Analysis of retail fixed calls markets and the decision on the withdrawal of specific obligations (former markets 3-6)

Transcription

1 Analysis of retail fixed calls markets and the decision on the withdrawal of specific obligations (former markets 3-6) 10 August 2010

2 Table of contents Summary Background Introduction Current regulation New Recommendation History and market development Market definition General comments on market definition Market definitions in the previous analysis Definition of the markets Three-criteria test First criterion: High and non-transitory barriers to entry Structural barriers to entry Regulatory barriers to entry Conclusion for first criterion Conclusion of the three-criteria test Decisions Withdrawal of obligations Entry into force Consequences of withdrawing obligations Need for transition period Appeal Annex 1 Summary of the consultation on NPT s notification of decisions in the retail fixed calls markets Annex 2 ESA s comments on NPT s draft decision 2

3 Summary In the Norwegian Post and Telecommunications Authority's (NPT's) decision of 21 April 2006, Telenor ASA (Telenor) was designated as an undertaking with significant market power and directed to meet specific obligations in the retail fixed telephony markets (former markets 1-6). The basis for the NPT's market definitions in market analyses and decisions from 2006 was the six retail fixed telephony markets which comprised markets 1-6 in ESA's Recommendation on relevant product markets for ex ante regulation from The starting point for NPT's revision of market regulation of the retail fixed telephony markets is the EFTA Surveillance Authority's (ESA's) current Recommendation on relevant markets, which entered into force on 5 November In the revised Recommendation, the two retail fixed access markets (former markets 1 and 2) have been merged into one market, which is defined to include subscriptions for both residential and non-residential customers. This market for access to the public telephone network at a fixed location for residential and non-residential customers is market 1 in the current ESA Recommendation. In the current Recommendation, the four retail fixed calls markets, referred to as markets 3-6 in the previous recommendation, have been removed. These markets therefore no longer qualify for sector-specific ex ante regulation. This document contains NPT's assessment of whether the four retail fixed calls markets (former markets 3-6) still qualify for sector-specific ex ante regulation on the basis of national circumstances. The four calls markets are: The market for publicly available local/national telephone services provided at a fixed location for residential customers The market for publicly available international telephone services provided at a fixed location for residential customers The market for publicly available local/national telephone services provided at a fixed location for non-residential customers The market for publicly available international telephone services provided at a fixed location for non-residential customers For national regulatory authorities to define markets which deviate from the pre-defined markets in the Recommendation, the following three cumulative criteria (three-criteria test) must be met: 1. There are high and non-transitory structural or regulatory barriers to entry in the relevant product market. 2. The market has characteristics such that it will not tend towards effective competition. 3. Competition law does not sufficiently address the objectives behind sector-specific regulation. Chapter 1 contains a description of the background and legal framework. Chapter 2 contains a short description of the overall developments in the fixed telephony markets. Chapter 3 contains NPT's definition of the relevant markets. The market definitions are based on NPT's 3

4 previous market boundaries and NPT upholds the market definitions used in the analyses from 2006 with respect to both product market and geographic market. Chapter 4 contains the three-criteria test of the four retail fixed calls markets. In NPT's assessment, there are no high and non-transitory barriers to entry in the markets. The main reason that the Authority considers the entry barriers to be low is that it is not necessary for an operator to have their own physical infrastructure in the form of an access network in order to offer fixed calls. Indirect access to the PSTN/ISDN network by the purchase of carrier pre-selection or carrier selection (using a prefix) from Telenor, combined if applicable with Wholesale Line Rental (WLR), along with the possibility of offering unmanaged Voice over Broadband (VoB), is reducing the barriers to entry. Telenor's carrier pre-selection and carrier selection offerings will still be regulated and provide predictable access from a regulatory standpoint, cf. NPT's decision in market 1 10 August All three criteria must be met for a market to qualify for sector-specific ex ante regulation. NPT has concluded that the first criterion has not been met for the four calls markets. The Authority has therefore not seen the need to assess the other two criteria. On this basis, NPT concludes that former markets 3-6 do not meet the three-criteria test, cf. Article 2 of the Recommendation. Chapter 5 presents NPT's decision. Since the conditions for applying sector-specific ex ante regulation are no longer present, NPT withdraws the designation of Telenor as an undertaking with significant market power in the four retail fixed calls markets. The Authority is also withdrawing the current obligations on Telenor's retail offering in the calls markets. NPT has considered whether the Authority should delay the phasing out of the current regulation in a transitional period in the interests of the affected operators' need to adapt to markets without sector-specific ex ante regulation. NPT has concluded that there is no need for such a transition period, and in section 5.2 it is stated that the decision takes effect immediately after the determination is made. Chapter 6 describes the right of appeal. 4

