Analysis of the wholesale markets for LLU and broadband access

Transcription

1 Annex 1 Analysis of the wholesale markets for LLU and broadband access Revised and updated 11 January 2006

2 Analysis of the wholesale markets for broadband access Contents SUMMARY AND CONCLUSION BACKGROUND AND LEGAL FRAMEWORK FOR MARKET ANALYSES BACKGROUND Legal framework for the market analysis GENERAL MARKET DEFINITION The product market The geographic market Criteria for identifying divergent relevant product markets DEFINITION OF THE RELEVANT PRODUCT MARKETS OVERVIEW OF THE PREDEFINED PRODUCT MARKETS IN THE RECOMMENDATION DESCRIPTION OF THE NORWEGIAN BROADBAND MARKET The retail market The wholesale market for LLU The wholesale market for broadband access ASSESSMENT OF THE BOUNDARY BETWEEN THE LLU MARKET (MARKET 11) AND THE MARKET FOR WHOLESALE BROADBAND ACCESS (MARKET 12) THE RECOMMENDATION S ASSESSMENT OF ALTERNATIVE ACCESS NETWORKS DEFINITION OF THE MARKETS FOR LLU AND WHOLESALE BROADBAND ACCESS VS. THE MARKET FOR WHOLESALE TERMINATING SEGMENTS OF LEASED LINES (I.E. DEFINITION OF MARKETS 11 AND 12 VS. MARKET 13) Definition of the market for wholesale terminating segments of leased lines vs. the market for LLU (i.e. definition of Market 13 vs. Market 11) Definition of the market for wholesale terminating segments of leased lines vs. the market for wholesale broadband access (i.e. definition of Market 13 vs. Market 12) DEFINITION OF THE MARKET FOR WHOLESALE BROADBAND ACCESS VS. THE MARKET FOR WHOLESALE TRUNK SEGMENTS OF LEASED LINES (I.E. DEFINITION OF MARKET 12 VS. MARKET 14) DEFINITION OF THE MARKET FOR WHOLESALE BROADBAND ACCESS (MARKET 12) VS. SIMPLE RESALE SUMMARY DEFINITION OF THE RELEVANT PRODUCT MARKET DEFINITION OF THE RELEVANT GEOGRAPHIC MARKET ANALYSIS OF THE MARKET REVENUE AND MARKET SHARE ENTRY BARRIERS Control of infrastructure that is not easily duplicated POTENTIAL COMPETITION AND INNOVATION CONDITIONS ON THE DEMAND SIDE Market power/countervailing buying power ASSESSMENT OF SIGNIFICANT MARKET POWER AND DESIGNATION OF PROVIDER(S) WITH SIGNIFICANT MARKET POWER DEFINITION OF THE RELEVANT PRODUCT MARKET DEFINITION OF THE RELEVANT GEOGRAPHIC MARKET ANALYSIS OF THE MARKET REVENUE AND MARKET SHARE ENTRY BARRIERS Control of infrastructure that is not easily duplicated Sunk costs Economies of scale and scope Access to financial resources Access to distribution and sales channels

3 Analysis of the wholesale markets for broadband access Barriers to expansion Regulatory entry barriers POTENTIAL COMPETITION AND INNOVATION PROVIDER BEHAVIOUR Bundling of products/product differentiation Leverage of significant market power to closely related markets Price development CONDITIONS ON THE DEMAND SIDE Market power/countervailing buying power Customers freedom of choice and possible costs of switching/lock-in effects ASSESSMENT OF SIGNIFICANT MARKET POWER AND DESIGNATION OF PROVIDER(S) WITH SIGNIFICANT MARKET POWER

