulatory restrictions). Furthermore, various forms of price control may also have entry-deterring effects, cf. recital 12 of the Recommendation. Only sector-specific regulations in the telecoms area are assessed here. 285. Frequency resources are a particularly important factor for enabling new operators to enter the mobile market. Frequency resources are covered below in section 4.3.13. 286. Pursuant to Public Telecommunications Network and Services Regulations § 4-6, cf. § 3-8, resellers are entitled to access the mobile networks of SMP operators at cost-oriented prices. NPT issued a decision in the autumn of 2002 regarding a reduction of Telenor Mobil’s resale prices.78 NPT is of the view that the obligation of cost-orientation has led to today’s resale prices being lower than they would have been if non-discrimination had been the only stipulation for resale terms and prices. The obligation of cost-oriented resale prices may have created an entry barrier for new network operators, especially since it may have intensified the downward pressure on retail prices.

78 Cf. NPT case no.. 2001-08425 Sense – Telenor Mobil.

59 Analysis of the market for access and call origination on public mobile telephone networks

287. Public Telecommunications Network and Services Regulations § 3-8 also provides a legal basis for demanding cost-oriented retail prices. However, no decision has been issued in this area, particularly because it has been NPT’s strategy to bring retail prices down so as to meet the obligation of cost-oriented retail prices through regulation at the wholesale level. In real terms, the obligation of cost-oriented retail prices has therefore had less significance as a regulatory entry barrier. 288. Furthermore, the obligation of cost orientation for new data services, such as MMS, has not been imposed in the regulations. 289. Pursuant to Public Telecommunications Network and Services Regulations § 4-6, cf. § 3-8 and licences, new operators in the mobile market are entitled to national roaming at cost-oriented prices. The same also applies to co-location, see Public Telecommunications Network and Services Regulations § 4-7, cf. § 3-8. This will make it easier for new operators to enter the market. 290. The introduction of number portability has also helped to reduce entry barriers. 291. The network operators’ terms in the resale agreements may lock in re-sellers, which in turn can affect entry opportunities for new operators. In one case NPT imposed an obligation on Telenor Mobil to change its terms on this point.79. 292. All in all, NPT is of the opinion that regulatory conditions do not represent any significant entry barriers in this market.

4.3.13 Frequency resources 293. Limited frequency resources have often been cited as one of the major entry barriers to the mobile markets in most European countries.80 294. In Norway too, the lack of access to frequency resources in the GSM bands was long regarded as an entry barrier. In the 900 band the frequencies are now divided among three operators, Telenor, NetCom and the MøllerGruppen, and there are no vacant resources. In the 1800 band, three operators have been assigned frequencies: Telenor, NetCom and Teletopia, but there are also vacant resources that would be sufficient for two to three operators. Interest in such licences has been modest. Within certain limits, the GSM licences are, in practice, also transferable, provided the Ministry of Transport and Communications approves a transfer. Access to GSM frequencies therefore no longer poses a formal entry barrier to operators who want to open new radio networks. 295. Norway also has frequencies available for 3G networks. As mentioned previously, Telenor, NetCom and “3” hold frequency assignments in the 3G band, while approx. 2x15 MHz in the paired band and 5 MHz in the unpaired band are available. 296. In 2004 the frequency licence in the 450 MHz band was assigned to Nordisk Mobiltelefon AS. They will use it for their 3G network with CDMA technology. No frequencies are available for similar licences in the 450 MHz band. 297. The Electronic Communications Act stipulates certain procedures for assigning frequencies and also contains provisions regarding fees. The main fees are a one-off fee paid for assignments and annual fees. Both lengthy processing of applications and

79 See the Sense case, NPT case no. 2001-08425 80 See for example Explanatory Memorandum, section 4.3.1.

60 Analysis of the market for access and call origination on public mobile telephone networks fees may represent a considerable disadvantage for operators in the establishment stage. 298. The Electronic Communications Act § 6-5 permits the transfer of frequencies. Generally it can be expected that the trading of frequencies will have a positive effect by reducing the entry barriers associated with access to frequencies, since this will facilitate faster and more cost-effective allocation of available resources. The option of transferring frequencies must, however, often be combined with rules preventing resource concentration. 299. In summary, NPT does not anticipate that the shortage of frequencies today should constitute an entry barrier. However, the processes for assigning licences and frequency fees etc. can still make access to frequencies act as a barrier to entry in the Norwegian mobile market.

4.3.14 Summary – the most important entry barriers 300. There are relatively significant barriers to establishing new, commercial mobile networks in Norway. Because frequencies are available for both 2G and 3G, these barriers cannot be regarded as absolute. However, there are high sunk costs associated with the rollout of networks with sufficient commercial coverage, i.e. coverage in more than merely the central Østland region and large cities in Norway. 301. Expansion of mobile networks in Norway entails high fixed costs and a relatively low demand base due to a small population. Economies of scale can therefore also act as an entry barrier and as a competitive advantage for established operators. In general, the entry barriers associated with sunk costs and economies of scale rise in proportion to the amount of coverage the networks must have and with how much proprietary infrastructure (masts, etc.) each operator must have. This signifies that access to national roaming and co-location can be critical to reducing entry barriers in the market. 302. Telenor’s strong position in the Norwegian markets for electronic communication, both in markets for input factors such as leased lines and masts as well as in the markets for fixed telephony, can make it more difficult and more expensive for new network operators to establish themselves in the Norwegian mobile market. The terms governing use of necessary input factors could, for example, be less favourable than if competition in the respective markets had functioned better than it apparently does today. This situation could, however, possibly be remedied by suitable regulation of the specific markets. 303. The limited interest shown at the last auctions of GSM and UTMS frequencies, along with the fact that two of the four UMTS licences that were offered in 2000 have now been returned, can also indicate that substantial entry barriers exist in the mobile communications market.

4.4 Other criteria and indicators

4.4.1 Access at the wholesale level 304. The extent to which access is given at the wholesale level to external providers in the retail market and on which conditions any access is granted, can indicate if there is effective competition in the relevant market and whether it is an undertaking with

61 Analysis of the market for access and call origination on public mobile telephone networks significant market power. Price developments at the wholesale level are described below in section 4.4.2. 305. Access forms at the wholesale level in the Norwegian mobile market and providers that have or may desire access are described in section 2.2.5. Access regulation, as it was under the old rules, is described in Chapter 4 in the document with the draft decisions. 306. In the initial period after the market was liberalised in 1998, service providers generally did not receive access to either NetCom’s or Telenor Mobil’s networks. After the authorities had evaluated the Sense case,81 and prior to the Storting’s discussion of access for MVNO, Telenor and NetCom opened access to resellers. Today there are just under 20 service providers on both networks. 307. In recent years in particular there appears to have been a certain amount of competition between NetCom and Telenor with respect to providing access to resellers or retaining large resellers on their networks. In particular, the reduction in access prices and increased margins can indicate competition. However, it must be added that both Telenor and NetCom have had obligations to provide access to resellers at cost- oriented prices. In the autumn of 2002, NPT also issued a decision regarding a reduction of resale prices. 308. Tele2, TDC and Ventelo have been given access to Telenor’s network as MVNO, without the authorities having to intervene by means of decisions. In Tele2’s case, access was given when at the same time Telenor was given access as an MVNO in Tele2’s mobile network in Sweden. As a result of the obligation of non- discrimination in the old regulations, Telenor was obliged to offer other operators MVNO access after having entered into the agreement with Tele2. 309. Today, only Teletopia has access for national roaming. The company has an agreement on such access to Telenor’s mobile network. Telenor also has an obligation under the old rules regarding providing access for national roaming. 310. In NPT’s opinion, one could say in summary that there has been a certain amount of competition with respect to giving access to resellers. However, the situation regarding other forms of access is more unclear. Furthermore, there does not seem to have been active marketing at the wholesale level or pronounced facilitation to obtain new customers. In assessing this indicator consideration must also be given to the fact that under the old rules both Telenor and NetCom were subject to obligations to provide access.