5 1 Background 1.1 Introduction 1. Under Sections 3-2 and 3-3 of Act No. 83 of 4 July 2003 relating to electronic communications (Electronic Communications Act), NPT is obliged to analyse the various markets for electronic communications and identify undertakings with significant market power. If one or more undertakings are designated as having significant market power, at least one obligation shall be imposed over and above the general obligations pursuant to the Electronic Communications Act with regulations. 2. In NPT's decision of 21 April 2006, Telenor ASA (Telenor) was designated an undertaking with significant market power and directed to meet specific obligations in the retail fixed telephony markets (former markets 1-6). 3. On 24 February 2010, NPT announced that the Authority would withdraw the designation of Telenor as an undertaking with significant market power in the retail fixed calls markets (former markets 3-6). Furthermore, the Authority announced the withdrawal of Telenor's current obligations in the decision of 21 April 2006, section NPT received responses to the consultation from the Norwegian Competition Authority, Telenor ASA, Tele2 Norge AS and TDC AS. NPT's assessment of the consultation input concerning the former markets 3-6 is contained in Annex On the basis of the notification and consultation responses, NPT prepared a draft decision which withdrawal current obligations in the retail fixed calls markets. The draft was translated into English, and notified to ESA on 28 June 2010, cf. Section 9-3 of the Electronic Communications Act, Article 7 of the Framework Directive and Article 7 of ESA's Recommendation 1. NPT received comments on the draft decisions in ESA s letter of 22 July ESA pointed out that all three criteria should be examined when applying the threecriteria test, although the NPT has concluded that the first criterion is not met for the retail fixed calls markets. Moreover, ESA had no comments in relation to the NPT s conclusions with regard to the retail fixed calls markets. 6. NPT has evaluated ESA s comments and believes that the NPT s assessment of whether the calls markets qualify for sector-specific ex ante regulation is sufficient, since all of the three conditions must be met for such regulation to be applied to a market that does not appear in the ESA Recommendations. Thus, an assessment of criteria 2 and 3 would not change the NPT s conclusion. 7. Operators with a legal interest in appealing will be able to appeal the final decision in the ordinary manner, in accordance with the provisions of Sections 28 and 29 of the Public Administration Act and Section 11-6 of the Electronic Communications Act. 1 EFTA Surveillance Authority Recommendation of 14 July 2004 on notifications, time limits and consultations provided for in Article 7 of Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services 2 See Annex 2. 5

6 1.2 Current regulation 8. The regulatory framework for electronic communication is based on five directives adopted by the European Union (EU). 3 These directives entered into force for Norway on 1 November The Electronic Communications Act and related regulations implement the directives into Norwegian law. 9. The framework shall lay the foundation for the harmonization of regulation in the EU/EEA, limit entry barriers and facilitate effective competition to the benefit of users. 10. NPT shall perform market analyses based on the pre-defined markets contained in ESA's Recommendation on relevant markets (the Recommendation). 4 These market analyses form the basis for assessing whether there are undertakings with significant market power in a relevant market. In the retail fixed calls markets, Telenor was designated as an undertaking with significant market power and NPT imposed specific obligations on Telenor in all four markets. NPT's market definitions of the four calls markets were based on ESA's Recommendation of 14 July 2004 and were identical to markets 3-6 in this Recommendation. The markets were: Market 3: Publicly available local and/or national telephone services provided at a fixed location for residential customers. Market 4: Publicly available international telephone services provided at a fixed location for residential customers. Market 5: Publicly available local and/or national telephone services provided at a fixed location for non-residential customers. Market 6: Publicly available international telephone services provided at a fixed location for non-residential customers. 11. Telenor, in pursuance of Section 4-10 of the Electronic Communications Act, was directed to meet the following obligations in all four markets: A prohibition against bundling VoB with other electronic communications services in such a way that the end-user cannot choose to purchase the services individually. Bundles between VoB and Telenor's broadband access service is exempted from this prohibition. Any discrepancy in prices and conditions between individual services and package offers shall be transparent, objectively justified and reflect underlying cost differences, both in relation to PSTN/ISDN calls and VoB. 3 Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services (Framework Directive); Directive 2002/20/EC on the authorisation of electronic communications networks and services (Authorisation Directive); Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities (the Access Directive); Directive 2002/22/EC on universal service and users rights relating to electronic communications networks and services (Universal Service Directive); Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector (Directive on privacy and electronic communications). 4 EFTA Surveillance Authority Recommendation of 5 November 2008 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with the Act referred to at point 5cl of Annex XI to the EEA Agreement (Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services), as adopted by Protocol 1 thereto and by the sectoral adaptations contained in Annex XI to that Agreement. 6