4 Analysis of the wholesale markets for broadband access Summary and conclusion This document contains the analyses that the Norwegian Post and Telecommunications Authority (NPT) has undertaken of the two relevant wholesale markets for broadband access (Markets 11 and 12). For practical reasons NPT has found it appropriate to coordinate the analyses of the two relevant markets in a joint document. The first two chapters of the document are common to both analyses. The market analyses will provide the basis for employing 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 analyses. In Chapter 2 the relevant product markets are assessed and defined on the basis of EFTA Surveillance Authority s (ESA) two predefined markets. Based on these assessments, NPT has concluded that there are no national circumstances indicating that, in Norway, relevant wholesale markets for broadband access should be defined differently from the predefined markets. In NPT s view, the relevant wholesale markets for broadband access in Norway will therefore include: 11. Wholesale unbundled access (including shared access) to metallic loops and sub-loops, for the purpose of providing broadband and voice services (also referred to as LLU) 12. Supply of wholesale broadband services including bit-stream access (also referred to as wholesale broadband access) Market 11 (the LLU market) is analysed in Chapters 3-6. Market 11 has been defined as limited to one particular access technology because the copper-based access network occupies a special position with respect to coverage. The first part of the market analysis provides a description of the relevant product market. This is followed by a geographic definition of the market. NPT has concluded that this relevant geographic market is national. Given the way in which this relevant market is defined and delineated, Telenor has virtually a 100 % market share. Furthermore PT has concluded that significant entry barriers exist in the LLU market. The market analysis concludes that Telenor has significant market power in the LLU market. Market 12 (the market for wholesale broadband access) is analysed in Chapters The first part of the market analysis provides a description of the relevant product market. This is followed by a geographic definition of the market. NPT has concluded that this relevant geographic market is national. Given the way in which the relevant market for wholesale broadband access is defined and delineated, Telenor has a market share of approximately 65 %. According to the 4

5 Analysis of the wholesale markets for broadband access Guidelines, paragraph 75, a market share in excess of 50 % is a clear indication of significant market power. Even though the market for wholesale broadband access does not have entry barriers as significant as those found in the LLU market and is also characterised by rapid technological development, NPT has determined after an overall assessment that these factors do not contribute to weakening Telenor s position in this relevant market to such a degree as to support a conclusion that Telenor does not have significant market power. The market analysis therefore concludes that Telenor has significant market power in the market for wholesale broadband access. 5

6 Analysis of the wholesale markets for broadband access 1 Background and legal framework for market analyses 1. This document contains the analyses that the Norwegian Post and Telecommunications Authority (NPT) has undertaken of the two relevant wholesale markets for broadband access (Markets 11 and 12). The market analyses were undertaken according to the current rules for electronic communication. Both the product markets and the geographical markets are defined, and the relevant markets analysed. The market analyses will provide the basis for employing sector-specific measures in the various markets in which an operator/operators with significant market power are identified. 2. The document has been circulated for comment, and the analyses express NPT s assessment of the situation in the relevant markets. 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 markets and the analyses of them are not fixed once and for all, but will be subject to regular review. Nevertheless in markets with frequent and comprehensive changes such reviews will of course have to be carried out within a reasonable time. These market analyses are therefore limited in the extent to which they are forward-looking, cf. the Guidelines, paragraph 20. See further details about the Guidelines below under Chapter Legal framework for market analysis. This analysis has a time horizon of two to three years. 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 The directives, which are relevant to the EEA, came into force with effect for Norway from 1 November when 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; 6

7 Analysis of the wholesale markets for broadband access The Universal Service Directive - Directive 2002/22/EC on universal service and users rights relating to electronic communications networks and services; 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. 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 Methodology Document), the work on the market analyses 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 31 March 2004, and NPT then received comments from BaneTele AS, Catch Communications AS, the Norwegian Competition Authority, NextGenTel AS, Song Networks AS, TDC Norge AS, Tele2 Norge AS, Telenor ASA and Tiscali AS. These comments entailed certain changes in the analyses. 9. In the period 1. July 2005 to 22 August 2005, a new national consultation was conducted on the market analysis along with the notification of decisions for the market. Subsequently the analyses have been updated 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 Act 2, which came into force on 25 July The Act s definition of significant market power is, in accordance with 3-1, as follows: A provider has significant market power when the provider alone or together with others has economic strength in a relevant market that means that the provider may act largely 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. 1 Metode for markedsanalyse (Methodology for Market Analysis) of 6. January 2005, prepared by NPT 2 The Electronic Communications Act, Ekomloven, is available at html 7

