Cable Europe contribution to the public consultation on the draft review of the BEREC Common Position on geographical aspects of market analysis

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1 Cable Europe contribution to the public consultation on the draft review of the BEREC Common Position on geographical aspects of market analysis 10 February 2014 Executive Summary Cable Europe believes that the best option will always be to maintain a broad geographic market definition for a variety of reasons. In a broad geographic market it always remains open to NRAs to adjust the remedies imposed in different geographic regions. The conditions of competition in a geographic area can change quickly either because the NRA initially made an error or because the market evolved faster than expected or did not evolve as expected, remedies will need to be able to adapt to those needs in a speedy manner. The process of geographically segmenting the market and making separate notifications is a lengthy procedure and does not lend itself to reacting quickly to changed circumstances. If an NRA chooses to vary remedies within a broader geographic market they retain that ability to change remedies rapidly when appropriate. A regulatory regime that segments markets geographically therefore runs a far greater risk of regulatory failure than one which chooses to adjust remedies within a broadly defined geographic market. There are significant risks that arise from an extensive use of geographically segmented markets to isolate competitive and non-competitive areas that are understated in BEREC s analysis. By setting a national market and keeping an obligation to provide average wholesale access prices on incumbents, NRAs are ensuring that even locally limited competitive pressures brought about by cable network operators and other altnets are uniformly transmitted across the whole market thereby giving scope in the market for the benefits of competition to be available for all and for regulation to be removed. Competition that exists or potentially exists in more than 50% of the market, it is likely to move 100% of the market thereby bringing the benefits of competition to the rural consumers who are unlikely to have significant offers from alternative operators. Therefore if urban based competition drives prices down then rural based consumers will still enjoy the benefits of that competition. If price deaveraging is allowed (and even encouraged via segmented market analysis) and markets become geographically segmented as a result, then the effects of urban based competition will not be felt in rural areas. Section (6.5) dealing with pricing in BEREC s report seems to suggest that an average price between the competitive urban and uncompetitive non-urban is likely to be set. This is unlikely since it would not serve to meet the market where it needs to (in the urban area) while representing an unprompted discount where it is not needed (the non-urban). The most likely outcome with national pricing is 1

2 that either (a) the competitive area is sufficiently large such that competition is met or (b) that the competitive area can be ceded in order to maintain rents in the non-competitive areas. In the unlikely event that the conditions of competition are so different that NRAs feel compelled to adjust their interventions, then Cable Europe believes that the best option will always be to maintain a broad geographic market definition and to adjust the remedies imposed. BEREC should seek to ensure that strong regional competition can benefit the national market through the use of national markets. Against a background where the broadband product markets are currently under review, it is the principles and the approaches that are applied that will be critical to ensuring an appropriate analysis of the market. Any micro-market approach to market analysis would create enormous administrative burdens for NRAs for a variety of reasons. First, data is not likely to be available and will require additional surveys and data generation. Second, market boundaries in this sector are unlikely to be stable. The suggestion that narrow geographic markets are somehow emerging suggests in itself a degree of instability that is difficult to ignore. While the pace at which NGA is being deployed is impressive, what is less impressive is NGA s ability to differentiate itself by means of product offerings and by corollary by way of pricing. Most NGA developments outside of the much more advanced cable networks have been in vdsl or FTTC technologies. Yet alternative operators remain on copper based ULL since their product offerings and those delivered over this improved copper network are broadly comparable in consumer s eyes leading to little price differentiation. In practice therefore, very little is happening in the market from a pricing or competitive position. It may be that this will change over time but it cannot be presumed. Another factor that must be considered is that even for these new networks the geographic scope of these new access products will fall exactly in line with existing access products since there will be a considerable overlap with existing infrastructure. For the most part the same technical inputs will continue to be used by access seekers. In practice therefore, technology by itself will not imply a changed market scope and it would be wrong to presume such an outcome. An approach that focuses on a geographic sub-national market analysis risks missing some broader effects on the market analysis. Wholesale access products are normally delivered on a geographically averaged price which allows operators to deliver products across the geography at the same price to end users. According to the memorandum accompanying the Recommendation on relevant markets, The practice of the Commission is that retail price variations are normally indicative of different geographic markets. If there is no evidence of geographically differentiated prices, according to the Commission there is no indication of different geographic markets. In fact, pushing for more geographically segmented markets would likely lead to differentiated prices, thus risking to become a self-fulfilling prophesy. 2