4.4.2 Prices and price developments 311. The current price level and the development of prices over time may provide some indication of the degree of competition, or possibly the degree of potential competition, and can thereby provide a pointer to whether a provider has market power. Furthermore, analysing Norwegian prices in an international context can provide some indication of the intensity of competition in the Norwegian market compared with other countries.

81 NPT case number 98/04141.

62 Analysis of the market for access and call origination on public mobile telephone networks

Price developments at the retail level 312. Figure 7 below shows the average use costs for individual subscriptions and pre-paid cards from Telenor Mobil, NetCom and Chess for 1994 to 2004 (for Chess only from 2002). The numbers are adjusted for inflation. The figure does not include international calls or SMS/MMS. The calculation is based on an average usage measured over the course of 2004. For Telenor Mobil the subscriptions Primær (later Privat+), Privat and Ring Kontant were used. For NetCom the subscriptions Standard (later TALK) were used, and for Chess the subscriptions Connect and Move were used.82 313. It can be seen from the graphs that there was a relatively strong price reduction in the period 1994-1999. This was followed by a period with less of a reduction. Furthermore it can be seen that Chess has significantly lower prices compared with Telenor Mobil and NetCom.

800 Telenor Mobil Ring Kontant Telenor Mobil Privat 700 Telenor Mobil Primær/Privat+ NetCom Standard/Talk 600 Chess Connect Chess Move 500

400

300 Cost per month per Cost

200

100

0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Figure 7 Cost per month (in 2004 prices) for selected subscriptions and pre-paid cards based on average calling patterns. 2004 prices. The calculations are based on figures obtained by NPT from the operators.

314. A strong price reduction has taken place with regard to SMS in the past two to three years. Before 2000 the price for sending a text message was NOK 1.50. After that the price was reduced to just under NOK 1 until the spring of 2002, when prices first began to reach as low as NOK 0.50. The external service providers were responsible for the lowest prices. The network operators, who have kept stable and identical prices over long periods, did not react to these price reductions until the following year, in spring/summer 2003. At the end of 2004 several external service providers had SMS prices as low as 0.40, while the prices of network operators were somewhat higher.

82 In comparing the prices of subscriptions from other service providers, for example by average usage using the calculator on telepriser.no, Chess Connect and Chess Move come out relatively good, but are not among the least expensive.

63 Analysis of the market for access and call origination on public mobile telephone networks

315. There are many possible explanations for this development in the price level in the retail market. Firstly, the price reduction can in any case be due in part to the threat from new entrants in the mobile market, particularly before 1999. In that case the price reduction can be viewed as a result of a form of strategic entry barrier. Secondly, demand grew rapidly throughout the entire period from 1994 to 2004. It can therefore be expected that unit costs (and probably also marginal costs) have fallen. This has created an opportunity for reduced prices. A reduction in prices can, of course, be profitable because it helps to boost traffic. Thirdly, the price reduction is probably the result of competition between the existing operators. If so, price developments can give the impression that competition functioned better in the period 1994-1999 than in the following years. However, it is also conceivable that in recent years Telenor and NetCom have placed greater emphasis on subsidising handsets than on lowering subscription/call rates. In the Norwegian market subsidisation of handsets today is a significant competition parameter, cf. section 4.4.3 below. 316. Re-sellers have clearly contributed to the increase in intensity of competition and pressure on prices at the retail level in recent years. Chess is an example of a high- profile low-price operator; since 2002 it has probably been a factor in driving a stronger degree of price competition. In the spring of 2004 even more new service providers - including Mobyson, TalkMore and Mobilfabrikken - started operations. They offer pre-paid subscriptions with call rates well under the traditional subscriptions. With pre-paid subscriptions, all traffic is paid in advance via bank or credit card, and there is no lock-in period. The reason for the low price level is that customer service is largely Internet-based and the customers themselves are responsible for recharging calling accounts. In addition, providers incur little credit risk with pre-paid calls. 317. With TeliaSonera’s acquisition of Chess/Sense, today’s largest external service provider will probably disappear from the market as an independent provider. In the long term it is also conceivable that the brand names will disappear completely from the market. It is uncertain what impact the acquisition will have on retail prices. In the period from the end of 2002 until spring 2004, Chess was the provider who was largely behind the price pressure on retail prices. From the spring of 2004, however, new and smaller providers, such as Mobyson and Noextras.net, have had the lowest prices in price comparisons such as telepriser.no. In isolation, this is an indication that the pressure on prices will not stagnate, even if Chess disappears from the market.

International price comparisons 318. Figure 8 below shows a comparison of mobile telephony charges for consumers with medium usage in the OECD countries. The figure was obtained from NPT’s telecom statistics for the first half of 2005. The comparisons are based on so- called OECD “baskets”, which represent a specific mobile telephone usage, with a particular amount of calls/call minutes to the national fixed network, to mobile telephones and to international destinations. The combined costs are expressed in US Dollars including VAT (exclusive of VAT for the business market). The figures are adjusted for differences in buying power (PPP, Purchasing Power Parity) and referred to as USD/PPP. 319. The average for the OECD is calculated as a non-weighted average for the countries included in the overview.

64 Analysis of the market for access and call origination on public mobile telephone networks

320. Three different categories are used for comparing usage in the OECD figures: Low use, medium use and high use of mobile telephony. Both pre-paid subscriptions/pre-paid cards and post-paid subscriptions are included. There can be many operators and many subscriptions in each country. The largest operators from each country were selected for the overview. For Norway only Telenor Mobil’s and NetCom’s prices are included in the survey. 321. Here, NPT has only included the figure for the medium use category and refers to NPT’s semi-annual statistics for 2005 for the other two categories. In the category for medium use Norway went from eighth to fourth place from August 2004 to August 2005. In the category for low users Norway similarly fell from ninth to fifth place in the same period, while in the category for heavy users Norway went from second to fourth place. For all categories Norway is under the OECD average. However, it is not possible to draw any clear conclusions on the intensity of competition from such international price comparisons. The results and rankings in the comparisons fluctuate widely, inter alia because they depend on conditions such as exchange rates. Factors in each country must also be taken into account (relative costs, traffic volume, willingness to pay, etc.)

1000 900 aug.05 800 aug.04 700 600 500 400 300 200 100 0 UK Italy USA Spain Korea Japan Ireland France Austria Poland Mexico Iceland Finland Greece Norway Canada Sweden Belgium Portugal Hungary Australia Denmark Germany OECD snitt Switzerland Netherlands Luxembourg New Zealand Czech Republic Slovak Republic

Figure 8 Annual charges for mobile telephony for customers with medium usage in the OECD countries, including VAT, together with the OECD average August 2004 and August 2005 in US dollars, adjusted for purchasing power differences.