7 A prohibition against price discrimination whereby Telenor offers discounted rates for PSTN/ISDN calls to some but not to all customer groups, unless the price differences are objectively justified and based on underlying cost differences. For Telenor`s provision to residential customers (former markets 3 and 4) the price differences shall also be transparent. 12. In markets 3 and 4, Telenor, in addition to the above obligations is required to disclose all temporary discounts with associated terms and conditions for PSTN/ISDN calls. 1.3 New Recommendation 13. ESA's current Recommendation on relevant markets came into force on 5 November ESA's Recommendation corresponds to the European Commission's Recommendation 5 of 17 December In the current Recommendation, the number of relevant markets for ex ante regulation has been reduced from 18 to 7. The four retail markets for fixed calls (former markets 3-6) were among the markets that were removed from the Recommendation. 14. The purpose of the Recommendation is to identify the product and service markets where ex ante regulation may be warranted 6. For a market that deviates from the Recommendation 7 to be susceptible to sector-specific ex ante regulation, three cumulative criteria (three-criteria test) specified in Article 2 ff of the Recommendation must be met. The three criteria are: 1. There are high and non-transitory structural or regulatory barriers to entry in the relevant product market. 2. The market has characteristics such that it will not tend towards effective competition Competition law does not sufficiently address the objectives behind sector-specific regulation. 15. This means that national authorities cannot apply sector-specific ex ante regulation to national markets that are not identified in the Recommendation and do not meet the threecriteria test. The Commission's Explanatory Note 9 states: It will only be possible for NRAs to regulate markets which differ from those identified in this Recommendation where this is justified by national circumstances in the sense that the three cumulative criteria referred to in recital four of this Recommendation are met, 5 Commission Recommendation of 17 December 2007 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services. 6 Recital No. 3 of the Recommendation and Article 15 of the Framework Directive 7 Cf. Annex to the Recommendation. 8 The Recommendation uses the term effective competition, which may best be translated into Norwegian as virksom konkurranse. ESA's Guidelines of 14 July 2004 define this as a market in which operators with significant market power are absent, cf. paragraph 19. This cannot be interpreted in an antithetical manner, i.e. the presence of an operator with significant market power will prevent the market from becoming more competitive. 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. Although the meaning of the terms is not exactly the same, NPT still believes that the terms will coincide for this purpose. 9 Page 4 in the Commission's Explanatory Note SEC(2007)1483. Recital No. 26 of ESA s Recommendation includes the Explanatory Note as relevant in the interpretation of ESA s Recommendation. 7

8 16. Chapter 4 applies the three-criteria test to the four retail fixed calls markets. NPT has made such a three-criteria test the basis for determining if current obligations in these markets should be withdrawn or whether there are grounds to perform new market analyses of the markets according to current regulations for electronic communication. 2 History and market development 17. Fixed telephony for end-users can be described as access to publicly available telephone services at a fixed location so the customer can make outgoing calls and receive incoming calls. Telephone services provided at a fixed location are therefore usually offered as a bundled package that includes both access and use. The presentation below includes both these elements of the telephony service. 18. The markets for fixed publicly available telephone services were liberalized in 1998, and liberalization enabled new providers to establish themselves in the market and provide competing offers to Telenor's offers. 19. In the summer of 1999, carrier pre-selection and number portability were introduced. Using carrier pre-selection, Telenor s competitors could offer all fixed calls as a bundled product, while number portability helped improve the competitive conditions for Telenor's competitors who offered direct access (predominantly to business customers). 20. The first competitive offers after liberalization were largely based on carrier selection code calls and direct connection, i.e., subscriptions and calls via their own and/or leased lines. While there have been offers of access to publicly available telephone services provided at a fixed location for business customers from Telenor's competitors since liberalization, the situation was different regarding offers to retail customers. 21. Shortly after liberalisation, many of Telenor s competitors sought an access/subscription product in the upstream market so that they could offer a comprehensive telephony product package incorporating both subscription and calls. In autumn 2001 NPT ordered Telenor to offer such a product, and Telenor launched its product at the end of 2002/beginning of However, NPT's decision was revoked by the Ministry of Transport and Communications on 10 June 2003 due to the lack of a legal basis for such an order. Telenor nevertheless chose to continue to offer the Wholesale Line Rental product. Telenor was virtually alone in offering access to publicly available telephone services provided at a fixed location for residential customers until they launched WLR in At the beginning of 2004 the first VoB service for residential customers was launched. This type of offer had existed in the business market a few years previously, but in a limited scope. Today, VoB is offered both by providers with and without their own access network. The number of residential VoB subscriptions at the end of 2009 was 500,985 and the number of business subscriptions was 18,306. Most of these subscriptions were established as replacements for PSTN/ISDN subscriptions. As of the same date, there were 1,258,830 PSTN\ISDN subscriptions and 1,783,426 fixed telephony subscriptions. PSTN/ISDN and VoB thus amounted respectively to 70.5% and 29.1% of the total fixed telephony subscription market. 23. Figures 1 and 2 show the development in demand for fixed telephony for subscriptions/connections and calls, respectively. Figure 3 shows the change in demand for VoB alone, measured by number of subscriptions. 8