3 It must be borne in mind that by setting a national market and keeping an obligation to provide average wholesale access prices on incumbents, NRAs would be simultaneously achieving two pro-competitive effects: avoiding geographically segmented predatory strategies by the incumbent and ensuring that even locally limited competitive pressures brought about by cable operators and other altnets are uniformly transmitted across the whole market thereby giving scope in the market for the benefits of competition to be available for all and for regulation to be removed. Cable Europe agrees that the key aspects that need to be considered in any new market analysis are the impacts of technology change in the levels of retail competition and how best this might be dealt with. There remain alternative approaches to dealing with situations of competition that vary between areas or regions and there are a number of advantages to an approach which does not involve the examination of atomised geographical markets. NRAs can modulate remedies and access prices as a function of competitive conditions in certain geographic areas, which will allow them to apply less intense remedies in more competitive areas and will give a push to investment in less densely populated areas (by admitting a risk premium for investments in such areas). By tweaking remedies, NRAs can act quickly which they cannot in segmented markets. It should be made clear that NRAs expect to continue to delineate geographic markets in accordance with competition law practice. Any regional variation in the intensity of competition owing to the presence of cable networks is best addressed through the variation of remedies where it is appropriate. Cable Europe is concerned that too much emphasis is placed on the number of retail players and the coverage of services in advance of the price differences in BEREC s analysis. In the absence of clearly defined successors to markets 4 and 5, then the principles of assessment become even more important. In particular section IV (b) of BEREC s report has a questionable interpretation of the role of uniform pricing in the market. For instance, the notion that an SMP operator with common pricing might be operating in different areas on the basis that different competitors to that SMP operators are putting different pricing in different regions is both unorthodox and unsupported by practice. It is as if the basic tenet of the SMP process is being set aside since the proposed focus of the analysis in such an approach is not the dominant entity and its behaviour but the behaviour of alternative, competing operators. The primary focus of any market analysis must be the potentially dominant entity and its behaviour over the territory. Once the product set is identified, the sequencing of the analysis is normally to consider if there is a dominant entity and over what geographic area is that entity dominant or is its behaviour constrain in some areas but not in others. If that entity behaves exactly the same way in one region as in another, then it is that common constraint that the dominant entity perceives or does not perceive in this example that delineates the market. It is not the behaviour of a set of regional competitors that it can, and does ignore in this example. 3

4 BEREC is correct that the greater the importance of LLU in the market, the greater the role of the local exchange/main distribution frame (MDF) of the operator with significant market power (SMP) for the purposes of geographical segmentation. BEREC is also correct that the objective of the analysis must be to identify that area where there is no effective competition in order that remedies can be imposed to constrain or where possible, eliminate, the SMP. However, there is a danger that there is too much emphasis being placed on the transition to NGA and the manner in which this is likely to impact on geographical market definition rather than actual practice in the market. BEREC should clarify the pre-eminence of behaviour as manifested in pricing in the assessment of Geographic assessments and put their Common Position in line with Commission Practice to date. One of the drivers, indeed the principle driver of the current review is the widespread deployment of a range of new technologies. The telecoms sector has been, and continues to be, subject to significant technological changes both in direct technology terms, service delivery terms and even the modalities of technology deployment and distribution. The basic point is that the sector is dynamic and even if markets boundaries (both product and/or geographical) are legitimately subject to changed scope, any new boundary cannot be judged to be permanent or even stable. In such a context it is important to retain the capacity to adjust by extending and contracting the scope of remedies without the need to engage in a full market analysis which is lengthy and restrictive in the context of shifting market boundaries. Additionally it can be observed that certain remedies are inherently national in their scope (for example accounting separation) while certain pricing schemes (for example retail-minus) schemes could be subject to extensive manipulation in a readily segmented market. BEREC should clarify that even in the presence of significant variation in competitive conditions, their preference is for flexibility in the application of remedies as the best option to allow a rapid response to changing market conditions. Finally, while Cable Europe agree that it is timely for BEREC to consider the issue of geographic market definition given the technology changes that are underway, the existing regulatory framework is based on competition law principles and thresholds, and no change to this basis has been proposed in recent legislation. Therefore the existing decisional and competition law practice remains the relevant framework in which to consider geographic market definition. BEREC should also consider whether this Common Position ought to be delayed so as to consider fully the final delineations of product market boundaries in the forthcoming Recommendation on Relevant Markets and base any guidance in the new market context. 4

