Wholesale Broadband Access Markets

Transcription

1 Wholesale Broadband Access Markets Retail Broadband Market Response to Consultation C09/17 22 nd September 2017 Gibraltar Regulatory Authority Communications Division 2nd Floor, Eurotowers 4, 1 Europort Road Gibraltar Telephone: communications@gra.gi Web:

2 Contents Executive Summary Introduction Scope of the review Previous Reviews Market Characteristics Structure of this document Regulatory Background European regulatory background Gibraltar regulatory background Market Definition Methodology Retail broadband market Wholesale broadband access markets Market Analysis Methodology Competiton assessment: retail broadband at a fixed location Competiton assessment: wholesale broadband access Preliminary conclusions and SMP designation if appropriate Designation of undertakings with SMP Proposed SMP Obligations Competition problems Principles in determining SMP obligations Retail broadband at a fixed location Wholesale local access provided at a fixed location Wholesale central access provided at a fixed location Annex A Notification of draft measures pursuant to Article 7(3) of Directive 2002/21/EC Summary Notification Form... 52

3 Executive Summary The communications regulatory framework requires the Gibraltar Regulatory Authority (GRA) to define relevant markets susceptible to ex-ante regulation, appropriate to national circumstances in accordance with the market definition procedure outlined in the Framework Directive 1. In addition, the GRA is required to conduct an analysis of the relevant markets to decide whether or not they are effectively competitive and, having identified competition problems, propose appropriate regulatory measures. On 8 th May 2017, the GRA issued a national consultation on Wholesale Broadband Access Markets (wholesale local and central access markets 3a and 3b) and the Retail Broadband Market (public consultation C02/17). The consultation period ended on 8 th June The GRA received submissions from two operators listed below by close of the consultation period. Detailed responses to the consultation were provided by: Gibfibrespeed Gibtelecom. The GRA set out in the consultation document how, on a preliminary basis, it had found each of the three markets reviewed to be susceptible to ex-ante regulation and analysed those markets to see if there is evidence of market power. The analyses took into consideration a range of factors in the assessment of market power including high market shares; conduct which would indicate market power; countervailing buyer power; barriers to entry; potential competition and vertical integration. The GRA thanks the respondents for their submissions. Having considered the views of the respondents, the GRA sets out in this document its conclusions regarding the market review process including its proposed SMP obligations and subsequent notification to the Commission, BEREC and other national regulatory authorities (NRAs) in accordance with Article 7 of the Framework Directive. Market Definition The GRA proposes to define the following broadband markets: Wholesale local access provided at a fixed location (WLA) Wholesale central access provided at a fixed location for mass-market products (WCA) Retail Broadband Market. 1 DIRECTIVE 2002/21/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on a common regulatory framework for electronic communications networks and services (Framework Directive) OJ [2002] L 108/33. 1

4 Market Analysis The markets defined were analysed to see if there was evidence of market power. The analyses took into consideration a range of factors in the assessment of market power including high market shares; barriers to entry; economies of scale; vertical integration, potential competition and countervailing buyer power. Article 16(4) of the Framework Directive states, Where a national regulatory authority determines that a relevant market is not effectively competitive, it shall identify undertakings which individually or jointly have a significant market power on that market in accordance with Article 14 and the national regulatory authority shall on such undertakings impose appropriate specific regulatory obligations referred to in paragraph 2 of this Article or maintain or amend such obligations where they already exist. Where there is a finding of SMP in wholesale markets, the GRA is obliged to impose obligations to remedy competition problems. SMP obligations are outlined in Regulation 10 to 14 of the Communication (Access) Regulations 2006 (The Regulations). Such obligations may include: Transparency Non-Discrimination Accounting Separation Access Price control and cost accounting. Where there is a finding of SMP in retail markets, the GRA is obliged to impose obligations to remedy competition problems. SMP obligations are outlined in Regulation 14 of the Communication (Universal Service and Users Rights) Regulations The GRA s view is that Gibtelecom has SMP in the markets for wholesale local access provided at a fixed location, wholesale central access provided at a fixed location for mass market products and retail broadband. Gibtelecom owns and controls a fibre-to-the-node (FTTN) network across Gibraltar with approximately 100% network coverage. At present, the wholesale markets only consist of self-supply as no operator is currently contracting any wholesale services from another. At the time of writing, Gibtelecom has approximately 73% of the retail broadband market in terms of subscriber numbers. SMP Obligations The GRA proposes to apply the following SMP obligations on Gibtelecom in the following markets: 2