322. Another way of comparing retail prices is to see, for example, which subscription charges Telenor offers in different countries. In September 2005, Telenor’s cheapest subscription on telepriser.no was Djuice Allstar. In Sweden, Telenor offers Djuice Abonnement and Djuice Pluss. Both of these subscriptions have a significantly lower monthly cost than Djuice Allstar, going by the average usage in telepriser.no. In Denmark, the subscription Debillos from Sonofon83 also has a lower monthly cost than Telenor’s cheapest subscription in Norway. Despite the fact that this is an overarching comparison and is based on a very simple basis, it can indicate lower competitive intensity in Norway than in Sweden and Denmark.

83 Telenor owns Sonofon in Denmark.

65 Analysis of the market for access and call origination on public mobile telephone networks

Price developments at the wholesale level 323. In the case of price developments on the wholesale level, it must first be mentioned out that NPT does not have access to any relevant internal prices, i.e. prices for sales from the network division to the internal service provider division for the two network operators. For example, Telenor Mobil’s network division does not sell capacity to the company’s internal service provider division at the prices shown. It is therefore impossible to assess the development of internal prices. 324. However, the development of resale prices can be commented on. NPT has obtained information from Telenor and NetCom about the development in resale prices and the margins re-sellers face. Resale prices have dropped since the introduction of resale agreements in 1999/2000. The price fall in the first period could be due to the lack of experience with such prices in Norway, and that price levels were probably set relatively high in the beginning. The price reductions in recent years were initially driven by an NPT decision, and have subsequently, at least to some extent, taken place on a commercial basis. NPT notes that in general, the re-sellers’ margins in the residential segment (low-end segment) have risen since their entry into the Norwegian market, despite heavier competition and lower retail prices. 325. However, NPT has not seen any sign of a general “price war” in access charges. Furthermore, NPT is of the impression that thanks to its size and agreements with both Telenor and NetCom, Chess/Sense have achieved the lowest prices and been a driving force for much of the price reduction at the wholesale level in recent years. This will hardly be the case after TeliaSonera’s purchase of Chess/Sense. 326. Currently, only Telenor has provided access for national roaming and MVNO, cf. inter alia sections 2.2 and 4.4.1. For national roaming there has been an obligation of cost-oriented prices, whereas an obligation of non-discrimination has been in effect for MVNO access. On the basis of price information obtained by NPT along with the fact that only Telenor has given such access, it is difficult for NPT to see that there is reason to say that there is price competition and falling prices with respect to such forms of access.

Summary: Prices and price development 327. Price levels and price trends do not provide any clear and certain picture of the competition in the Norwegian mobile market and the market power of the operators. However, the criterion does provide some indication that there have been periods of relatively intense price competition between the existing operators in the retail market, even though Telenor Mobil and NetCom have not been the leaders in this competition in recent years. It is difficult to provide any clear and complete explanation of the reason for the price reductions witnessed in the retail market. With respect to price developments at the wholesale level, there does appear to have been a certain amount of price competition between Telenor and NetCom for the resale product. For other forms of access, such as national roaming and MVNO access, it can hardly be said that there has been a pronounced amount of competition in wholesale prices.

4.4.3 Subsidisation of handsets/other market activity 328. The different service providers in the mobile market have long used handset subsidisation as an important element of their sales and distribution strategy. The extent of this type of subsidy has varied somewhat over time, but seems to be increasing in connection with generational changes in handsets. Subsidising handsets

66 Analysis of the market for access and call origination on public mobile telephone networks can both be a way of winning customers and generating greater use of new services, such as for example the increased coverage of MMS-/camera phones. Sales of new mobile phones were high in 2003 and 2004 compared with 2002, probably because of the introduction of MMS/camera phones. Over 90 % of the mobile telephones sold in 2004 had MMS functionality, while around 65 % had a camera.84 Sales of handsets with UMTS technology is also a growth area85 and a candidate for subsidising. 329. Other market activities are also extensive, especially in terms of marketing in newspapers, on television, on the Internet and in other media. Marketing focuses on price, different technical solutions and services as well as various quality parameters. 330. In NPT’s opinion the extent of handset subsidisation and other market activities can provide some insight into the intensity of competition in the retail market. In the case of handsets, it is clear that the operators are also choosing to compete for customers via handset offers, as opposed to other competitive parameters such as subscription and call rates. In that case, both the extensive subsidisation of handsets and other market activities indicate relatively strong competition in the retail market. To some degree, however, these are activities intended to avoid losing customers to service providers on other networks. Marketing, subsidising etc. seem to be targeted at the end users of competitors in the retail market, regardless of network they are on. To the extent Telenor or NetCom avoid losing customers to service providers on their own networks, or Telenor avoids losing customers to the MVNO Tele2, this is therefore competition that strictly speaking is not between networks. For example, one can expect that relatively much of Telenor’s marketing activities can be attributed to a desire not to lose end users to the MVNO Tele2 or the reseller Ventelo, both of whom are connected to Telenor’s network. On this basis NPT does not find the intensity of competition in the retail market to be a determinative measure of the market power of network operators.

4.4.4 Lack of potential competition86 331. The degree of potential competition depends on the opportunities for new operators to enter the relevant market. The threat of competition can discipline the setting of prices and reduce the possibility of maintaining higher prices than would be found in a more competitive market. Potential competition can reduce the possibility of established operators misusing market power. This criterion must be assessed in close connection with market access and the presence of entry barriers, see the review in section 4.3. It is to be expected that high entry barriers weaken potential competition. To a certain degree entry barriers and the absence of potential competition can be regarded as two sides of the same issue. Potential competition is particularly a feature of innovation-driven markets. 332. As noted in section 4.3.14, the market in question has relatively high entry barriers. This in principle would suggest limited potential competition. On the other hand “3” has been issued a UMTS licence in Norway. The licence is subject to moderate coverage requirements compared to the UMTS licences obtained by Telenor and NetCom. Such amended licence terms and “3”’s expected entry will clearly serve

84See report from the Electrical and Electronics Trade (EE Branch of Trade), February 2005. 85 See, for example, the article titled “Ny boom i mobilsalget” "New boom in mobile phone sales” in Aftenposten, dated 20 October 2005. 86 The criterion corresponds to “absence of potential competition” in the Guidelines, paragraph 79.