5 1.1. Introduction The application of competition law principles and established case law dictate that a relevant geographic market comprises an area in which the undertakings concerned are involved in the supply and demand of the relevant products or services, in which area the conditions of competition are similar or sufficiently homogeneous and which can be distinguished from neighbouring areas in which the prevailing conditions of competition are appreciably different. Article 15(3) of Directive 2002/21/EC makes clear that national regulatory authorities have particular competence to define the relevant geographic markets within their territory. As always this happens in accordance with competition law and taking utmost account of the Recommendation on relevant markets. There are two relevant sources of guidance from the Commission in relation to setting the scope of geographic markets from Competition Policy and existing exante regulatory guidance. The European Commission advises that its working hypothesis in applying Article 102 of the Treaty on the Functioning of the European Union ( TFEU ) is that areas where similar market shares persist and similar pricing exists should prima facie be considered to be the scope of the geographic market: 1 The Commission's approach to geographic market definition might be summarized as follows: it will take a preliminary view of the scope of the geographic market on the basis of broad indications as to the distribution of market shares between the parties and their competitors, as well as a preliminary analysis of pricing and price differences at national and Community or EEA level. This initial view is used basically as a working hypothesis to focus the Commission's enquiries for the purposes of arriving at a precise geographic market definition. In Section 59 of the SMP Guidelines 2 it is recalled that in the electronic communications sector, the geographical scope of the relevant market has traditionally been determined by reference to two main criteria: (a) the area covered by a network; and (b) the existence of legal and other regulatory instruments. A normal strategy for competitive entry is focus on those product and geographic markets where they are most likely to succeed. The competitor attempts in limited geographic areas particularly where the industry is capital intensive, where the competitor perceives the best prospect of achieving sufficient penetration, and thus sufficient local scale economies. An extensive use of sub-national markets could lead the NRA to treat incumbent and competitor alike within a small geographic area even though the incumbent has in the national context far greater economies of scale and scope, better access to capital, and other fairly durable advantages over any competitors. 1 See Commission notice on the definition of relevant market for the purposes of Community competition law, Official Journal C 372 of

6 Any definition of limited geographic markets for market 5 (WBA) which is the main object of BEREC s analysis would constitute a deviation from case law 3 because markets thus defined would be narrower than the coverage of the network of the incumbent. Therefore definition of regional markets for WBA would necessitate a particularly careful justification. Given that the definition of regional WBA markets (i) would probably cover areas that would normally be smaller than the network coverage of the incumbent DSL operator, and (ii) would in most cases not depend on differences in the applicable regulatory framework, it is necessary to identify other factors that could justify a regional segmentation of WBA markets, in particular deaveraging of prices and regional differences in infrastructure deployment. The Commission Notice on the definition of relevant market for the purposes of Community competition law 4 suggests that a national regulator could not propose a regional differentiation of WBA markets unless WBA prices have been deaveraged 5. Even if wholesale prices are de-averaged, it would have to be clarified if such de-averaging is due to differences in competitive constraints or variations in the underlying costs (e.g. to higher population density or the absence of ancillary backhaul costs). In order to determine that regions supported different degrees of infrastructure competition, this must result in regional variations of prices at retail level. Regional segmentation of WBA markets would be difficult to accept if retail prices for broadband access are not de-averaged since, what otherwise would be the effect of different levels of competitions in different areas? The observable facts are that generally in Europe, DSL networks have close to 100% of the WBA market and that pricing is normally homogeneous over their entire network area. DSL networks could choose not to de-average prices for several reasons. Marketing costs could increase if the operator was to offer different prices according to regions. Further, DSL networks would face political pressure if prices were raised to end users in low density areas. It needs to be clarified if the possibility of appreciable differences in the prevailing conditions of competition at wholesale level can be excluded from the outset because no such differences exist at retail level. Even if it were determined that there are appreciable differences in infrastructure competition and/or that there is de-averaging of prices, this would not necessarily imply that demand for WBA is not national in scope. It seems that at least for 3 See e.g. Case COMP/M ACEA/Telefónica; Case IV/M Telia/Telenor, paragraph 124, Case IV/M.1430, - Vodafone/Airtouch, paragraphs 13-17, Case COMP/JV.17 - Mannesmann/Bell Atlantic/Omnitel, paragraph 15, and Case IV/M.570 -TBT/BT/TeleDanmark/Telenor, paragraph Official Journal C 372 of It has to be noted that in regulated markets de-averaging might not be possible due to price control obligations. In such an event, the conditions of competition would have to be analysed in the absence of regulation, according to the Greenfield approach. This element is dealt with at length in BEREC s analysis. 6