8 Analysis of the wholesale markets for broadband access 11. The term significant market power in the Electronic Communications Act 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 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 ) The documents are available on NPT s website under the menu selection SMP 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. 14. In accordance with the Electronic Communications Act 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 market. 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, alone or together with others, has significant market power. See more about this under General Market Definition, section The Methodology Document prepared by NPT 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 perceptions 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 Methodology Document 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 EEA competition law, NPT s assessments will be motivated by the requirement for general ex ante 3 EFTA Surveillance Authority Guidelines 14 July EFTA Surveillance Authority Recommendation 14 July 2004 with the Commission s Explanatory Memorandum 2003/311/EC. 8

9 Analysis of the wholesale markets for broadband access regulation, whilst the competition authorities assessments are as a rule ex post in connection with actual cases. The Competition Authority s and NPT s assessments in accordance with the two sets of rules may therefore differ even within the same or overlapping markets. 1.2 General Market Definition 17. As stated above, in regard to the market analyses, NPT must assess whether the predefined markets 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. A relevant product market comprises products or services (the terms are used interchangeably below without difference in meaning) that are sufficiently substitutable. The starting point for defining a relevant product market is an assessment of demand-side substitutability. However, substitutability may also exist on the supply side and may thus be relevant in the definition of the relevant market 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 small price change in the short term, can change their production or distribution and offer substitutable products without incurring significant additional costs or substantial risk The geographic market 21. 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. 22. 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. 23. Assessment of the relevant geographic market will be somewhat different according to 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 5 See the Guidelines, paragraph 40, and Explanatory Memorandum to the Recommendation, section

10 Analysis of the wholesale markets for broadband access 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 forwardlooking assessment (ex ante) must be based on completely different circumstances. This will therefore also characterise the scope of the assessment of the relevant geographic market. 24. 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 Criteria for identifying divergent relevant product markets 25. 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 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 Explanatory Memorandum 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 competition Ordinary competition law does not sufficiently address the objectives behind sector-specific regulation. 2 Definition of the relevant product markets 26. In the Recommendation, recital 10 states that the starting point for the identification and definition of relevant 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 wholesale markets, which are markets for demand for and supply of products that third parties wish to supply in the retail markets. This means that, in analysing the wholesale markets, NPT has also taken into account the associated retail markets. 6 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. chapter 19. This cannot be interpreted as antithetical, i.e. the presence of an operator with significant market power prevents the market from moving toward effective competition. Proposition no. 58 ( ) to the Odelsting 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 still believes that they will coincide for this purpose. 10

11 Analysis of the wholesale markets for broadband access 2.1 Overview of the predefined product markets in the Recommendation 27. In defining the market for LLU and the market for wholesale broadband access, the Recommendation based itself on the retail market for access to generic data services at fixed locations. The Recommendation points out that there are currently three commonly available forms of Internet access in the retail market: dialup service, broadband access (via xdsl, cable modem or equivalents) or dedicated access (transmission capacity) In the case of dial-up Internet access, it is deemed in the Recommendation that this product technically comprises a separate market from the retail market for broadband access, basically because dial-up Internet access is not a substitute for an end user who needs a broadband connection. 8 The uploading and downloading speed of dial-up Internet access is too slow to be able to transmit broadband services reliant on high capacity. The Recommendation defines broadband service as a service allowing downstream capacity to end users in excess of 128 kbits/sec It follows from the Recommendation that dedicated capacity (including leased lines) is not a part of the retail market for broadband access According to the Recommendation the three forms of Internet access constitute different retail markets. Only the retail market for broadband access is regarded as potentially part of the basis of the related wholesale markets for broadband access. 31. ESA has defined the following related wholesale markets for the retail market for broadband access: 11. Wholesale unbundled access (including shared access) to metallic loops and sub-loops, for the purpose of providing broadband and voice services. 12. Wholesale Broadband Access. 32. The Norwegian designation for market 11 is: Full og delt tilgang til det faste aksessnettet for levering av bredbånds- og telefontjenester (hereinafter also called LLU ( local loop unbundling )). In the Recommendation, the market for LLU is specifically defined as a particular access technology: copper-based access. One of the reasons for this is that other access technologies are currently insufficiently developed or widespread. Consequently, the only commonly available option for delivering broadband services to the retail market is to utilise the existing copper access network. Furthermore, the Recommendation points out that the inclusion of LLU in the list of relevant markets is also a legal necessity due to the fact that the list of markets shall be drawn up in compliance with Annex 1 of the Framework Directive The Norwegian designation for Market 12 is: Tilgang for levering av bredbånds-tjenester, herunder bitstrømstilgang (hereinafter called wholesale broadband access). The market for wholesale broadband access includes bit-stream access produced over the fixed copper access network, but is nevertheless not limited to a particular technology. According to the Explanatory Memorandum of the 7 Explanatory Memorandum of the Recommendation, page 21, final paragraph. 8 Explanatory Memorandum of the Recommendation, page 22, third paragraph. 9 Explanatory Memorandum of the Recommendation, page 21, footnote Explanatory Memorandum of the Recommendation, page 24, first and second paragraphs. 11 Explanatory Memorandum to the Recommendation, page 25, second paragraph, first sentence. 11