67 Analysis of the market for access and call origination on public mobile telephone networks to increase potential competition in the market. This can affect the price setting and other market behaviour of the established operators. 333. The possibility of “3” becoming a genuine competitive factor in the market can be dependent on its access to co-location, national roaming and/or other network sharing. These factors can in turn depend on the regulatory obligations incumbent on the existing operators, including those imposed as a consequence of possible SMP status. It is thus important not to make an analysis based on the assumptions that obligations such as national roaming etc., already exist, but to proceed on the basis of the possibilities and incentives which the existing network operators already have in case no special obligations are imposed. It is NPT’s assessment that in this case the two existing operators would at least have a genuine possibility of keeping new operators out of the Norwegian market. In such a hypothetical situation without access to access regulation etc., an absence of potential competition could exist. 334. As pointed out in section 4.4.1, retail prices have been trending downward. Prices for access to networks have been declining ever since external service providers gained access to Telenor Mobil’s and NetCom’s GSM network. NPT believes that the existing competition in the retail market and increased traffic have been more important reasons for reductions in prices than potential competition from new network operators. NPT is also of the opinion that based on the experience of the Norwegian market it cannot be concluded that potential competition has weakened the market power of Telenor or NetCom to a significant degree. 335. The high pace of innovation reduces the significance of entry barriers (especially barriers to expansion) and increases opportunities for new entrants in the market. The bid by “3” for a UMTS licence in Norway has to be viewed as a consequence of technological development. Yet NPT does not regard this as implying that important entry barriers such as high sunk costs and economies of scale lose their significance for potential competition in the market. 336. All things considered, it is impossible at this time to categorically define the extent and possible effects of potential competition from new network operators such as “3” and Nordisk Mobiltelefon. Even though a downward price trend is evident, this is more likely to be due to increased competition at the retail level and increased traffic. Since new UTMS operators will need access to the existing mobile infrastructure, at least in a transition period, and Nordisk Mobiltelefon is unlikely in the short term to offer products aimed at the mass market in the same manner as the two existing large providers, NPT anticipates that potential competition will not significantly weaken the market power of the two existing network operators in the relevant market. Nor from the price developments described in section 4.4.2 can it be concluded that major potential competition is affecting the market power of the existing network providers.

4.4.5 Market power/countervailing buying power87 337. The presence of customers with bargaining power can restrict a provider’s opportunity to behave independently in the market. Such countervailing buying power may be the result of a customer’s size, purchasing volume or the customer having

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

68 Analysis of the market for access and call origination on public mobile telephone networks something to offer, for example better market access to other markets or market segments. 338. Potential operators requiring access to the existing mobile networks can, for example, own their own telephone infrastructure or other input factors that can strengthen their hand in negotiations regarding access. In Norway, Telenor owns the vast majority of the infrastructure used to produce electronic communication services. This gives other operators less strength in negotiations on access to the network. 339. Both Telenor and NetCom/TeliaSonera have operations in other countries too, both in and outside the Nordic countries. As part of their strategies, the groups plan to expand internationally. Tele2 has therefore entered into an MVNO agreement for access to Telenor’s mobile network, while Telenor (under the name “djuice”) has received access to Tele2’s mobile network in Sweden. This demonstrates that it is possible to gain access to Telenor’s mobile network on commercial terms. It is possible that other operators can offer Telenor and/or TeliaSonera similarly attractive access to other countries such as Tele2 gave to Telenor in Sweden, and thereby have bargaining power in Norway. 340. External service providers can theoretically negotiate better terms for access to the networks, for example by threatening to move part or all of their customer base to another network. In particular NPT assumes that Chess/Sense, with their relatively large aggregate customer base and customers on both networks, have had bargaining power. With TeliaSonera’s acquisition of Chess/Sense this is probably no longer the case. Today, the remaining independent service suppliers are relatively small, which weakens bargaining power. Nor does NPT have the impression that the external service suppliers are coordinating their negotiations with the network operators to any significant extent. Furthermore, as described above in section 4.3.10, practical factors may limit the service provider’s ability to utilise such mechanisms in negotiations with the network operators. A possible switch from one network operator to another would mean that new SIM cards must be issued to each subscriber, which in itself represents a barrier. 341. It is NPT’s assessment that operators on the demand-side may have a certain amount of bargaining power with respect to access to the existing networks. In NPT’s view, this fact will not, however, apply in all cases or to a very significant degree. This criterion is nevertheless regarded as being of less significance in the assessment of significant market power in this market.

5 Analysis of the market - collective dominance

5.1 General - Collective Dominance

342. Pursuant to the definition of significant market power in both Framework Directive Article 14 (2) and Act on Electronic Communications § 3-1, several providers can have significant market power if they jointly behave independently of competitors, customers and consumers, so-called collective dominance. The existence of collective dominance rules out single dominance and vice versa. 343. The term collective (or joint) dominance is taken from EU competition law. Paragraph 87 of the Guidelines states that both Article 82 of the EC Treaty and Article

69 Analysis of the market for access and call origination on public mobile telephone networks

54 of the EEA Agreement point out that several operators together may enjoy significant market power if two or more operators adopt a uniform conduct hindering effective competition in a defined market. European Court of Justice case-law has pointed out that formal cooperation in the form of agreements and the like is not a prerequisite for a finding of collective dominance.88 Collective dominance may exist where the actual structure in the market facilitates a more informal coordination of the behaviour between different operators in the market. 344. Relevant ECJ case-law and the Guidelines, paragraph 98, point out several elements that should be included in an assessment of collective dominance. The list from these sources is neither cumulative nor exhaustive. Moreover, the elements largely coincide with the criteria used in assessing single dominance. However, the content and weight/significance are not necessarily the same. 345. In addition, three prerequisites can be derived from ECJ case-law89 and the Guidelines, paragraph 98, all of which should be present for two or more operators to be deemed collectively dominant. 346. First of all, the operators must be capable of collecting information and keeping updated on the behaviour of the other operators in order to engage in tacit collusion. If the market is sufficiently transparent, the undertakings can with a sufficient degree of precision and speed adopt a joint strategy. They can also track whether the partners are loyal to the alliance. 347. Secondly, the tacit collusion must be sustainable over time. This will be ensured, inter alia, through adequate retaliatory mechanisms between the undertakings. They can make it unprofitable for individual operators to break out or deviate from the coordination. Each participant will be aware that contravention of the coordination could entail similar behaviour by the other parties, and thus not be very profitable in the long term. 348. Finally, the results of the coordination must not be capable of being undermined by competitors or customers. By definition, the term significant market power, whether individually or jointly with others, requires that providers are capable of behaving independently of competitors and customers. When it is a question of collective dominance, it is particularly the market power of competitors and customers outside the tacit collusion that is relevant. High entry barriers and degree of power on the demand side will be key in assessing this condition. 349. As when assessing single dominance, the analysis is also forward-looking here. In other words, the question is which direction the authorities see the market heading over the next two to three years. 350. In its case-law the Court of First Instance has laid down strict requirements for proof of coordinated conduct. In the AirTours case, it was established that a “heavy burden of proof” rested on the Commission when it wished to prohibit a merger due to the risk of collective dominance. Since these regulations are also of a forward-looking nature, the statements will also have a bearing on assessments pursuant to the Electronic Communications Act. This is also explicitly stated in the Guidelines, paragraph 103.

88 Case C 395-396/96 : Compagnie Maritime Belge Transports SA and Case T-102/96 : Gencor Ltd v Commission. 89 Case T-342/99: Airtours v Commission, particularly paragraph 62.

70 Analysis of the market for access and call origination on public mobile telephone networks

351. Below is a review of the criteria in the Guidelines, paragraph 98, which in NPT’s assessment are the most important for assessing collective dominance in the Norwegian mobile market. Some criteria from the Guidelines have been excluded, but will not, in NPT’s view, change the conclusion of the analysis. In addition to criteria from the Guidelines, NPT has chosen to look at yet another indicator, access at the wholesale level.