7 operators who need WBA in order to provide solutions for multi-site businesses 6 it will be necessary to purchase a wholesale input at a national level. In practice, such operators would bid against the incumbent and might be obliged to buy wholesale inputs from the incumbent or other operators in areas where they have not rolled out infrastructure themselves. If the WBA market was segmented regionally, the incumbent would only be obliged to provide WBA in the areas where it has been found to have SMP. Therefore the alternative operator could be forced to negotiate WBA with several players, which might not be realistic in the timeframe available for making the bid Practice to date The Commission s practice on geographic segmentation is best illustrated in comments made in relation to the UK 7 and Spanish 8 market 5 cases and more recently in the Czech 9 and Polish 10 cases. Before looking at the individual cases, one high level theme is worth observing which might be characterised as there being a far greater emphasis on behavioural rather than structural market characteristics. For instance, if multiple competitors can be observed in one part of a market each with their own infrastructure, if the potential SMP operator behaves no differently that in any other part of the market then it is this behavioural aspect which is determinative. For instance the guidance from the seminal UK case suggested certain lines of enquiry regarding the establishment of different geographic markets. In that comments letter, behavioural data such as differentiated retail or wholesale pricing, and different market strategies or sales channels in different regions were considered important. Emphasis was also drawn subsequently to structural characteristics such as market share evolutions, the stability of market boundaries and the functionality of the product offerings were also identified as important. However the mere presence or absence of a given structure in terms of the presence of certain operators was not considered important in and of itself, rather it was behavioural data which was deemed pre-eminent. Similarly, in opening the Phase II investigation in relation to the Spanish case, the Commission raised doubts about the establishment of separate geographic markets where LLU operators and Cable operators were stronger. The Commission identified therein the kinds of evidence which they felt would be pertinent in that case to justify geographic segmentation and which are very consistent with those identified in the UK case. correspond to elements that point to the existence of different conditions of competition in the wholesale broadband access market across Spain, such as : - different geographic commercial strategies of operators in area 1 as compared to area 2, 6 See for example NL/2005/0281 and AT/2008/0757 ~ AT/2009/ UK/2007/0733: Wholesale Broadband Access in the UK 8 ES/2008/0805: Wholesale Broadband Access in Spain 9 CZ/2012/1322: Wholesale Broadband Access in the Czech Republic 10 PL/2012/1394: Wholesale Broadband Access in Poland 7

8 - an indication of lower average retail prices in area 1 because of genuine competition at retail level, - differences in the functionalities or types of services offered in each of the two areas, - the possible decline of Telefónica's wholesale and retail market shares in area 1, - stability of the boundaries between the areas including the question whether the, NGA deployment is likely to modify the competitive conditions and affect any such boundaries between areas and - evidence of an overall trend towards effective competition in respect of area 1. Taking these elements and considering them in a European context we can see that there is no evidence of different strategies in place between different operators in different parts of Member States 11. There is certainly uniform pricing enacted by DSL operators in most markets with no regional operations or promotions and the service functionality provided does not vary by region. Even pronounced regional differences in market shares have not affected DSL operators behaviour on many markets. On the contrary, in most markets DSL operators act precisely the same on the WBA market throughout their territory with no regional variation. In terms of product offering, functionality is equivalent throughout the national market and sales and marketing are also delivered uniformly. Such pricing and market behaviour suggests that DSL operators do not perceive themselves as being under more or less competitive pressure for WBA customers in one part of the national market compared to another. In terms of a practical decision to move towards geographically segmented markets, the Commission itself, in its impact assessment concerning its NGA Recommendation suggested that doing regional analysis would be a very difficult and limiting and that the appropriate manner in which to address geographic markets remains national with variation in remedies to be applied as necessary 12. While it is true that competitive conditions vary not only between Member States but also within national markets, NRAs over the past decade since liberalization have been reluctant to resort to sub-national market definitions, which may carry the risk of regulatory atomization in the Community. The success of unbundling in some markets, the upgrade of cable and the deployment of NGA networks put the existing divergence of levels of competitive intensity between commercially attractive metropolitan areas and less attractive rural areas into starker relief. While those areas characterised by strong infrastructure-based competition might be in need of different regulatory treatment than other areas of the market, the market boundaries will be subject to change within the period of review. Geographic segmentation would lead to a regulatory patchwork in the single market, and render the imposition of asymmetric access remedies impossible, should NRAs decide this was justified in the light of anti-competitive effects stemming from the manner in which NGA networks might be deployed and used by the formerly SMP-designated firm. Thus, a more proportionate way to reflect subtle geographical divergences of competition in an NGA context would be for 11 The exceptions being the UK, Portugal and Austria