9 Million minutes Yearly change Number of subscriptions in 1000 Yearly change % 10 % 8 % 6 % 4 % 2 % 0 % -2 % -4 % -6 % -8 % PSTN ISDN 2B+D ISDN 30B+D Other fixed subscriptions Yearly change Figure 1: Total number of connections (in thousands at 31 December) PSTN, ISDN 2B+D, fixed connections in all (including ISDN 30B+D, telephone connections via cable TV network and other types of connection) Annual percentage change in the number of total connections. Sources: Norwegian Telecom and Norwegian Telecom s Central Administration , Norwegian Post and Telecommunications Authority from % Traffic minutes -5 % -10 % -15 % -20 % % Figure 2: Traffic volume from fixed-line telephone and annual volume change in per cent. Source: NPT. 9

10 2nd half st half nd half st half nd half st half nd half st half nd half st half nd half st half Figure 3: Growth in number of VoB subscriptions. Source: NPT. 24. Developments on the demand side show that both the number of fixed telephony subscriptions and traffic volume are steadily decreasing. Meanwhile, growth in the number of broadband subscriptions has slowed since Figure 1 shows the number of fixed telephony subscriptions during the period 1970 to Up until 1997 there was steady growth in the demand for access to fixed telephony. However, the decline since the last analysis 10 is significant. At the end of 2009, approximately 36% of all Norwegian households did not have a fixed-line subscription. Based on half-year figures for 2005, 17% of households did not have a fixed-line subscription. The number of broadband customers with VoB has increased from 13% in June 2005 to 33% at the end of As growth in terms of VoB has slowed, the number of broadband customers is growing faster than the number of VoB customers. In other words, the share of broadband customers with VoB is decreasing. 26. Figure 2 shows the growth in traffic volume from fixed telephony in the period from 2001 to Since 2001 there has been a clear decline in traffic volume. There has also been a significant reduction since the previous analysis, and traffic has dropped by more than half since 2005 (approximately a 54% reduction). 27. The reduction in the number of fixed telephony subscriptions is mainly because more people choose to only use mobile telephony. This applies especially to the younger segment of the population. Mobile telephony usage is close to 100% in the adult segment of the population, and as the call rates for mobile telephony have been reduced, many people no longer see the need for fixed line services. A relatively high fixed subscription fee for fixed telephony encourages the decision to cancel the fixed telephony subscription. 28. Similarly, increasing use of mobile telephony led to reduced traffic volume for fixed telephony. In addition, the sharp reduction in the use of dial-up Internet also contributed to a significant reduction of traffic volume for fixed telephony. 29. When it comes to changes in the operators' share of the overall calls markets, Telenor's market share has been reduced somewhat since the previous market analysis, measured by both the number of call minutes and revenue. The previous analysis showed 10 The market analyse of 21 April 2006 is based on 2005 half-year figures. 10

11 Telenor with a 65% overall share of the calls markets measured by the number of call minutes, and 66% measured by revenue. By the end of 2009, Telenor's market share was reduced to 58% and 63%, respectively. Four competing operators have achieved market shares of 5-10% Market definition 3.1 General comments on market definition 30. As stated above, NPT must consider whether ESA's pre-defined markets are suitable for Norwegian circumstances, including considering whether markets that are already regulated but no longer in the Recommendation still qualify for ex ante regulation based on national circumstances. 31. A description of the product market is to be provided and the geographic market defined. The definition of relevant markets will follow the same procedure used for market definition within competition law. In some cases, however, markets defined by competition authorities can differ from markets defined in ESA's Recommendation or by national regulatory authorities pursuant to Article 15, paragraph 3 of the Framework Directive A relevant product market comprises products or services that are sufficiently substitutable. The starting point for the definition of 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 definition of the relevant market. 33. Once the relevant product markets are determined, the geographic market is defined. The geographic market may be defined as that area in which the relevant product is offered on approximately similar and sufficiently homogeneous conditions of competition. 13 Geographic markets in electronic communications have traditionally been determined by reference to the relevant network s area of coverage as well as the effective boundaries (jurisdiction) of the legal regulation of the market In accordance with Section 1-3 of the Electronic Communications Act, cf. Regulation No. 882 of 4 July 2003, 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 Section 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. Further reference to Norway as a jurisdiction should therefore be taken to mean mainland Norway/Norwegian land territory. 11 Total market share in the calls market at the end of 2009 measured in call minutes: Telio Telecom AS 10%, Tele2 Norge AS 7%, TDC AS 7% and Ventelo AS 7%. 12 ESA s Guidelines of 14 July 2004, paragraph The Guidelines paragraph The Guidelines paragraph