5.2 Criteria for collective dominance

5.2.1 Market concentration90 352. Collective dominance is more likely in a highly concentrated market where a small number of operators have a high market share, cf. the Guidelines, paragraph 98. A market with few operators simplifies the opportunities for coordination among the operators since it means a reduction in the transaction and monitoring costs in the market. On the other hand, a high concentration does not necessarily mean that the structure of the market is conducive to tacit collusion, cf. the Guidelines, paragraph 101. High market concentration alone is therefore no sure indicator of collective dominance. 353. Today there are only two providers of substantial size in the Norwegian wholesale market for access and call origination on mobile networks: Telenor and NetCom. This means a very high level of concentration. With respect to the number of operators, the situation in the Norwegian mobile market has also been this way for a long time. There is little to indicate that this will change appreciably in the next two to three years. 354. Most of the other European countries have more providers, and Norway is one of the countries in the EU/EEA with the highest market concentration. 355. In principle, a market with just two operators is quite conducive to mutual tacit collusion. The high level of concentration in the Norwegian mobile market thus indicates that it may be conducive to collective dominance by Telenor and NetCom.

5.2.2 Similar market shares91 356. However, market concentration must be viewed in the context of the operators’ market shares. Relatively even market shares among the operators make tacit collusion and collective dominance more probable than where there are significant differences.92 357. The market for access and call origination on mobile networks is characterised by operators with unequal market shares. As shown in section 4.2.1, Telenor has a market share of just under 70 %, while NetCom has a market share of around 30 %. The big difference between Telenor’s and NetCom’s market shares may suggest that effective mutual competition is more likely than a situation of collective dominance. As the smallest operator, NetCom can have considerable incentive to capture shares from Telenor.

90 The criterion corresponds to “market concentration” in the Guidelines, paragraph 98. 91 The criterion corresponds to “similar market shares” in the Guidelines, paragraph 98. 92 The Guidelines, paragraph 98, Airtours1, paragraph 111, and Case M.1838 BT/Esat, paragraphs 10- 14.

71 Analysis of the market for access and call origination on public mobile telephone networks

358. In addition, by looking at developments over time, (cf., for example, Figure 2), it is furthermore clear that there has been a degree of competition since 1993 and that a steadily smaller difference in the market shares of Telenor and NetCom has evolved, even though the difference is still considerable. The growth curve has flattened, but the tendency is still that NetCom is slowly but surely consolidating its position. This suggests that mutual competition between the two has been, and will probably be considerable for both providers, and that tacit collusion is therefore less relevant. Nevertheless, the purchase of Chess will be able to even out some of the differences in the long term provided that a significant share of the customers is transferred to NetCom’s network. However, in the short and medium term, NPT believes that any reduced incentives for NetCom to fight for market share may be counteracted by the fact that Telenor may have the incentive to capture share back from NetCom.

5.2.3 Mature market93 359. It will be more difficult to enter and become established in mature markets, i.e. markets that are largely saturated with little probability of further expansion in the customer base and sales. This is related to the criterion barriers to expansion, in the review of criteria for single dominance (section 4.3.7). The fact that the market is mature may be a factor giving rise to tacit collusion in order to keep other operators out and prices up. In such cases collective dominance for the established operators can be likely. 360. The Norwegian mobile market, which previously was characterised by a high degree of growth in customers and traffic base, is currently experiencing a far flatter growth curve. Mobile density is up to about 104 %, cf. inter alia section 4.3.7. This is a very high number indicating fewer prospects for further expansion. From this perspective the market is mature. Any new providers will basically have to fight to win customers from the existing providers. The existing providers may attempt to maintain a stable profitability by, inter alia, keeping the price level up, which in turn is possible through tacit collusion. 361. Even so, it is true that the mobile networks are taking a steadily increasing share of the traffic from the fixed network. NetCom in particular may have much to gain here since they are not loosing fixed traffic. In addition, growth is expected from data and content services, which will also affect the opportunities for entering the market. The fact that other and new operators have purchased licences in both the GSM and UMTS networks indicates that the mobile market is still regarded as being an arena for competition and growth. 362. In regard to mobile density the market seems mature and conducive to tacit collusion. Expected development related, inter alia, to the transfer of traffic from the fixed network and growth in new services, nevertheless paints a more nuanced picture.

5.2.4 Lack of technical innovation/mature technology94 363. In markets where the technology is mature and cannot be characterised as innovation-driven, there is less opportunity for providers to differentiate themselves with respect to services and technology. On the other hand, in markets with a high level of technological innovation, there is more scope for product differentiation and

93 The criterion corresponds to “mature market” in the Guidelines, paragraph 98. 94 The criterion corresponds to “lack of technical innovation, mature technology” in the Guidelines, paragraph 98.

72 Analysis of the market for access and call origination on public mobile telephone networks competition along several product axes. In such markets it is thus more difficult to achieve tacit collusion on joint profit maximisation. In addition, newcomers will have an easier time of entering innovation-driven markets with new products, which gives less incentive to work together. Furthermore, the uncertainty that innovation creates regarding future market conditions will provide an incentive to compete for customers and market share today, in order to have a favourable starting point in the next market phase. 364. The technology necessary to produce mobile voice telephony must be characterised as mature and is unlikely in isolation to provide great opportunities for product differentiation. However, it is the mobile market as a whole rather than voice telephony in isolation that is significant for assessing this criterion. For example, the earnings new providers can expect to make from new services have a bearing on market entry. Moreover, it is to be expected that new mobile services will often be offered bundled with voice telephony. As such, the mobile market can be said to be innovation-driven to some degree. Even though the expectations regarding, for example, 3G technology and services, are lower today than 5 or 6 years ago, technological development will be able to set the tone for the market in the years to come. This applies, for example, to new services via UMTS and the opportunities and threats that, for example, mobile VoB represents for mobile providers. In NPT’s opinion, these technological developments may curb the existing providers’ incentive to engage in tacit collusion, including with respect to ordinary mobile voice telephony. 365. In NPT’s view, this criterion weighs against the existence of tacit collusion and collective dominance in the market.

5.2.5 Absence of excess capacity95 366. It will be easier to engage in anti-competitive conduct where there is only a limited degree of excess capacity for expansion. In such a situation, providers will have less opportunity and incentive to break out of the coordination by using their excess capacity, thereby achieving greater gains than what coordination can provide. 367. The Commission has pointed out that in the mobile sector, limited frequency resources could entail a risk of tacit collusion and collective dominance.96 Even though frequencies are available for mobile telephony in Norway, any expansion of the capacity in existing networks will be both time-consuming and associated with relatively large costs. The capacity situation in the GSM networks therefore indicates that the conditions are conducive to tacit collusion. 368. However, the changeover to UMTS networks implies access to increased capacity and opportunities for expansion in the period to come. Both Telenor and NetCom will have the opportunity to use more of their own capacity and offer more to their wholesale customers. On this basis, NPT believes that in the future, the market will not be characterised by limited capacity to the same degree. 369. All in all, NPT deems that this criterion does not provide any clear indications with respect to tacit collusion and collective dominance.

95 This criterion corresponds to “absence of excess capacity” in the Guidelines, paragraph 98. 96 Case No IV/M.1430 – Vodafone/Airtouch, paragraph 28.

