The proposed Code appears (inappropriately) to support incumbents investment models at the expense of competition

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1 Sky s response to the European Commission s consultation on the proposed Directive establishing a new European Electronic Communications Code Introduction 1. Sky plc ( Sky ) 1 is Europe s leading pay TV operator 2 and the UK s second largest broadband and telephony provider. 2. Sky s top line views on the draft Directive establishing a new European Electronic Communications Code ( the proposed Code ) are set out below. In the time available we have focused on two areas of reform: access regulation and consumer protection. 3. On access regulation, our top line position is that we reject the proposed Code s central premise of reducing competition from access seekers in return for entrenching incumbents control over investment. We disagree with the proposed extension of the periodicity of market reviews from three years to five years as it enables greater regulatory forbearance and the introduction of a double-lock system which may weaken a national regulatory authority s ( NRA s ) ability to impose SMP remedies. 4. On consumer protection, the proposed maximum harmonisation approach is overly prescriptive, doesn t recognise differences between how national markets are structured and unduly changes the rules on how and when communications providers communicate with their customers. I. Changes to access regulation The proposed Code appears (inappropriately) to support incumbents investment models at the expense of competition 5. A thriving UK communications sector is crucial for the development of the economy. In this digital age, communications services have rapidly and inextricably become woven into the fabric of the everyday lives of nearly all businesses and individuals. As commerce and society moves online, the central role that the communications sector plays in driving growth and productivity has become even more pronounced. 6. The successful development of the sector over the last ten years has been in part attributable to a regulatory regime that created conditions that were conducive for efficient investment and innovation and which led to effective and sustainable competition over large parts of the value chain. 1 2 Sky plc is a registered company under the EU Transparency Register. Our ID number is See for further information. Sky plc provides pay TV services in the United Kingdom, Ireland, Germany, Austria and Italy. 1

2 7. The strength of the existing European telecoms framework is that it gives NRAs autonomy to weigh factors like promoting investment against promoting competition based on what they see in their own markets. 8. Our main concern is that, throughout the proposed Code, the Commission has placed weight on the fact that certain commercial models (such as co-investment models) are, on their face, pro-competitive. This may be true in some cases but should not be presumed to be true in all cases. Instead, NRAs should assess each commercial model or market development on a case-by-case basis, looking solely on effects on competition. By being more prescriptive about how certain business models or market structures should be treated, the proposed Code may limit NRAs ability to assess the market. This may inappropriately bias NRAs towards entrenching incumbents control over investment and access rather than competition (to the ultimate detriment of consumers) and has the potential to distort the market by promoting certain business models and market structures over others. 9. The following proposed changes are of particular concern: a. Regulatory treatment of new network elements Article 74 appears to be intended to drive co-investment models by allowing co-investors the ability to benefit from firstmover advantages. Effectively, Article 74 acts as a carve-out for 'new network elements' from the requirement to impose remedies on SMP operators under Articles 66 and In our view it s unclear why the Commission saw the need to develop a specific regulatory carve-out for a single investment model. This should be assessed on a case-by-case basis, as explained above, and by reference to the Article 3 objectives. We also argue that access seekers, like Sky, should be able to benefit from access to all products made available through any new network elements on fair and reasonable terms. b. Market analysis procedure - in assessing whether a market tends towards effective competition under Article 65(1)(b), NRAs must, under Article 65(2), take into account (among other things): 'the existence of market developments which may increase the likelihood of the relevant market tending towards effective competition, such as those commercial co-investment or access agreements between operators which benefit competitive dynamics sustainably.' Our concern here is that the Commission is not applying an evidence-based framework and instead appears to assume that coinvestment or access agreements have a positive impact on competition. As explained above, this may be true in some cases but cannot be assumed in all cases. NRAs should be required to look solely at effects on competition and not make generalised assumptions based on the type of business structures used by the operators involved. c. Pricing flexibility - the proposed Code promotes the use of pricing flexibility to encourage investment in next generation networks. For example, Article 72(1) states that '[i]n determining whether or not price control obligations would be appropriate, national regulatory authorities should take into account long-term end-user interests related to the deployment and take-up of next-generation networks, and in particular of very high capacity networks' and that NRAs must 'take into account the benefits of predictable and stable wholesale prices in ensuring efficient entry and sufficient incentives for all operators to deploy new and enhanced networks.' In Sky s view, this reflects a policy shift towards preferring investment over competition, even though investment in very high capacity networks is often dependent on maintaining strong competition. While it may be appropriate to not impose price regulation on significant, risky fibre investments at least for a period in order to encourage appropriate investment, there is a strong risk that competition and consumers will be harmed in the long run from high ongoing prices for wholesale access to the new fibre services. Given the importance of vibrant retail competition in underpinning consumer demand and hence scale for these new fibre investments, it is inappropriate to position pricing flexibility as taking primacy over price regulation in order to promote investment. In practice, an NRA will need to weigh carefully 2