12 Analysis of the wholesale markets for broadband access Recommendation, other access technologies will also be relevant when and if facilities equivalent to bit-stream access are offered on these technological platforms. 12 The Recommendation defines bit-stream access as a service that depends in part on the copper access network, and may also include other networks such as ATM networks. 13 The Recommendation defines the market for wholesale broadband access as not including simple resale. The justification is that simple resale is not considered sufficient to meet the needs of the broadband access market Description of the Norwegian broadband market The retail market 34. The LLU market and the relevant market for broadband access are two wholesale markets with the same associated retail market. On this basis, NPT has chosen to give a joint description of the retail market for these two wholesale markets. 35. At the end of the 1990s there was little talk of a separate market for broadband access. Internet access in the residential market at that time was mainly based on dialup access (ISDN/PSTN), whereas in the business market it was a combination of dialup access and fixed access in the form of leased lines or similar. As an example, at the end of 2000, NPT had received reports of just under xdsl accesses sold from providers in the market. 36. Since that time the broadband market has grown rapidly, and according to figures NPT has obtained from the operators in the market, approximately broadband accesses had been established in Norway at the end of Approximately of these were based on the copper-based access network (xdsl). Broadband accesses via cable TV networks totalled approx , while the remainder numbering approximately consisted mainly of fibre or radio loops. 37. There are many different products and product packages in the broadband access market. Most of the xdsl operators in the residential market offer 4-5 different variants of ADSL at different monthly rates. The price differences are primarily due to different speeds and different degrees of additional services included in the product package. Some of the ADSL products contain restrictions with regard to usage per month, but most are now based on the principle of unlimited usage. 38. Some of the locally/regionally based broadband providers in the residential market offer product packages that in addition to high-speed Internet access also include TV services and broadband telephony, so-called triple play solutions. Broadband providers who offer such product packages generally utilise fully or partly fibre-based access networks. 39. The business market for broadband access also has a number of different product packages covering different customer needs. Different variations of SHDSL are offered in addition to ADSL products. Whereas the ADSL products provide socalled asymmetric transmission capacity, i.e. higher speed into the broadband customer (downstream speed) than out from the broadband customer (upstream speed), SHDSL offers the same speed both ways (symmetric transmission capacity). 12 Explanatory Memorandum to the Recommendation, page 24, fourth paragraph, second sentence. 13 Explanatory Memorandum of the Recommendation, page 24, footnote Explanatory Memorandum to the Recommendation, page 25, first paragraph, second sentence. 12