9 NRAs to impose differentiated remedies, and refrain from causing a situation of albeit temporary regulatory forbearance through sub-national market definitions. All evidence therefore suggests that a national market for Wholesale Broadband Access remains the appropriate metric Implication of more geographic markets An economic approach to market definition attempts to identify and include all relevant competitive constraints that a firm faces. The inclusion of constraints which are not very strong may therefore generate market share estimates that overemphasise the competitive constraints on the firm under investigation. Therefore constraints should only be considered for inclusion in the defined product and geographic market where those constraints are strong and their exclusion would understate the market power of the firm in question. It is to be expected that competitive entry will focus on those product and geographic markets where they are most likely to succeed. Entry in more limited geographic areas emphasises local scale economies which an entrant is more likely to achieve. However, looking at a local content too readily is likely to overstate the strength to that local operator. Treating a fledgling entrant on a par with an incumbent in a small geographic area would be a mistake where that geography is not of sufficient scale. In a national context an incumbent may have far greater economies of scale and scope, better access to capital, and other fairly durable advantages over any competitors regardless of how successful they are locally. From an economic perspective in either approach what is important is that the constraints are neither overstated nor understated. A real danger arises in situations where the constraint is not strong and in those circumstances it will matter whether constraints are included in a broad geographic market definition or not. Where the constraint is overstated then type II errors are likely to occur where no regulation is imposed though such regulation is warranted. NRAs should enjoy considerable discretion on defining geographic market and these markets are capable of being more narrowly or more broadly defined in draft Recommendation on Relevant Markets with a greater emphasis on the role of virtual access products in the WLA market as proposed. The most obvious potential implication for geographic segmentation stems from a possible change in the product market definition whereby Physical Access/VULA could be constrained to unbundled exchange areas. This is an idea first proposed in the Ecorys study 13 and which has found its way into the Commission s draft Recommendation on Relevant Markets. It is further evident in the provisions of Article 18 of the Single Market Proposals which suggest that pricing can be relaxed in the presence of multiple NGAs 14. This suggests that some differentiation between the assessment and implementation of remedies in areas with multiple NGAs versus areas where multiple NGAs will be exceedingly rare. Furthermore, and notwithstanding the theme that the Single Market proposal is principally about

10 removing regulation, the suggestion in Recital 38 that two NGA networks is sufficient: For example, in the conduct of their case-by-case assessment pursuant to Article 16 of Directive 2002/21/EC and without prejudice to the assessment of significant market power and the application of EU competition rules, national regulatory authorities may consider that in the presence of two fixed NGA networks, market conditions are competitive enough to be able to drive network upgrades and to evolve towards the provision of ultra-fast services, which is one important parameter of retail competition. This is a theme in line with BEREC s analysis (see for example paragraph 182). However, this carries an implicit assumption that assessments between urban and rural areas (in broad terms) will be required. This is also true in terms of the DSM observation that the current and prospective state of infrastructure-based competition and the evolution of market conditions towards provision of competing next-generation networks (Article 18(4)).The prospective probability of competing network will be markedly different in different parts of any territory. The implication therefore is that there is a high probability of much more granular analysis based on the proposals particularly in light of the impact on the forthcoming Recommendation on Relevant Markets. As noted above in the Commission s guidance, such a granular approach based on current or indeed on prospective competition, does not imply a need for separate geographic markets. In fact, the opposite is the case particularly when an analysis is incorporating recent or future events whose effects cannot be known ex ante. In such a context, retaining the flexibility that exists within national markets to quickly flex remedies will be critical to an appropriate and timely response to market developments The Consideration of Cable when Assessing the Geographic Scope of Markets Cable networks generally operate within limited regions on a sub-national scale and are still fragmented in most Member States. Even where available, often multiple network owners are concerned over the entire area of coverage. The European Commission refers to the restricted geographic coverage of cable networks as a factor limiting the scope for effective demand-side substitution visà-vis DSL-based broadband offerings in Spain: demand-side substitution is constrained by the difference of geographical coverage of the available cable and ADSL networks in Spain. Whereas nearly all of the Spanish population can get broadband access based on Telefónica's ubiquitous ADSL upgraded network based on conventional copper pairs, only about 40% of the population can get broadband access based on cable-modem. This would not allow a purchaser of wholesale cable-modem access to offer broadband access services throughout the Spanish territory The geographic coverage of the Spanish 10