12 3.2 Market definitions in the previous analysis 35. The starting point for NPT's market definition of the four calls markets in the market analyses of 21 April 2006 was the description of these markets found in the original Recommendation. NPT considered whether these pre-defined markets were suitable for Norwegian conditions. The Authority concluded that it was not necessary to change the definitions which came from the Recommendation from The market for publicly available local and/or national telephone services provided at a fixed location for residential customers (market 3), market for publicly available international telephone services provided at a fixed location for residential customers (market 4), market for publicly available local and/or national telephone services provided at a fixed location for non-residential customers (market 5) and market for publicly available international telephone services provided at a fixed location for residential customers (market 6) were further defined as follows: Market 3: Market 4: Market 5: Market 6: The market covers all telephony calls from residential customers that originate on a fixed electronic communications network in Norway and terminate on a fixed or mobile network in Norway. Telephony calls to mobile subscribers of a Norwegian mobile network, but who are in a foreign country, are defined in this context as termination on a mobile network in Norway and are thus part of this market. Conversely, telephony calls to mobile subscribers of a foreign mobile network, but who are in Norway, are not part of this market. The market covers all telephony calls from residential customers that originate on a fixed electronic communications network in Norway and terminate in a foreign country. Traffic resulting from use of telephone cards for international calls is included in this market. Telephony calls to mobile subscribers of a Norwegian mobile network, but who are in a foreign country, are defined in this context as termination on a mobile network in Norway and are thus not part of this market. Conversely, telephony calls to mobile subscribers of a foreign mobile network, but who are in Norway, are part of this market. The market covers all telephony calls from non-residential customers that originate on a fixed electronic communications network in Norway and terminate on a fixed or mobile network in Norway. Telephony calls to mobile subscribers of a Norwegian mobile network, but who are in a foreign country, are defined in this context as termination on a mobile network in Norway and are thus part of this market. Conversely, telephony calls to mobile subscribers of a foreign mobile network, but who are in Norway, are not part of this market. The market covers all telephony calls from non-residential customers that originate on a fixed electronic communications network in Norway and terminate in a foreign country. Telephony calls to mobile subscribers of a Norwegian mobile network, but who are in a foreign country, are defined in this context as termination on a mobile network in Norway and are thus not part of this market. Conversely, telephony calls to mobile subscribers of a foreign mobile network, but who are in Norway, are part of this market. 36. The relevant geographic market for these four calls markets is restricted to Norway. 12

13 3.3 Definition of the markets 37. In defining the relevant markets the NPT has used the market definition of the four calls markets in the market analyses of 21 April Both the earlier and the current Recommendation distinguish between markets for access to fixed telephony and markets for fixed calls. Even though subscriptions and use are usually purchased as a bundled service, carrier pre-selection/carrier selection offers make it relatively simple for end users to use different providers for access and calls, respectively. The Commission s Explanatory Note 15 furthermore states that an assessment of supply-side substitution indicates that subscriptions and outgoing calls should be defined as different markets. NPT consequently still finds that fixed-line subscriptions and calls are largely complementary rather than substitutable products. 38. In line with the Recommendation from 2004 NPT concluded in the previous analysis that the retail fixed telephony markets had to be differentiated between markets for residential customers and non-residential customers. Both the assessments of demand-side and supply-side substitution favoured a division between markets for residential customers and non-residential customers. At the same time the Authority pointed out that in principle there is no clear distinction between provision of publicly available telephone services provided at a fixed location directed at residential customers and non-residential customers, respectively. This applied with respect to both access and use of telephone services provided at a fixed location. 39. NPT has chosen not to delve deeper into whether this distinction should be removed in connection with the new assessment of the four calls markets. Since these markets are no longer listed in the Annex to the Recommendation, which contains the markets considered relevant for sector-specific ex ante regulation, NPT must as mentioned apply a different methodological approach. Because the Authority does not consider further assessment of the distinction between non-business and business markets to be a material significance for the assessments in a three-criteria test, plus the fact that as preliminarily mentioned there is no clear distinction between these market segments, the Authority has chosen to retain the earlier market definitions in the previous analyse of the calls markets on this point. 40. The Recommendation differentiates between markets for fixed publicly available telephone services and public telephone services based on mobile networks. This means that telephony calls originating on mobile networks are in principle not to be considered part of the retail fixed calls markets. In its 21 April 2006 analysis NPT concluded that there was not a sufficient degree of substitutability between telephony calls originating on fixed and mobile networks, respectively, for mobile-originated calls to be included in the four fixed telephony calls markets. 41. Mobile calls account for an ever-increasing percentage of overall traffic charged per minute. In 2009 mobile-originated calls accounted for 61% of the total calls from fixed and mobile phones, whereas at the time of the previous analysis they accounted for 27%. By the end of 2009 the share of households who have a fixed-line telephone is 64%. Most of these also have mobile telephony since the real mobile telephony penetration in the first half of 2009 was 96%. 42. The Authority believes that even though the share of end users who have both products is falling, the share is still so high that it provides a basis for maintaining that a majority of customers still see phone services via mobile networks as more of a supplement 15 Page 23, paragraph 2 13