13 Analysis of the wholesale markets for broadband access 40. In addition to different speed classes, the product packages in the business market are distinct from each other with regard to application areas. For example, some of the product packages and solutions are adapted to small businesses with a large need for bandwidth, others are more suitable for businesses with several branch offices, whilst still others are specially adapted businesses that want to establish closed networks between home offices and the workplace. 41. Figures 1 and 2 provide an overview of market share in the retail market for broadband access, based on volume (i.e. number of broadband accesses) and revenue respectively. Market share in the retail market (based on volume/number of accesses) 60 % 50 % 40 % 30 % 20 % 10 % 0 % 52 % 14 % 7 % 5 % 4 % 3 % 2 % 13 % Telenor NextGenTel UPC Tele2 Bluecom Tiscali Catch Andre Figure 1: Market share in the retail market, based on volume. (Source: NPT s telecom statistics based on reported figures for 2004 from the operators in the market) 42. Figure 1 shows that Telenor has just over a 50 % market share in the retail market if the number of broadband accesses sold is used as the basis for the calculation of market share. The group Other consists of more than 110 operators, of which many have registered with the NPT in the last couple of years. NPT has elected to include the market shares for BlueCom and Tiscali in the table, even though the companies were purchased by Catch 15 and Telenor, respectively, in NPT s telecom statistics for the first half of 2005 shows that Telenor s market share, based on volume, has risen to approximately 54 %. However, this share includes Tiscali, which is incorporated into Telenor s figures in For the remaining operators there are relatively small changes in the shares for the first half of 2005 compared to the shares for 2004 as a whole as shown in figure Catch was bought by Ventelo in the second half of

14 Analysis of the wholesale markets for broadband access Market share in the retail market (based on revenue) 50 % 45 % 40 % 35 % 30 % 25 % 20 % 15 % 10 % 5 % 0 % 44 % 16 % 5 % 5 % 5 % 3 % 2 % 20 % Telenor NextGenTel UPC Tele2 Bluecom Tiscali Catch Andre Figure 2: Market share in the retail market, based on revenue (Source: NPT s telecom statistics based on reported figures for 2004 from the operators in the market) 44. Figure 2 shows that Telenor would have a smaller market share (44 %) if revenue is used as the basis for the calculation of market share. Among other things, this is because Telenor offers broadband access in both the residential and business markets, which means that Telenor s revenue per broadband access is a weighted average of residential and business rates. Since the average price for xdsl accesses is significantly higher in the business market than in the residential market, and there are broadband operators who primarily focus on the business market, their market share will increase at the expense of operators who also supply the residential market when revenue is used instead of volume as the basis for the assessment of market share. 45. NPT s telecom statistics for the first half of 2005 shows that Telenor s market share, based on volume, has risen to approximately 47 %. However, this share includes Tiscali, which is incorporated into Telenor s figures in For the remaining operators there are relatively small changes in the shares for the first half of 2005 compared to the shares for 2004 as a whole as shown in figure For the record, NPT wishes to emphasise that while the entire sales of broadband operators offering triple play product packages have been included in the calculation basis for Figure 2, the TV revenue of cable TV providers is not included. This is assumed to be one of the reasons why Other (i.e. operators with less than 1 % market share) has a higher overall market share in Figure 2 than in Figure 1. From the business market-focused operators, only revenue reported to NPT as Internet via broadband access is included in the calculation basis The wholesale market for LLU 47. Telenor was obliged to offer LLU as a result of the LLU Regulation adopted by the EU on 18 December The LLU Regulation was implemented in Norwegian law through amendments of the Public Telecommunications Networks and Services Regulations of 6 February Telenor s LLU offering is known as Operatøraksess. The schematic diagram in Figure 3 is taken from Telenor s Operatøraksess product sheet and shows what the LLU 14

15 Analysis of the wholesale markets for broadband access service includes. The Operatøraksess product is offered together with the co-location product Telelosji. Figure 3: Schematic diagram Operatøraksess (LLU) (Source: Telenor) 48. Figure 4 provides an overview of the different product types and product variants of Operatøraksess (LLU) offered by Telenor. Figure 4: Product types and product variants of Operatøraksess (LLU) (Source: Telenor) 49. The price for Operatøraksess (LLU) has been subject to the obligation of costorientation since 6 February Up to now, current cost has been used as the 15