11 cable operators thus acts as a significant constraint on demand-side substitution between cable modem and ADSL wholesale access. 15 The impact of geographic coverage is further reinforced in the Commission s Explanatory Note to its Recommendation, where it states: Experience under the market analysis and Article 7 notification procedures so far has indicated that, where cable networks exist, their geographical coverage is often limited and wholesale access to such networks does not constitute a direct substitute for DSL based wholesale access products from the demand or the supply side, so that inclusion in the same product market is not justified. 16 The restricted geographic scope of cable networks therefore diminishes the attractiveness either directly through lack of availability by increasing the cost to establish interface systems with multiple operators in order to achieve economies of scale in supply to end-users and the complication of managing multiple supplier relationships. It is a fact that in most Member States any offers of a nationwide WBA product or WBA/Broadcast hybrid would have to be managed across multiple networks and interfaces if any network other than the incumbent s is used. Geographic differences will therefore further diminish the attractiveness of WBA access on Cable Networks and therefore with regard to geographic segmentation of markets, the competitive pressures introduced by cable networks and by other alternative network operators should be taken into account normally in a national context. An approach that focuses on a geographic sub-national market analysis risks missing some broader effects on the market analysis. Wholesale access products are normally delivered on a geographically averaged price which allows operators to deliver products across the geography at the same price to end users. According to the memorandum accompanying the Recommendation on relevant markets, The practice of the Commission is that retail price variations are normally indicative of different geographic markets. If there is no evidence for geographically differentiated prices, according to the Commission there is no indication for different geographic markets. In fact, pushing for more geographically segmented markets would likely lead to differentiated prices, thus risking to become a self-fulfilling prophesy. Cable Europe does not want to see an extensive use of geographically segmented markets to isolate competitive and non-competitive areas. In that respect it must be borne in mind that by setting a national market and keeping an obligation to provide average wholesale access prices on incumbents, NRAs would be simultaneously achieving two pro-competitive effects: avoiding geographically segmented predatory strategies by the incumbent and ensuring that even locally limited competitive pressures brought about by cable operators and other altnets are uniformly transmitted across the whole market thereby giving scope in the 15 European Commission decision of relating to a proceeding under Article 82 of the EC Treaty (Case COMP/ Wanadoo España vs. Telefónica), paras Explanatory Note, p