14 than a substitute for phone services via the fixed network. Furthermore, the Authority believes relatively big differences still exist in the production of mobile and fixed telephony. NPT has therefore concluded that there is no sufficient degree of substitutability between telephone calls originating on fixed and mobile networks for mobile-based calls to be included in the four retail fixed calls markets. 43. NPT has not seen a need to undertake a further assessment of other factors assessed in connection with the definition of the markets in the previous analysis, including the distinction between national and international calls, the distinction between calls terminating on fixed or mobile networks, definition vis-à-vis data traffic and geographic definition. The Authority cannot see that any substantial changes have taken place since the previous analysis with respect to these assessment subjects. 44. With respect to including VoB in the market definitions, NPT refers to the assessment contained in the analysis of market 1 10 August The assessments in section in the aforementioned analysis will also be relevant for the calls markets. 45. In summary, NPT can thus not see any reasons in favour of departing from the conclusions in the previous analysis. NPT considers that the assessments and conclusions contained in Chapter 2 of the analysis of 21 April 2006 with respect to the definition of the product markets, and Chapters 12, 16, 20 and 24 in regard to geographic definition, still express the Authority's viewpoints. For this reason NPT will use the same definition of the calls markets as in the analysis of 21 April 2006, as cited in section 3.2 above. 4 Three-criteria test 46. In the following NPT will assess whether the four retail fixed calls markets are susceptible to sector-specific ex-ante regulation. As mentioned in section 1.3, three cumulative conditions must be met for the markets to still qualify for such ex ante regulation. They are as follows: 1. There are high and non-transitory structural or regulatory barriers to entry in the relevant product market. 2. The market has characteristics such that it will not tend towards effective competition. 3. Competition law does not sufficiently address the objectives behind sectorspecific regulation. 47. The starting point in assessing whether the three conditions have been met shall be a Modified Greenfield Approach. This means that the conditions shall be assessed under the precondition that the relevant markets in question are not subject to ex-ante regulation. Regulation in adjacent markets shall nevertheless be taken into consideration. 48. Since there is a close connection between the different calls markets, NPT has found it most practical to undertake the three-criteria test combined for all four markets. 4.1 First criterion: High and non-transitory barriers to entry 49. Barriers to entry can be of various natures and occur for different reasons. Barriers to entry limit competition by reducing the opportunities for new operators to enter the market. This chapter contains an assessment of structural and regulatory barriers to entry. 14

15 4.1.1 Structural barriers to entry 50. The Recommendation refers to structural barriers to entry as follows: Structural barriers to entry result from original cost or demand conditions that create asymmetric conditions between incumbents and new entrants impeding of preventing market entry of the latter. For instance, high structural barriers may be found to exist when the market is characterised by absolute cost advantages, substantial economies of scale and/or scope, capacity constraints and high sunk cost. 51. In assessing the first criterion NPT analysed the following structural barriers to entry: Control of infrastructure not easily duplicated Sunk costs Economies of scale and scope Access to financial resources Access to distribution and sales network Control of infrastructure not easily duplicated 52. If an operator controls infrastructure not easily duplicated, and this infrastructure represents an important input factor in the relevant market, this could represent a substantial structural barrier to potential competitors. 53. Without taking a view on whether the relevant infrastructure in the affected markets may be seen as an essential facility in relation to competition law, NPT has assessed whether control of infrastructure not easily duplicated can be considered an entry barrier in these relevant markets. 54. It is not necessary to own or control physical infrastructure in the form of access networks to offer local/national and/or international calls to end users. Indirect access, via carrier pre-selection or carrier selection, is an alternative for operators who want to enter these markets. Carrier pre-selection and carrier selection have until now been regulated since Telenor has had significant market power in the retail markets for fixed-line subscriptions (former markets 1 and 2). In its new assessment of market 1 NPT has concluded that Telenor is still deemed to have significant market power in this market. This means that Telenor s obligation to offer carrier pre-selection and carrier selection will be continued Combined with WLR, carrier pre-selection has served to increase the ability to compete for Telenor s competitors. Furthermore, VoB services do not require providers to own their own access network. Control of infrastructure not easily duplicated thus does not represent an entry barrier of importance in the retail fixed calls markets Sunk costs 56. Irreversible (sunk) costs are costs attributable to an irreversible investment, i.e. a provider cannot expect to recover the investment once it is made, for example through the sale of the investment item, if the provider wishes to exit the market. Sunk costs mean that a potential new entrant faces higher decision-relevant costs than the (or those) operator(s) already established. This cost difference comprises a structural barrier to the potential entrant. 16 See NPT s decisions in market