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5.2.6 Transparency97 370. There will be more opportunities for tacit collusion and thus collective dominance in situations where operators in the market can relatively easily obtain detailed information about their competitors’ prices, customer relations etc. Transparency is a weighty argument in the assessment. 371. Refusals of access will normally be easily visible to both competitors and regulatory agencies. 372. With respect to price and other terms, both Telenor and NetCom are currently required to publicise both reference offers and reference agreements on access to networks and services, cf. Public Telecommunications Network and Services Regulations §§ 3-3, 3-5 and 4-3. These publication requirements mean that operators largely have relevant transparent information available. Moreover, further information can be obtained from marketing material the operators make available to the retail segment. The contract terms for residential customers are largely public. However, the value of this information is reduced by agreements on subsidising handsets, varying use of special services and discount agreements. In the case of large business customers in the retail market, the terms are, in addition, less transparent. 373. In the opposite situation, in which the transparency obligations in the wholesale market had lapsed for either one or both operators, the chances for tacit collusion could be reduced. Some of the transparency could disappear if NetCom is not regulated. Even so, the company can still publish price information, or Telenor Mobil will in many cases be able to provide the necessary information in other ways. 374. Besides statutory publishing of information and retail services, Telenor and NetCom will in any case be able to derive information about relevant services because of its extensive contact in different areas. Examples could be in connection with negotiating of interconnection agreements, meetings in common trade organisations and exchange of necessary technical information. 375. All in all, NPT believes that the Norwegian wholesale market for access and call origination on public mobile telephone networks is relatively transparent. This could be counteracted to a certain degree by ending or modifying the legal obligation to publish information.

5.2.7 Homogeneous products98 376. The more alike the products are, or at least seem to customers, the greater the possibilities are for both price competition and mutual monitoring among the operators. Both of these aspects can motivate tacit collusion. In the opposite case, competition in more differentiated product markets often focuses on several elements and axes of the product. In such markets it can be more difficult to sustain tacit collusion. The benefit of transparent contract terms declines correspondingly. 377. In the retail market, the situation is not clear with respect to the homogeneity of the products. On the one hand, the voice telephony product itself must be said to be relatively homogeneous. However, this product is bundled with a number of other products such as data services, camera phones etc. This means that providers today are

97 The criterion corresponds to “transparency” in the Guidelines, paragraph 98. 98 The criterion corresponds to “homogeneous product” in the Guidelines, paragraph 98.

74 Analysis of the market for access and call origination on public mobile telephone networks competing along more dimensions in the retail market, which would make it more difficult to sustain any tacit collusion. 378. The wholesale products that are publicly available from Telenor and NetCom are largely comparable. The two offer virtually the same products with respect to use and composition. The structure of the pricing is also relatively the same. The fact that a high degree of homogeneous products exists in this manner, indicates that the wholesale market is quite conducive to tacit collusion and, ultimately, to collective dominance. 379. Since the wholesale services are homogeneous to a certain degree, the conditions are conducive for tacit collusion and collective dominance.

5.2.8 Lack of countervailing buying power99 380. In markets where there are customers with strong negotiating positions, the providers will have less opportunity to act independently of their customers. Countervailing buying power therefore plays a crucial role in assessing whether someone has significant market power, regardless of whether single or collective dominance is involved. The assessment subject will then be whether Telenor’s and NetCom’s wholesale customers have a negotiating position by which they and their negotiating partner can exercise equal influence on the negotiations and their outcome. 381. As shown in section 4.4.5, there are several factors causing operators on the demand side to have limited negotiating strength, although it too cannot be underestimated. Should Telenor and NetCom enter into a partnership, the customers’ market strength could, however, be further reduced since the threat of switching to the other operator would be less disturbing for the two. Together, Telenor and NetCom can win by engaging in a partnership and acting in concert without risk of loss. A situation of limited countervailing buying power and two strong operators on the supply side accordingly suggest that collective dominance is possible. Seen in conjunction with the other elements for assessing significant market power, the criterion must nevertheless be deemed to be of limited significance.

5.2.9 Retaliatory mechanisms100 382. In this context retaliatory mechanisms are meant to prevent actions that go against tacit collusion. An example can be threats of tough price competition if one of the operators leaves the group. Threats of such “punishment” do not need to be explicit. The mechanisms must be of a nature that they would make it not very profitable for some of the relevant providers to withdraw from the joint maximisation of profits. 383. Mechanisms in the form of, for example, tough price competition to win customers to one’s own network requires, inter alia, that there is excess capacity in the network and that the customers are able to switch networks at relatively short notice. This applies to customers at the wholesale and retail levels. Generally speaking, however, it cannot be assumed that such conditions have been met. For example, the mobile networks have capacity limitations, and it can be both time-consuming and costly to get customers to switch networks.

99 The criterion corresponds to “lack of countervailing buying power” in the Guidelines, paragraph 98. 100 The criterion corresponds to “retaliatory mechanisms” in the Guidelines, paragraph 98.

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384. NPT sees that the market has retaliatory mechanisms that may serve to sustain any tacit collusion. However, the efficiency, for example, of strong price competition depends, inter alia, on operators having excess capacity to meet increased demand by reduced prices, and that it has not been too costly and time-consuming to win customers with the use of the retaliatory mechanism.

5.2.10 High barriers to entry101 385. Relevant entry barriers are described in detail in the assessment of single dominance. A key question regarding the existence of collective dominance is whether the presence of such entry barriers makes it profitable for the large operators in the market to engage in and sustain tacit collusion. 386. As shown in section 4.3, the entry barriers in the mobile market are relatively large. The obstacles are not absolute, but new operators will require large sunk costs to build themselves up. Economies of scale and vertical integration in Telenor and NetCom lend further support here. The fact that both operators already have nationwide mobile networks is a major competitive advantage in further expansion that new operators may have to struggle with for a long time. 387. On this basis, high barriers to entry can be said to be a factor that can keep other operators out of the market. This provides incentives for and is conducive to tacit collusion. Having said that, one must still bear in mind that various regulatory remedies can serve to reduce the entry barriers in the market. Among other things, access obligations such as co-location and national roaming will permit more operators should they be imposed on Telenor or NetCom, or both. This in turn can reduce the incentives for tacit collusion.

5.2.11 Lack of potential competition102 388. The lack of potential competition from other network operators will make it easier for Telenor and NetCom to maintain the benefits of tacit collusion. Among other things, this is due to the fact that the long-term benefits of coordination increase. Conversely, the threat of a new competitor could create turmoil and upset their relationship. The criterion must be viewed in connection with the corresponding criterion for assessing single dominance, see section 4.4.4. 389. As shown in section 4.3, the entry barriers in the mobile market are relatively high. At the same time new operators are in the process of getting established. Teletopia has entered into a national roaming agreement with Telenor and offers services in the retail market. The company “3” will be able to build up a new 3G network, and Nordisk Mobiltelefon AS will begin offering services via its CDMA network. However, there is a lot of uncertainty regarding the market position they will achieve in the years to come. 390. NPT believes that there is some potential for competition, but considers it very unlikely that there will be any significant effect of this over the course of the lifetime of the analysis. The criterion suggests that there are incentives for tacit collusion.

101 The criterion corresponds to “high barriers to entry” in the Guidelines, paragraph 98. 102 The criterion corresponds to “lack of potential competition” in the Guidelines, paragraph 98.