5 For the wholesale broadband access markets (markets 3a and 3b), the GRA has defined the following obligations as being appropriate, proportionate and justified in light of the market failures identified: Transparency Non-discrimination Access Accounting separation Price controls and cost accounting. For the retail broadband market, the GRA has defined the following obligations as being appropriate, proportionate and justified in light of the market failures identified: Transparency Non-discrimination Accounting separation Cost accounting. The GRA has considered regulatory options in light of its overall objectives and in the context of the problems identified in the wholesale market. The application of SMP obligations on relatively small authorised operators in Gibraltar shall therefore take due account of the limited resources available to such operators to engage in detailed regulatory compliance arrangements. The GRA believes the SMP obligations set out in this market review supports the objectives outlined in the Communications Act 2006 (the Act), as to how the GRA should exercise its functions. The SMP obligations imposed aim to address market failure, protect consumers against the exercise of market power and promote competition in the wholesale and retail broadband markets. 3

6 1. Introduction 1.1 Scope of the review The main purpose of a market review is to identify the competitive conditions prevailing in a market by assessing systematically the competitive constraints that are faced by undertakings in the market. A market review commences by defining a market susceptible to ex-ante regulation, which is then analysed to assess the degree of effective competition. The competition assessment determines whether any undertaking is found to have SMP, which is held to be equivalent to the concept of dominance under competition law, and is defined as the ability to behave independently of competitors, suppliers and ultimately businesses and consumers in that market. If there is no SMP, the market is effectively competitive and does not require ex ante regulation 2. If there is SMP, then the market is not effectively competitive and ex ante regulation should be imposed, at either the wholesale or the retail level (or both), to counteract the potential negative effects of the competition problems that may be caused by the SMP operator. The European Commission has published a Recommendation on Relevant Markets. The Recommendation defines four relevant markets as being susceptible to ex ante regulation. These are: Market 1: Market 2: Market 3: Wholesale call termination on individual public telephone networks provided at a fixed location Wholesale voice call termination on individual mobile networks a) Wholesale local access provided at a fixed location b) Wholesale central access provided at a fixed location for mass market products Market 4: Wholesale high-quality access provided at a fixed location. This review takes into account two of the markets above in Gibraltar: Market 3(a) Wholesale local access provided at a fixed location (WLA) Market 3(b) Wholesale central access provided at a fixed location for mass-market products (WCA). The review considered Market 3(a) and Market 3(b) of the Recommendation and collectively referred to these markets as the Wholesale Broadband Access Markets. The GRA proposed and remains of the view that, whilst these markets are separate, the current market conditions in Gibraltar mean that conditions within these two markets are similar enough to be considered at the same time in this review. 2 Ex ante regulation is the application of regulation before an abuse of power has necessarily occurred. The reasoning behind its application is that finding that an operator has SMP means that the operator is likely to have the incentive and motivation to behave in a way which exploits its market power to the detriment of competitors and ultimately to consumers. Ex ante regulation can be contrasted with ex post regulation, which investigates an incident which has already happened. 4

7 In addition, the GRA reviewed the retail broadband market, which is not included in the Commission s Recommendation, but is the downstream market for which regulation of the other two markets would seek to develop and support sustainable competition. 1.2 Previous Reviews The Retail Broadband market in Gibraltar has not previously been reviewed. Both the WLA market and the WCA market were last reviewed in The GRA designated Gibtelecom with SMP in both markets and imposed obligations of transparency, non-discrimination, access, accounting separation, price control and cost accounting. Gibtelecom was the only player in the market at the time. 1.3 Market Characteristics This description is pertinent to all three markets considered in this review. Broadband is a technical term which describes a data communications technology that provides a permanent, high throughput connection. Typical speeds can vary from 2 Megabits per second (Mbit/s) to 300 Mbit/s. Broadband technologies are able to provide a mix of data, voice, and video services over one pipe. Broadband connections are typically asymmetric but can also support equal downstream and upstream rates. In this context, broadband is thus taken to mean any technology that uses a permanent connection, has the capability of providing bi-directional data transmission rates that are higher than achievable using a narrowband (e.g. dial-up/isdn modem) technology, but without resorting to the use of a dedicated end-to-end network resource (such as leased lines). Local market structure In Gibraltar, there are currently four operators authorised to provide broadband services: Gibtelecom Sapphire Networks U-mee Gibfibrespeed. Gibtelecom Gibtelecom is the incumbent operator within Gibraltar. Gibtelecom owns and controls a fibre-to-the-node (FTTN) network across Gibraltar with 100% coverage. It currently offers 16, 25, 50 and 100mbps SuperSwift products over its FTTN network priced between 24 and 54 per month. 3 Wholesale fixed markets Decision Notice 04/08. 5