16 Analysis of the wholesale markets for broadband access calculation principle for the obligation of cost-orientation with regard to Operatøraksess (LLU) The wholesale market for broadband access 50. In advance of Report No. 24 ( ) to the Storting Regarding certain regulatory issues in the telecom sector, Telenor proposed bit-stream access as an alternative to LLU. As a result, the Report did not include directives on LLU, but supported instead Telenor s bid to produce a bit-stream product, which was referred to in the Report as fixed access. 51. The obligation for providers with significant market power to provide bitstream access was implemented by amendment of the Public Telecommunications Networks and Services Regulations on 6 February Pursuant to the Regulations, 3-2a, first paragraph, such access must be given on non-discriminatory terms. The bit-stream product has not been subject to price regulation. 52. Telenor currently offers the bit-stream products Jara ADSL and Jara SHDSL, hereinafter referred to as DSL accesses, which are included in Telenor s broadband portfolio at the wholesale level. In addition, the portfolio also includes the BAP Connect, IP Connect DSL and IP Total DSL products. 53. Telenor s DSL accesses are defined between the interface for end user (NTP) and interface for broadband access points (BAP) on Telenor s network, cf. Figure 5. A BAP is an ATM switch, but can also be an IP router. 54. The wholesale customer can choose to retrieve traffic on the BAP to which the end customer in question is connected, or it can choose to retrieve traffic on another point with the aid of the BAP Connect, IP Connect DSL or IP Total DSL products. They can be used for transport between BAP and the wholesale customer s connection point. Figure 5: Reference figure for Telenor s product Jara ADSL/ADSL Access (Source: Telenor). 55. Telenor offers Jara ADSL in the form of three so-called profiles (ADSL Proff, ADSL Premium and ADSL Basis). The individual wholesale customer must choose one of these profiles. Each of the three profiles contains four different capacities that the wholesale customer can supply in the retail market. 56. Based on the information NPT has received from the operators in the broadband market, no one other than Telenor has until recently sold wholesale products in this market to any particular extent, cf. section 9.1. For this reason, this 16

17 Analysis of the wholesale markets for broadband access description of the existing wholesale market for broadband access services is limited to the above description of Telenor s offering. 2.3 Assessment of the boundary between the LLU market (Market 11) and the market for wholesale broadband access (Market 12) 57. Technically, the difference between LLU and wholesale broadband access is related to where the broadband access interface is located on the network and which network elements the wholesale customer installs and operates. When purchasing LLU the wholesale customer only receives access to the paired cable between a subscriber exchange and the end user and must install and operate important network elements itself in the subscriber exchanges (including a DSLAM - Digital Subscriber Line Access Multiplexer) in order to produce broadband services offered in the retail market. A DSLAM is a unit that aggregates several digital subscriber lines and makes it possible for a large number of data streams to share a common data connection further down the network. 58. Wholesale broadband access in the form of bit-stream access is characterised by the use of unique subscriber lines where a separate connection of a specific quality can be set up from the subscriber to an access point (known in Telenor s network as a Broadband Access Point (BAP)), at which the bit stream access is handed over to the wholesale customer. The bit-stream product currently offered by Telenor means that Telenor conveys traffic over the copper line, installs and operates the necessary xdsl equipment, and ensures transmission up to the BAP. 59. Wholesale broadband access enables an operator to offer broadband access services in the retail market without making a major investment in its own infrastructure. Consequently, the investment risk is lower than with the purchase of LLU. However, since wholesale broadband access means that the wholesale customer does not place its own DSLAMs in the subscriber exchanges, the wholesale customer s flexibility will be limited compared with an operator basing its operations on LLU. By purchasing LLU the wholesale customer can influence the quality of the broadband services through capacity (speed, concentration factor etc.) and supplementary services. The operators basing their operations on wholesale broadband access do not have comparable flexibility and are more bound by the wholesale provider s product. 16 In addition, wholesale customers that solely base their operations on the purchase of broadband access cannot offer services outside the coverage area to which the wholesale provider has chosen to extend services at any given time. 60. In the Recommendation, the LLU market is separated from the general market for wholesale broadband access. The definition of the LLU market differs from the definition of the market for wholesale broadband access in two respects: one, that the LLU market is specifically limited to a particular technology, and two, that the access interface is precisely specified. However, it is NPT s view that it is not certain that these markets would be regarded as being two separate markets if assessments of substitutability alone had served as the basis. 16 As opposed to simple resale, wholesale broadband access does nevertheless provide the buyer with an opportunity to supply valued added services to the end customer. 17