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5.2.12 Lack or reduced scope of price competition103 391. If competition in a market is to function efficiently, one would expect to see prices close to or moving toward actual cost. The risk of strong price competition and thin profit margins can lead to the operators preferring to engage in tacit collusion that both can profit from. Through such coordination they can keep prices up. Limited reduction of prices, or prices that match each other, can thus be indicators of tacit collusion. On the other hand, observed price changes must be interpreted carefully since there can be several other reasons for them. 392. Price developments in both the retail and wholesale market were covered in section 4.4.1. On the basis of the observed price changes, there is in NPT’s opinion a certain amount of competition between Telenor and NetCom, at both the retail and wholesale levels. Vis-à-vis end users, both companies operate, for example, with different subscription models, and they market themselves aggressively to customers. Wholesale prices have also fallen in recent years while at the same time service providers have achieved better margins. Nor have the changes occurred in parallel at both operators. Moreover, NPT has no concrete proof that joint price changes and the like have come in response to the establishment of new operators in the market. However, the changes we have seen in the wholesale market can be because Chess/Sense have been able to build up some bargaining power with its considerable customer base in both networks. It is probable that this dynamic will be reduced now that the company has been purchased by NetCom’s owners. 393. Although it has been pointed out in section 4.4.2 that it is difficult to make any certain pronouncements about the reasons for the price decline, it is NPT’s opinion that price developments clearly indicate that there is no tacit collusion between Telenor and NetCom. Moreover, providers in the retail market also compete in several other parameters, including subsidising of handsets, coverage, new data services and the like. The change in retail prices alone will therefore have limited significance with respect to collective dominance.

6 Assessment of significant market power and designation of provider(s) with significant market power

6.1 General - Significant Market Power

394. The assessment of significant market power builds on the Guidelines, section 3.1, and is based on the different criteria discussed in the market analysis in Chapters 4 and 5 above. In accordance with the Guidelines, paragraph 76, and with a starting point in the existing market conditions, NPT has based the assessment of significant market power on a two to three-year forward-looking market analysis. 395. The Electronic Communications Act, § 3-1, cf. Framework Directive, Article 14 (2), states that:

103 The criterion corresponds to “lack or reduced scope for price competition” in the Guidelines, paragraph 98.

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“A provider has significant market power when the provider individually or jointly with others has economic strength in a relevant market affording the provider the power to behave to an appreciable extent independently of competitors, customers and consumers.” 396. This provision designates the subject for assessing significant market power. For the sake of clarity NPT wishes to emphasise that it is significant market power that is the relevant subject of assessment and not anti-competitive misuse of significant market power. In assessing significant market power it is therefore not central whether any market power/dominance is actually misused or not. This does not however mean that a provider’s behaviour in the market is irrelevant to the assessment of significant market power. Even if structural factors carry the most weight in the assessment, behaviour that contributes to creating or maintaining competitive advantage for a provider who already has a dominant position in the market may imply a strengthening of this provider’s market power. 397. As stipulated in laws and directives a single operator may not have significant market power both alone (single dominance) or together with others (collective dominance) in the same market. In the vast majority of cases it will be natural to first assess whether single dominance exists. This is especially true in cases where high market share would indicate this. If the analysis concludes that no operator has single dominance in the market, the question of collective dominance will then be assessed. According to established European Court of Justice case law, significantly high market share, i.e. more than 50 %, is per se a strong indication of a dominant position, unless there are special reasons to deviate from this.104 As mentioned earlier there is a legal presumption that an undertaking has significant market power if there are high market shares and they have been stable over time.105

6.2 Assessment of single dominance

398. As a general rule, a provider is considered to have significant market power in a market if its market share is over 40-50 %. NPT deems the current providers in this market to be Telenor Mobil and NetCom. 399. NetCom has a market share at the wholesale level of just over 30 %. In principle, this is too low to indicate significant market power, particularly when there is another operator in the market with a substantially higher market share. NetCom has indeed increased its market share over time, but in NPT’s opinion it is nonetheless improbable that through competition over the next few years the market share will rise to a level indicating significant market power. NPT is also of the opinion that application of the relevant criteria in Chapter 4 fails to show other factors which can particularly indicate that NetCom alone has significant market power. NPT therefore finds that NetCom cannot be deemed to have sole significant market power in this market. 400. Telenor Mobil’s market share in the retail market is just under 60 %, while its market share as network operator (in “the upstream market”) is close to 70 %. Telenor Mobil’s market share is thus well above the level normally indicating significant market power. Telenor Mobil’s market shares have been trending downward for

104See the Guidelines, paragraph 75. 105See the Guidelines, paragraph 76.

78 Analysis of the market for access and call origination on public mobile telephone networks several years, but its reduction in market share as network operator must nevertheless be characterised as moderate. NPT places considerable emphasis on Telenor Mobil’s high market share in its assessment of the undertaking’s market power. For this reason there is also a legal presumption that Telenor has significant market power. 401. It would be very expensive to duplicate the networks of Telenor Mobil or NetCom, and therefore achieve comparable coverage without network access such as co-location, national roaming and/or other sharing of infrastructure. The fact that Telenor Mobil has mobile networks with very good coverage in Norway, indicates that the company has market power in the relevant market. 402. The market has relatively large entry barriers at the network level. The sunk costs of rolling out a mobile network of a certain size would be high, particularly so for building infrastructure in less densely populated areas. NPT finds that there are economies of scale inherent in network operations in Norway. Significant fixed costs for rolling out mobile networks in Norway together with a relatively small demand due to low population density and few inhabitants are likely to make these economies of scale substantial. NPT furthermore finds that Telenor Mobil has larger economies of scale than NetCom. Telenor Mobil also has larger economies of scope related to parts of the Group’s other operations. 403. Telenor is a main supplier of input factors to NetCom through its position as provider of leased lines. This is also likely to be the case for new network operators. 404. Mobile density is high in Norway, and it will therefore be considerably more difficult for new operators to acquire new customers than it was for Telenor and NetCom in the 1990s. There is still growth in terms of revenue, though the rate of this growth is now falling. However, growth in revenue through new services is expected, even though it is still uncertain how the new sources of income will affect the overall picture. Furthermore there is still considerable potential for increased voice telephony from the fixed network, but in this case such growth in income due to increased traffic is likely to be counteracted by reduced prices. 405. Frequency resources are currently available in Norway for both GSM and 3G. The limited interest shown at the last auctions of GSM and UTMS frequencies, along with the fact that two of the four UMTS licences that were offered in 2000 have been returned, may also indicate that substantial entry barriers exist at the network level in the mobile communications market. 406. Price levels and price developments alone do not provide any clear and certain picture of the competitive situation in the Norwegian market and the market power of the operators. However, price developments do provide some indication that there have been periods of relatively high intensity of competition between the existing operators in the retail market. However, neither Telenor nor NetCom have been price leaders in the retail market in recent years. Resellers and Tele2 have been leaders in pushing retail prices down. Other market activities, particularly increasing marketing and subsidising of handsets, indicate relatively strong competition at the retail level. However, in the last couple of years Telenor has managed to hold its position in the retail market with respect to market share. In any case, one cannot conclude on the basis of the competitive situation in the retail market that there is effective competition at the network level. 407. A main reason for the competition observed in the retail market is that there are relatively many operators with access to Telenor’s and NetCom’s mobile networks