12 market for the benefits of competition to be available for all and for regulation to be removed. Competition that exists or potentially exists in more than 50% of the market is likely to move 100% of the market thereby bringing the benefits of competition to the rural consumers who are unlikely to have offers from alternative operators. Therefore if urban based competition drives prices down then rural based consumers will still enjoy the benefits of that competition. If price de-averaging is allowed (or worse, encouraged via segmented market analysis) and markets become geographically segmented as a result, then the effects of urban based competition will not be felt in rural areas. This is a major failing of BEREC s current analysis. The section (6.5) dealing with pricing seems to suggest that an average price between the competitive urban and uncompetitive non-urban is likely to be set. This is unlikely since it would not serve to meet the market where it needs to (in the urban area) while representing an unprompted discount where it is not needed (the non-urban). The most likely outcome with national pricing is that either (a) the competitive area is sufficiently large such that competition is met or (b) that the competitive area can be ceded in order to maintain rents in the non-competitive areas. In the unlikely event that the conditions or competition are so different that NRAs feel compelled to adjust their interventions, then a range of options open up to that NRA, as noted above, the critical issue is to set the boundaries of the product and geographic market in such a way as to not over or understate the market power in question. Cable Europe believes that the best option will always be to maintain a broad geographic market definition and to adjust the remedies imposed. The conditions of competition in a particular area can change quickly either because the NRA initially made an error or because the market evolved faster than expected, remedies will need to be able to adapt to those needs in a speedy manner. The process of geographically segmenting the market and making separate notifications is a lengthy procedure and does not lend itself to reacting quickly to changed circumstances. If an NRA chooses to vary remedies within a broader geographic market they retain the ability to change such remedies rapidly when appropriate. Consequently, a regulatory regime which segments markets geographically runs a far greater risk of regulatory failure than one which chooses to adjust remedies within a broadly defined geographic market. Cable Europe is also concerned that the notion of geographic market definitions, especially when applied in an ex ante context, that can shift backwards and forwards across physical territories, tends to jeopardize the effective workings of the EU Regulatory Framework when viewed from a single market perspective. Administratively, the number of notifications would increase with greater uncertainty and less harmonisation for operators. Finally, it is not necessary to go into all the different reasons that many Member States have expressed and continue to express a desire both for social and economic reasons, to maintain a balance to spatial aspects within their State. It is sufficient to note the provisions contained within the Universal Service Directive which gives discretion to NRAs to impose nationally averaged prices to ensure a social divide does not emerge for basic ecommunications services. The 12

13 administrative process itself of geographically segmenting markets and making separate notifications is a lengthy and cumbersome procedure. Consequently, Cable Europe believes that a regulatory regime which segments markets geographically runs a far greater risk of regulatory failure than one which preserves national markets The impact of a changing market 4 on the geographical market aspect. A key element of the current revision to the Recommendation on Relevant Markets concerns the treatment of the current market 4 with a suggestion that this may become a broader product market that includes both physical and virtual (VULA) access products. While the proposed New Market 3 corresponds in totality to the existing markets 4 and 5 it is further subdivided to better reflect that correspondence. The description of Wholesale local access provided at a fixed location essentially corresponds to LLU plus SLU plus VULA. The key arguments in favour of a broader market are that technological evolution means that the traditional access product is slowly being replaced by an NGA version (vdsl or P2MP-FTTH) that does not support physical access. From a technology perspective, the network evolutions on the fixed telecoms networks imply that unbundling as a physical option will be very limited in future for either VDSL or P2MP-FTTH (hereafter PON) solutions. That constraint has been recognised as a feature of a large number of Article 7 cases in different ways. In some markets physical bundling as a remedy has effectively been removed 17 whilst in others, although maintained, the weakness of the measure means that the market 5 (bitstream access) remedy is being recognised as the effective remedy in market Current demand and supply conditions continue to see distinct demand for physical and non-physical access and it should not be presumed that a broadened market 4 will ultimately evolve. Present practice is the best indicator of future needs and 27 out of 27 NRAs have found SMP in market 4. Even though two NRAs have, in the remedies imposed, indicated that a virtual product (VULA virtual unbundled local access) might also be included, this is only in the case where the access product would be a functional equivalent to substitute for physically unbundled copper loops. Such an analysis which allowed VULA as a remedy in market 4 does not have any impact on the scope of the existing product market but seems to have been driven as much by a their previously geographically segmented approach based on the performance of LLU. Both NRAs who used VULA as a remedy in market 4, the UK regulator Ofcom (UK/2010/1064) and the Austrian regulator RTR (AT/2010/1084) had previously opted for geographically segmented markets in Market 5 (bitstream access) leaving them with potentially no mandated NGA access product in certain areas if a rapid migration to vdsl occurred based on existing unbundled local loop access products. 17 BE/2011/1227 and NL/2011/ UK/2010/1064 and AT/2010/