18 Analysis of the wholesale markets for broadband access 61. Some factors do indeed suggest that there is a limited degree of substitutability between these two products. The possibility of differentiating the retail product from the wholesale product and differences in investment risk are two examples of the above. However, NPT has noted that some wholesale customers switch from purchasing broadband access to purchasing LLU as their customer base grows. This may indicate that these two products are to a certain extent perceived as substitutes by some wholesale customers. In addition, the difference in investment risk between wholesale broadband access and LLU (which affects the degree of substitutability) will also depend on how these products are regulated in the future. For example, stricter price controls on LLU will make it more attractive for some wholesale customers to switch from wholesale broadband access to LLU. Similarly, price controls on wholesale broadband access provided that LLU regulation does not change could make it more attractive to purchase wholesale broadband access rather than LLU. 62. Following an overall assessment, NPT has found no grounds to deviate from the ESA s two predefined wholesale markets for broadband access. Like ESA, NPT has placed relatively great emphasis on the legal guidelines following from Annex 1 of the Framework Directive. However, NPT finds reason to point out that it would probably be appropriate to reassess the distinction between these two relevant wholesale markets the next time NPT carries out similar market analyses. 2.4 The Recommendation s assessment of alternative access networks 63. ESA has defined the market for LLU as limited to one particular access technology. NPT noted above that it is not obvious that LLU and wholesale broadband access comprise two distinct wholesale markets. Nor in NPT s opinion is it likewise certain that access products based on other access technologies would have been separated from the LLU market if substitutability were the sole assessment factor. 64. However, NPT shares the ESA s view that the copper-based access network occupies a special position with respect to coverage. It is therefore deemed correct to exclude access technologies such as radio and fibre from the market for LLU since the coverage of access networks based on these access technologies is still rather limited. The coverage of upgraded cable TV systems has historically been somewhat wider and can therefore be said to be distinct from the other alternative access technologies. However, the increase in the number of end users of broadband services via cable TV systems has been relatively lower in recent years compared to the increase in the number of end users of broadband services via fibre loops. 65. NPT is of the opinion that access products comparable to LLU delivered via cable TV systems do not represent a real substitute for copper-based LLU. This is primarily due to the fact that such a form of access via cable TV systems is expected to entail very high investment costs resulting from the cable TV systems original structure. The local loops in cable TV systems are generally much shorter than the local loops in the fixed access network. Access comparable to LLU on cable TV systems will therefore entail more establishments with few loops in each site. This will mean high investment costs. 18