79 Analysis of the market for access and call origination on public mobile telephone networks that offer services in the retail market. There are just under 20 resellers competing for end users. Furthermore, Tele2 has been a pro-active operator based on its MVNO agreement with Telenor. With respect to access for resellers, this has been regulated under the old rules, inter alia by an obligation of cost-oriented prices. However, in recent years there seems to have been some competition at the network level between Telenor and NetCom to attract resellers. Based on the few MVNO access and national roaming agreements that Telenor has signed, it can hardly be concluded that there is competition in the relevant market. With respect to the national roaming agreement that Teletopia has and the MVNO agreements that have been signed more recently, Telenor has been obliged to provide access. 408. Telenor Mobil’s very high market share on the network level and strong position in the retail market, the relatively high entry barriers at the network level and lack of competition for forms of access other than resale, indicate to a considerable degree that there is no effective competition between the existing providers in the market and that Telenor has significant market power. In NPT’s opinion, Telenor can largely act independently of NetCom, other competitors and end users. Telenor has managed to maintain a very high market share at the network level, despite increased intensity of competition in the retail market and movement in the customer base. 409. Because there are relatively high entry barriers on the network level in the Norwegian mobile market, NPT believes that potential competition will be limited, even though it exists. “3” has obtained a licence and will possibly build networks in Norway. Nordisk Mobiltelefoni is currently expanding its CDMA450 network, which is particularly aimed at users where the GSM/UMTS networks have no coverage. However, there is little to indicate that these providers represent any considerable potential competition and weaken the market power of the existing network operators. Potential competition is also affected by the degree of access to existing mobile networks and infrastructure through, for example, co-location and national roaming. 410. NPT does not expect the above factors to change significantly in the near future.

Conclusion 411. On the basis of the assessment of market shares alone, NPT believes that it is a presumption that Telenor alone has significant market power in the relevant market. Furthermore, this overall assessment of the criteria for single dominance clearly indicates that Telenor Mobil alone has the economic strength in the relevant market enabling it to act largely independently of NetCom and other competitors, customers and consumers. Its very high and relatively stable market share at the network level, its high, and in recent months relatively stable, market share at the retail level, considerable entry barriers at the network level and the Telenor Group’s strong position in most markets for electronic communication in Norway are particularly weighty factors in this assessment.

6.3 Assessment of collective dominance

412. As mentioned in section 5.1, the existence of single dominance rules out the possibility of ascertaining collective dominance.

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413. Although NPT has found a strong indication above that Telenor Mobil alone has significant market power alone, NPT will nevertheless briefly assess overall to what extent the Norwegian market for access and call origination on public mobile telephone networks can be said to have collective dominance. For example, the question can be asked whether a lack of effective competition at the wholesale level is because Telenor Mobil and NetCom together have dominance, and whether the analysis would have produced a different result if collective dominance had been assessed before single dominance. 414. The Guidelines lay down a two-part assessment in connection with the determination of collective dominance, cf. paragraph 93. First of all, it must be examined whether several operators together act as a collective unit vis-à-vis their competitors and customers. This is the case when competition is not taking place between the relevant parties and instead the operators adopt the same behaviour and strategy in the market. Not until the answer to this question is answered in the affirmative will the next stage be to assess whether the collective unit actually has a dominant position.106 This must be interpreted in light of the forward-looking nature of the analysis. 415. In Chapter 5 it was shown that different arguments suggest that mechanisms and structures in the market for access and call origination on mobile networks can be conducive to tacit collusion between Telenor Mobil and NetCom. It has been determined that factors such as high market concentration, relatively high entry barriers, little or absent potential competition and little market power on the demand side suggest the existence of opportunities and incentives for tacit collusion. 416. On the other hand, there are considerable imbalances in market share; the mobile market is innovation-driven and both Telenor Mobil and NetCom provide access at the wholesale level to external providers. Telenor Mobil and NetCom probably have greater incentive to compete against each other on price and position themselves in the market than to engage in tacit collusion. This is true of both the retail and wholesale levels. In NPT’s opinion, TeliaSonera’s purchase of Chess/Sense is furthermore also an indication that there is no tacit collusion in the market. 417. On the basis of the above assessments compared with guidance from European law and the Guidelines, NPT has not been able to find specific facts for making the case that tacit collusion is taking place between Telenor Mobil and NetCom, neither at the retail nor at the wholesale level. The fact that it cannot be sufficiently documented that tacit collusion is taking place, furthermore creates legal uncertainty that in itself weighs against a finding of collective dominance.

Conclusion 418. Provided that Telenor Mobil had not had a dominant position alone, it is also NPT’s view that no tacit collusion has taken place in the market. No operators together have collective dominance in the market for access and call origination on public mobile telephone networks.

106 Compagnie Maritime Belge, nos. 39 and 44.

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6.4 Conclusion

419. Based on the above, NPT has reached the conclusion that Telenor ASA alone has significant market power in the market for access and call origination on public mobile telephone networks (single dominance).

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Glossary

ARPU Average Revenue Per User

CPA Content Provider Access Access platform to the mobile network for content providers

CDMA Coded Division Multiple Access. An alternative mobile technology to GSM/UMTS.

DCS 1800 (GSM 1800) Digital Cellular System working at 1800 MHz

EDGE Enhanced Data rates for GSM Evolution Radio interface for GSM with large capacity for data.

GPRS General Packet Radio Service Packet switched mobile phone and data transfer service based on radio transfer. Capable of higher transmission capacity on the GSM network.

GSM Global System for Mobile Communications Common European digital mobile telephone system.

HSCSD High-Speed Circuit-Switched Data Further development of today’s GSM system, giving higher transmission capacity for data.

IMSI number International Mobile Subscriber Identity The SIM card’s unique number that is used in a mobile network to give each customer a unique identity, and to specify the card’s home network and nationality.

MHz Mega Hertz

MMS Multimedia Messaging Service “A new version” of SMS that makes it possible to send text, photos, sound and animations by mobile phone.

MNC Mobile Network Code

MVNO Mobile Virtual Network Operator Term for an operator without its own radio network, but who has all the technical systems necessary for interconnection and roaming with other network operators.

NMT Nordic Mobile Telephone The first automatic system for mobile telephony introduced

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in Norway

ONP Open Network Provision

Origination Interconnection service connecting the call from a subscriber connected to a supplier to the interconnection point of another provider. See also interconnection and termination.

Packet switching Networks on which the transmission capacity is used as a shared resource and data is sent in small logical units (packets) when the line is free. Each packet has a unique identification and its own recipient address. Thus it makes no difference which path the packet takes on its way to the recipient. Packets can also arrive in a different order from the one they were sent in but are finally reassembled in the correct order.

Roaming Term for agreements between operators of mobile networks regarding the use of each other’s networks.

Co-location Joint use of property in the form of premises, masts, cable routes etc., which are used or will be used for the placement of equipment for electronic communication.

Interconnection Function allowing the conveyance of traffic between providers such that end users can communicate with one another and have access to public electronic communications services independent of which provider they are connected to. See also interconnection and termination.

SIM card Subscriber Identity Module card

SMS Short Messaging Service A system for sending or receiving short text-based messages to or from mobile phones.

Termination Interconnection service which carries a call from an interconnection point between two providers to a customer connected to the provider on the receiving end. The service is used when a customer does not have direct access to the receiving subscriber through their operator, but completes the call through another operator’s access network. See also origination.

UMTS Universal Mobile Telecommunications System The name of a common European standard for a third generation mobile communication system.

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VoIP VoIP (Voice over IP) involves digitisation and compressing of voice calls to IP packages. These IP packages are transmitted via IP networks. The Session Initial Protocol (SIP) is used to find the correct addressee and set up and disconnect the actual call.

WAP Wireless Application Protocol

2G Second generation mobile network

3G Third generation mobile network

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