14 It is worth noting that, in the absence of geographic market segmentation, a more orthodox approach to remedy allocation could have been pursued. The analysis therefore was based on expediency and the need to preserve a fixed line access product rather than being the product of a belief that demand patterns had shifted inexorably. Indeed, the Commission 19 in its UK decision made it very clear at that time that while accepting the measure, a business as usual approach ought to be established as soon as possible and that this technological change does not impact on the functioning of the market. Accordingly, the VULA remedy should be replaced by fibre unbundling as soon as it is technically and economically feasible or should possibly continue to be required in addition to full fibre unbundling. While the vast majority of NRAs have concluded that market definition of Market 5 is limited to DSL network providers 20 even if remedies have slipped outside the defined market boundaries. Thus far, two NRAs have fully liberalised their markets (Romania and Malta the Netherlands had liberalised but re-established SMP in market 5) while a further four NRAs liberalised a substantial part of their markets (UK, Poland, Austria and Portugal). Finally, it is worth noting that those who are most dependent on these access products, as well as the NRAs who oversee the availability of the access products both agreed in their response to the Recommendation on Relevant Markets that markets 4 and 5 should be kept distinct and have emphasised the need to preserve physical access remedies 21. However, a move to distinct geographic markets within Member States could create a situation as occurred in both Austria and the UK where the NRAs essentially is obliged to impose a virtual access product because of its geographical dimension rather than on the basis of a purely demand and supply driven analysis. Cable Europe believes geographical sub-markets risks pushing remedies towards virtual rather than physical access products which undermines facilities based competition %20Acte(4).pdf 20 Or even if more broadly defined that such a definition would not impact the SMP designation. See for example BNetzA s approach in Germany

15 1.6. Conclusions Cable Europe believes that all evidence suggests that there should be a very strong preference for geographic markets to be set on a national basis. The main reasons for this preference are that a more segmented geographic approach risks overstating the strength of competition in isolated areas when the focus must be on the potential SMP operator s strength which often goes to its overall strength that transcend local considerations. A more local approach also risks isolating competition and undermining spill-over effects coming from that competition. Where strong cable or alternative competitors exist on a regional level, if that region is sufficiently large it will likely move the whole market so that those that live in the region without these competitors can also enjoy the benefits of competition. It is also the case that even if strong regional variations in competition exists, this can be addressed through the use of variations in the remedies that are applied rather than in the application of separate geographic analysis. Much of the reason that the scope geographic markets are being reconsidered is that new technologies may change the scope of competing networks but are also likely to change the remedies that will be applied. Such changes do not lend themselves to stable market boundaries and the latest proposals from the Commission even suggests that prospective products or access remedies should even be considered in the market analysis making market boundaries even less stable. Where NRAs need to adjust their interventions quickly, they cannot do so in a full market review but they can change quickly by adjusting remedies. A national market analysis would enable national regulators to rapidly adjust to changes in the market where a new technology is deployed or where a new technology does not evolve as anticipated. This is one factor which is understated in BEREC s analysis; for all the changes to network technologies that are occurring, very little behavioural practice can be observed as a result. It is clear that thus far, NGA have not differentiated themselves in terms of service offerings though this may happen over time, it may not. For these reasons Cable Europe believes that BEREC should unambiguously promote national market analysis leading to certainty for all parties in the market. Cable Europe believes that other adjustments that should be made concern a stronger emphasis on the potential SMP operator rather than regional competitors and a need to focus on that operator s behaviour, in particular as evidenced in its pricing behaviour. Pricing is the key indicator of behaviour changes that result from regional variations in the factors of competition. Cable Europe believes that this should also be given greater emphasis in BEREC s report. Finally, while Cable Europe agree that it is timely for BEREC to consider the issue of geographic market definition given the technology changes that are underway, the existing regulatory framework is based on competition law principles and thresholds, and no change to this basis has been proposed in recent legislation. Therefore the existing decisional and competition law practice remains the relevant framework in which to consider geographic market definition. 15

16 The proposed Common Position on Geographic Markets from BEREC is focussed on an analysis of Markets 4 and 5 in the Recommendation on Relevant Markets 2007 which in turn are a more or less perfect mapping from Markets 11 and 12 from the 2003 Recommendation 22. There is however the issue that the Commission is now proposing to morph these markets to two new markets which cover markets 4 and 5 in a new way that has potential implications for the geographic scope of these markets. That unofficial draft 23 contains considerable emphasis in the text on technological changes more than purely economic or competition law practice. This may be subject to change in the final draft of the Recommendation and it remains to be seen whether the final version will be as technology dependent in its analysis. BEREC should consider whether this Common Position ought to be delayed so as to consider fully the final delineations of product market boundaries in the forthcoming Recommendation on Relevant Markets and base any guidance in the new market context