16 57. In these markets sunk costs may represent considerable amounts for new undertakings considering providing calls by establishing alternative physical infrastructure all the way up to the individual household or business customer. However, it is no longer necessary to build alternative access networks to provide telephony calls to residential or business customers. The ability to provide calls via carrier pre-selection or carrier selection, combined (or not) with WLR, and the possibility of offering unmanaged VoB services mean that sunk costs cannot be viewed as a significant entry barrier in the retail fixed calls markets Economies of scale and scope 58. Economies of scale exist when an increase in production causes the average unit cost to fall. This is characteristic of production based on technology with relatively high fixed costs and low variable costs. 59. Economies of scope are reductions in average unit cost when more than one service is produced using common means of production, for example common infrastructure or common administrative systems. 60. Economies of scale and scope can work as structural barriers for new potential operators and as a competitive advantage for established competitors in the market. 61. NPT finds that Telenor has substantial economies of scale in the production of calls on fixed networks in consequence of its nationwide services and considerable number of customers. Even though other providers realise economies of scale on their own networks, the advantages will be lower due to the limited scope of the networks of other providers. For international calls it is conceivable that other foreign companies have opportunities to benefit from economies of scale that exceed Telenor s. However, the economies of scale are of less importance for assessing entry barriers in the calls markets, since the services from Telenor s competitors are largely based on the use of Telenor s switched network through the purchase of interconnection (indirect access via carrier pre-selection or carrier selection). Other providers can thus well benefit from the same economies of scale. For provision of VoB the scope of the provider's network is of minor importance for realising economies of scale. 62. Parts of a telecom operator s infrastructure and support systems can be used for the production and delivery of various services. NPT finds that Telenor, owing to its broad product portfolio and large customer base in several electronic communications markets, has somewhat larger economies of scope in these markets than any of its competitors. At the same time technological and market-related development in recent years means that Telenor s competitors in the retail market can to a greater degree than previously offer bundled products, for example in the form of triple play (telephony, broadband and TV) or bundle fixed and mobile telephony. In NPT's opinion Telenor s economies of scope can therefore not be regarded as an entry barrier to new operators in the calls markets Access to financial resources 63. Access to financial resources is important to an operator's opportunity to enter markets requiring major initial investment. Without necessary access to financial resources the operators face a significant entry barrier. 64. It would be very capital-intensive to establish adequate alternatives to Telenor s access network for access to fixed publicly available telephone services. However, a separate access network is not necessary for offering fixed calls in any of the four calls markets. The establishment costs for both carrier pre-selection operators and access-independent providers of VoB are relatively limited and can hardly be said to represent an appreciable barrier to 16

17 entry. Access to financial resources can therefore not be said to represent a significant entry barrier in the retail fixed calls markets Access to distribution and sales network 65. In markets in which the established operators have a well-developed distribution and sales network this may function as an entry barrier to potential new operators. This applies in particular in markets in which there are major costs associated with establishing distribution and sales network, or where the established operators have concluded exclusive agreements with the largest/most important distribution channels in the market. 66. Internet sales, telemarketing and direct mail are the most used sales channels aimed at households (former markets 3 and 4). In addition, telephony calls agreements are also sold along with telephones through some electronics shops/chains. 67. During the initial period after the liberalisation of these markets there were various kinds of ties between Telenor and some of the electronics chains, which limited the distribution opportunities of the new undertakings. This is not as big a problem today. 68. Providers of pre-paid telephone cards for international calls often use sales outlets such as kiosks, video shops and grocery stores. At the same time distribution via credit purchases on the Internet is also widespread. 69. For the business segment (former markets 5 and 6) the most widespread distribution form is direct sales through an in-house sales force or external partners. Dealer sales and telemarketing are also widespread in sales to small and medium-sized enterprises (SME). 70. Access to distribution and sales networks is not considered to be a significant factor in assessing whether high and non-transitory barriers to entry exist in the retail fixed calls markets Regulatory barriers to entry 71. Regulatory barriers to entry exist when market access is limited by regulatory conditions, for example requirements for public licences, resource restrictions or restrictions in regard to health, environment or safety (direct regulatory restrictions). Furthermore, various forms of price control may also have entry-deterring effects, cf. recital 11 of the Recommendation. 72. The previous absolute direct regulatory entry barriers in these markets were removed as part of the liberalisation of the telephony market in Up until the end of 2002/beginning of 2003 there was a price cap scheme for Telenor, which was based on a basket of subscription and call charges. In NPT s opinion, no regulatory barriers to entry exist in the retail fixed calls markets today Conclusion for first criterion 73. In NPT s opinion no high and non-transitory barriers to entry exist today in the retail fixed calls markets, nor are any new barriers expected to arise in the years to come. The main reason that the Authority considers the barriers to entry to be low is that it is not necessary for an operator to have their own physical infrastructure in the form of an access network in order to offer fixed calls. Indirect access to the PSTN/ISDN network by the purchase of carrier pre-selection or carrier selection from Telenor, combined if applicable with Wholesale Line Rental along with the possibility of offering unmanaged VoB, is reducing the barriers to entry. 17