3 based on the available evidence the use of both pricing forbearance and charge controls in serving its objectives, including the promotion of appropriate investment and competition. NRAs already have this power and, in this regard, it is not justified for the proposed Code to elevate the use of one remedy over the other. Extension of the periodicity of market reviews 10. The proposed Code proposes to extend the maximum review period from three to five years to 'allow operators longer term planning' and to 'provide national regulators with greater flexibility as regards the timing of market reviews' (Article 65). In addition, NRAs may request a one year extension to the five year maximum provided that the NRA provides the Commission with a reasonable basis for the extension and that the Commission doesn't object within 1 month of the notified extension. 11. Experience to date shows that there is no sound case for extending the current three year review process, which works well in practice. The key benefit of a shorter cycle is its ability to keep up with changing circumstances and to take into account the very dynamic nature of the telecoms sector. Indeed, to revert back to a longer cycle for review would be to reverse the progress made in 2009 which shortened the cycle to three years. It would also introduce greater uncertainty (e.g. as to the appropriateness of remedies and the impact of market developments). 12. Moreover, there is no evidence at all that the three year review cycle has discouraged investment. On the contrary, infrastructure investments are typically long term with long payback periods much longer than three or even five years and have been possible under the current market review periods. BT constantly claims that since 2010 it has invested substantial amounts in upgrading its network with VDSL technology. It recently stated that it has invested over 10 billion in broadband services over the past decade. New double-lock system allowing EU-level vetoes of proposed SMP remedies 13. Currently, where standard remedies are imposed by an NRA, the Commission may provide comments but ultimately may not veto the imposition of an SMP remedy. As part of the reform of BEREC, a new double-lock system is proposed. Where BEREC and the Commission agree on their position regarding an NRA s draft remedies, the NRA could be required to amend or withdraw the draft measure. 14. In Sky s view, this proposal is unhelpful, as it may weaken NRAs ability to impose remedies. We also question whether the proposed double lock system is compatible with the principle of subsidiarity. II. Changes to consumer protection 15. Sky considers that the current legislative framework or existing market mechanisms are fully adequate to deal with issues that arise in respect of the consumer protection regime applicable to electronic communications services. 16. In this context, the proposed maximum harmonisation approach (Recital 232 and Article 94) is overly prescriptive, doesn t recognise differences between how national markets are structured and unduly changes the rules on how and when communications providers communicate with their customers. Changes in the following areas are of particular concern: a. Switching- Sky notes that the proposed Code envisages (in Article 99(1)) a make before break model for switching (i.e. a new service would need to be up and running before an old service was stopped). The proposed Code also provides that the receiving provider shall lead the switching and porting process (Article 99(5)). 3