19 Analysis of the wholesale markets for broadband access 66. On this basis, NPT has found no reason to deviate from the Recommendation s definition of the market for LLU. In this connection, NPT has placed considerable emphasis on the legal guidelines following from Annex 1 of the Framework Directive. 67. In contrast to the LLU market, the market for wholesale broadband access was given a technology-neutral definition. Even so, the Recommendation has not identified broadband access products other than bit-stream access produced over the fixed copper-based access network. 68. Telenor is virtually alone in selling wholesale broadband access to external wholesale customers today. However, in NPT s assessment, defining relevant product markets at the wholesale level should not only take into account existing external wholesale sales. To assess at the wholesale level the real competitive effect of vertically integrated companies own use of input factors in the production of retail services, internal sales, or internal use, of broadband access products supplied through various access technologies and on various interfaces, should also be included in the relevant wholesale market. In NPT s opinion, operators that base their production of broadband access services for the retail market on LLU should in principle in this context be given equal status with vertically integrated access network owners. 69. The precondition for broadening the market for wholesale broadband access to also include broadband access products other than Telenor s bit-stream access is the existence of a form of internal sales, or internal use, of broadband access products between actual or hypothetical wholesale and marketing divisions of fibre, radio and cable TV access network owners. NPT is aware that for the majority of these access network owners it is not possible to identify actual internal wholesale products with an interface comparable to bit-stream access. The assessment of whether broadband access products are used internally must therefore be based on whether it is possible to offer an external broadband access product through the relevant access technologies which consequently could constitute a substitute for Telenor s bit-stream access. 70. In NPT s view it will be technically possible to also offer products similar to bit-stream through access networks other than the copper-based one, where the wholesale customer gains access to the traffic stream from the retail customers at a suitable access point. The cost of offering such access on different types of access networks will likely vary somewhat based on the topology and technical configuration of the different networks, a factor that may affect the degree of substitutability. 71. As defined, the relevant market for wholesale broadband access is distinct from the LLU market because the access interface is not unambiguously defined. It is clear from ESA s definition of this market that wholesale broadband access may also contain an element of conveyance. 17 In other words, access in the form of wholesale broadband access need not necessarily be provided at the same level in the various access networks, but can be adapted to the individual network s structure and configuration. This means that the market for wholesale broadband access is not limited only to Telenor s bit-stream products. 72. On this basis, it is assumed in this analysis that any sale of broadband access services in the retail market, irrespective of underlying access technology, is matched by an external or internal sale, or use, of broadband access at the wholesale level. 17 Explanatory Memorandum of the Recommendation, page 24, footnote

20 Analysis of the wholesale markets for broadband access 2.5 Definition of the markets for LLU and wholesale broadband access vs. the market for wholesale terminating segments of leased lines (i.e. definition of Markets 11 and 12 vs. Market 13) 73. Providers who wish to deliver access products to end users and lack their own access network, face in principle a choice between building their own access network or purchasing one of several access products in the wholesale market. In practice, the choice of access products is between LLU, wholesale broadband access or wholesale terminating segments of leased lines. These three product areas entail different degrees of additional processing. The choice of access product will depend on which retail product the wholesale customer wishes to offer. In addition, this choice will determine the other investments the wholesale customer must make to be able to offer an adequate retail product. LLU can be said to be a stripped down version of wholesale broadband access, where the wholesale customer only receives access to the paired cable between a subscriber exchange and the end user. LLU therefore requires greater investment by the wholesale customer. Wholesale broadband access means that in addition to the paired cable, the wholesale customer gains access to xdsl equipment and in some cases transmission up to a Broadband Access Point (BAP). Unlike wholesale broadband access, transmission capacity services (for example a leased line) provide guaranteed bandwidth in both directions and a generally higher quality of service. 74. On the basis of the above, NPT has assessed the separation between Market 13 (wholesale terminating segments of leased lines) and Market 11 (LLU) and Market 12 (wholesale broadband access), respectively. In this connection NPT has also assessed whether it will be appropriate to combine Market 13 with all or parts of Markets 11 and 12 to form a single relevant market Definition of the market for wholesale terminating segments of leased lines vs. the market for LLU (i.e. definition of Market 13 vs. Market 11) 75. End users desiring connection to the Internet can in practice choose between ISDN/PSTN (mostly the residential market), xdsl (residential and business markets) or transmission capacity/leased lines (exclusively the business market). For business customers the choice between leased lines and an xdsl product will be a question of price and functionality. There is reason to believe that a small, lasting price increase for leased lines will cause some business customers to want to connect to the Internet using an xdsl product instead of via a leased line. At the retail level there is therefore reason to believe that leased lines and xdsl are regarded as substitutes, and can thus be said to be in the same relevant market. 76. It can be derived from the above that there will also be a certain degree of demand-side substitutability in the wholesale market between wholesale terminating segments of leased lines and the wholesale products used as input factors for offering xdsl products in the retail market, namely wholesale broadband access and LLU. However, it is NPT s view that other factors weigh against such substitutability in the wholesale market and thus opposes the idea that wholesale terminating segments of leased lines on the one hand and wholesale broadband access and LLU on the other can belong to the same relevant market. 20