18 74. The conclusion is simultaneously based on access to Telenor s PSTN/ISDN networks being available under equivalent conditions as today, i.e. continued regulation including obligations for Telenor to supply carrier pre-selection, carrier selection and Wholesale Line Rental. 4.2 Conclusion of the three-criteria test 75. Article 2 of the Recommendation explicitly states that the three-criteria test is cumulative. For markets not included in the list of relevant markets in the Annex to the Recommendation it is thus a requirement that all three aforementioned terms shall be met for a divergent market to qualify for sector-specific ex ante regulation. Since NPT concluded in section 4.1 that the condition that high and non-transitory structural or regulatory entry barriers must be present in the relevant market has not been met for the four retail fixed calls markets, the Authority believes there is no need to undertake an assessment of the other two criteria. For this reason the three-criteria test has not been met with respect to the four calls markets. Consequently, the markets no longer qualify for sector-specific ex ante regulation, and the Authority assesses the consequences of this in Chapter 5 below. 5 Decisions 5.1 Withdrawal of obligations 76. As mentioned in section 1.3 the purpose of the Recommendation is to identify product and service markets where ex ante regulation may be warranted. National authorities are not in a position to apply sector-specific ex ante regulation to markets that are not identified in the Recommendation and do not meet the three-criteria test, cf. Articles 1 and 2 of the Recommendation. 77. In NPT s opinion the four calls markets do not meet the three-criteria test, cf. section 4.2. Since the four calls markets no longer qualify for use of sector-specific ex ante regulation, there is no reason to carry out new market analyses of the four calls markets with a view to whether any undertakings have significant market power. Nor by the same token is there reason to continue the conclusion in Chapter 2 of NPT s decision of 21 April 2006, in which Telenor was designated an undertaking with significant market power in these markets. 78. NPT has considered whether the Authority should delay the phasing out of the current regulation for a transitional period in the interests of the affected operators' need to adapt to non-regulated markets. NPT has concluded that there is no need for such a transitional period, cf. section 5.4 below. 79. For this reason NPT is withdrawing its designation of Telenor as an undertaking with significant market power in the retail fixed calls markets, cf. Chapter 2 of the Authority's decision of 21 April Furthermore, NPT is withdrawing section of its decision of 21 April 2006 concerning specific obligations in the retail fixed telephony markets. The current obligations incumbent on Telenor and that are being withdrawn are: A prohibition against bundling VoB with other electronic communications services in such a way that the end-user cannot choose to purchase the services individually. 18

19 Bundles between VoB and Telenor's broadband access service is exempt from this prohibition. Any discrepancy in prices and conditions between individual services and package offers shall be transparent, objectively justified and reflect underlying cost differences, both in relation to PSTN/ISDN telephony and VoB. A prohibition against price discrimination whereby Telenor offers discounted rates for PSTN/ISDN calls to some but not to all customer groups, unless the price differences are transparent 17, objectively justified and based on underlying cost differences. An obligation to publish all temporary discounts with related terms and conditions for PSTN/ISDN calls to non-business customers. 5.2 Entry into force 80. The decision enters into effect immediately. 5.3 Consequences of withdrawing obligations 81. The current obligations to which Telenor is currently subject in the calls markets are meant to avert competition problems related to anti-competitive product bundling/crosssubsidisation and exploitive behaviour in the form of price discrimination to capture customers. In NPT s view the significance of the competition problems has been lessened compared with before. See the Authority's assessment in Chapter 7 in the decisions in market 1 10 August In NPT s opinion the deregulation of Telenor s retail services will have limited consequences. The Authority cannot see that competition in the calls markets will be adversely affected to any particular degree, given the fact that the competition problems current regulation is meant to counteract have been considerably reduced since the previous decision. 82. Since the competition problems in the markets have diminished, NPT also believes that competition law will be sufficiently effective to a greater degree than before in counteracting any competition problems related to product bundling/cross-subsidisation and exploitive behaviour in the form of price discrimination that may nevertheless arise in the calls markets. For this reason NPT believes that a lack of sector-specific ex ante regulation will not adversely affect competition in the market even though competition problems can potentially still arise. 83. Moreover, ecom regulations will continue to place certain limitations on Telenor s behaviour concerning the possibility of product bundling and price discrimination Former markets 3 and Limitations on Telenor s product bundling options in Section 5-10 of the Ecom Regulations and the general transparency obligation in Section 2-4 of the Electronic Communications Act, cf. Section 1-7 of the Ecom Regulations. 19