4 However, in Sky s view, no further measures are required to facilitate switching, as the current switching processes work well for consumers. There is no evidence of serious consumer harm; nor is there any evidence of any adverse effects on competition, whether in the provision of bundles, or of individual services to justify further intervention and a move to a receiving provider led process. Further, we consider that it is inappropriate to examine switching issues, in any sector, through the lens of a pre-determined preference for a receiving provider led process, given the significant costs for consumers associated with receiving provider led processes. These costs include: i. Many switches taking longer; ii. Consumers receiving fewer retention offers from their existing provider and there being fewer opportunities for the existing provider to right-size the consumer s existing package so it best meets the consumer s needs and budget; iii. Consumers not knowing the implications of switching when they agree to switch; iv. Consumers are more likely to be the victim of slamming, erroneous transfers or mis-selling and v. The underlying processes are complex and costly to implement with those costs invariably being passed on to consumers. National regulatory authorities should be expected to evaluate the costs and benefits of different switching processes carefully to ensure than any changes are necessary and proportionate before introducing process reforms. The Code, to the extent it includes prescriptive rules on switching, should reflect that approach instead of a pre-determined preference for receiving provider led processes in all cases. b. Bundled offers - the proposed extension of certain key articles in the Code to all elements of a bundle (Article 100), is far too broad and ill-considered and, in the absence of evidence of consumer harm or market failure, causes Sky serious concern. In the first instance, it is so broad that there appears to be no limit to the type of bundled products that the provision could apply to. Second, in the context of pay TV, the provision of pay TV services is fundamentally different to communications services not least as no physical infrastructure (namely a telephone line) is required to be switched. Moreover, pay TV is already extensively regulated under consumer protection laws deriving from various existing EU Directives (e.g. Unfair Contract Terms Directive, the Unfair Commercial Practices Directive, and the Consumer Rights Directive) in addition to the UK Consumer Rights Act which has new provisions specific to digital content. The draft Digital Content Directive 3 is a more appropriate vehicle to address any perceived gaps in the legal framework covering pay TV services. Inclusion in the Code risks muddling content services with communications services when the two are fundamentally different. c. Early termination charges ( ETCs ) - The proposed Code (Article 98(4)) appears to lay down only two bases for calculating ETCs To reflect the value of subsidised equipment bundled with the contract or reimbursement for any other promotional advantages marked as such at the moment of the contract conclusion. The first of these reflects the mobile model of subsidised handsets and the second reflects the current legal approach in some countries (e.g., Italy). Neither of these reflects what is common across the UK market which is to base ETCs on the subscription 3 Proposal for a Directive on certain aspects concerning contracts for the supply of digital content,com(2015)634 final. 4

5 price that the consumer would have paid if they had adhered to the terms of the contract they agreed. This approach is broadly designed to ensure providers are able to recover a broad range of sunk acquisition costs (e.g., for equipment and services such as installation) that are typically not passed on to consumers as upfront payments. ETCs are already regulated by unfair terms legislation which ensures that consumers are protected by only having to pay fair ETCs. This means that Article 98(4) is unnecessary. If it does remain in the proposed Code in some form, at the very least, NRAs should have discretion to reflect the different market structures and pricing models in place in the Member State. d. Notice and churn right if any changes that are not exclusively to the benefit of the end-user - Article 20(2)) of the current Universal Services Directive provides a penalty-free churn right and prescriptive notification requirement in the event of a modification to the contractual conditions. However, Ofcom s rules (General Condition 9.6) include a threshold of material detriment before this applies. Ofcom s approach is a sensible one but Ofcom could not maintain it under the Code due to maximum harmonisation A materiality threshold is necessary as it limits the number of contract change notices providers need to give in highly competitive and innovative sectors where products and services change regularly to meet evolving consumer needs. The new language in Article 98(3) would conceivably require contract change notices to be issued on a durable medium for modest changes that are likely to only impact a few customers (for example changes to call rates to obscure destinations). This change would cause annoyance to consumers (who would receive notices from their provider that they do not consider important) and would have a significant and costly operational impact on all providers in the UK. e. Prescribed form of contract information Under the proposed Code (Article 95(5)) BEREC will be expected to issue a contract summary template that providers will need to complete and provide to customers. In Sky s view this approach mandates how communications providers communicate with their customers in an overly-prescriptive manner. 17. On a more positive note, we note that under the proposed Code 24 month contracts will remain possible (Article 98(1)). This is particularly useful when set against the de facto 12 month limit in the draft Digital Content Directive. There is now a clear and very fundamental inconsistency between the Digital Content Directive and the proposed Code which we hope will be resolved in the context of the ongoing Council negotiations on the Digital Content Directive. In our view, contracts of up to 24 months are preferable to 12 month contracts as they preserve flexible cost recovery options that benefit consumers looking for low entrycost access to innovative new products and services. Sky December