8 Gibtelecom is currently also offering a new residential broadband product inside a product bundle which includes 100Mbps broadband at home plus 1000 mobile mins, 1000 SMS and 10GB of data on your mobile; and Wi-Fi at public hotspots around Gibraltar for 55 per month. Other promotions available to existing customers on application is Gibtelecom s Go Double reward scheme where customers can get double their mobile data allowance and double their home broadband speed at no extra cost. Having been previously designated with SMP in the two wholesale markets, Gibtelecom is currently subject to a number of SMP obligations, one of which includes the availability of a reference unbundling offer (RUO) for other operators to procure local loop unbundling services in the wholesale local access market. The GRA notes that since its introduction in 2009, no other operator has taken up the offer to use this service. Gibtelecom also has a Reference Wholesale Broadband Access Offer (RWBAO) available, which allows operators to contract wholesale broadband services. To date, no operator has purchased any wholesale products from Gibtelecom. Gibtelecom also provides a product that supports resale of its legacy VDSL service (its Port and Pipe product) which is currently being used by Sapphire networks. Gibtelecom currently has 73% 4 share of the retail broadband market in terms of subscriber numbers. Sapphire Networks At the time when Sapphire Networks was first deploying its network, it also agreed with Gibtelecom to resell its VDSL products by using Gibtelecom s Port and Pipe product, in order to access customers where it did not have a physical presence. It is the GRA s understanding that Sapphire Networks no longer offers these services to new customers. Sapphire Networks has, for a number of years, also provided direct internet services through its own limited network, namely Sapphire Direct, Metro Internet and Business Metro Internet, with speeds ranging from 4 to 100Mbps. However, the company is not currently offering these products to new residential customers. All existing residential customers are being directed towards another provider, U-mee, which along with Sapphire Networks, is wholly owned by Broadband Gibraltar Ltd. Sapphire Networks is therefore focusing its business on corporate broadband clients only, leaving U-mee to fully dedicate its efforts to residential broadband customers. Sapphire Networks current market share is approximately 3% of the retail broadband market in terms of subscriber numbers. U-mee Since 2013, U-mee has progressively rolled out a fibre-to-the-home (FTTH) network which today covers around 50% of the population and has plans to achieve full coverage within the next few years. 4 This figure was quoted as around 75% in public consultation C02/17. 6

9 U-mee currently offers 100 and 300mbps packages priced at 29 5 and 59 a month respectively. This service includes a HDTV package ( U-mee TV ) which includes over 170 HD channels and an IP telephony service named U-mee talk. The company also recently launched its TV on the go service which allows you to watch online content on mobile devices via its u-mee TV+Go mobile app. In addition, as part of the U-mee family campaign, existing customers on the 100mbps package who refer a new subscriber to sign up are rewarded with an upgrade to a 300Mbps package for the same price. If the new subscriber chooses the 100Mbps service, they will immediately be up-graded to a 200mbps download speed service for the price of the 100mbps package. U-mee is currently estimated to have a 14% share of retail broadband market in terms of subscriber numbers. Gibfibrespeed A.J Sheriff Electrical trading as Gibfibrespeed was authorised to provide communications networks and services in Gibraltar towards the end of Gibfibrespeed s FTTH network currently reaches around 80% of Gibraltar s population. Gibfibrespeed currently offers 10, 20, 50, 100 and 200mbps packages priced between 10 and 65 per month for residential customers and 20, 50, 100 and 200mbps packages for small to medium sized businesses (SMEs) priced between 20 and 95 a month. Gibfibrespeed also offers other packages where it bundles broadband, cable TV and IPTV services. Gibfibrespeed s current market share in terms of subscriber numbers is estimated to be around 10%. 1.4 Structure of this document Section 2 sets out the regulatory and legislative background to the reviews. Section 3 outlines the market boundaries and describes the GRA s proposed market definitions. Section 4 analyses the different markets by conducting competition assessments and Section 5 proposes the SMP designations on the relevant operators. Section 6 proposes the SMP obligations in the different markets. Annex A outlines the notification of draft measures pursuant to Article 7(3) of Directive 2002/21/EC and includes a summary notification form. 5 This is an offer price for new subscribers. The 29 monthly fee shall be paid for the first year only which then increases to 39 per month. 7

10 2. Regulatory Background 2.1 European regulatory background The European regulatory framework for electronic communications networks and services is a set of five Directives 6 : Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services (the Framework Directive) 7 Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities (the Access Directive) 8 Directive 2002/20/EC on the authorisation of electronic communications networks and services (the Authorisation Directive) 9 Directive 2002/22/EC on universal service and users' rights relating to electronic communications networks and services (the Universal Service Directive) 10 Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector (the Privacy Directive) Gibraltar regulatory background These five European Directives were implemented as part of the Communications Act (the Act). The legislation enables the GRA to carry out reviews of competition in relevant electronic communications markets to ensure that regulation remains appropriate in the light of changing market conditions, otherwise known as market reviews. In conducting a market review the GRA must take account of the SMP procedures in the Act, sections (the SMP procedures), as well as the provisions dealing with co-operation with the European Commission, BEREC 13 and the regulatory authorities in the Member States, sections As Amended in DIRECTIVE 2009/140/EC. 7 See footnote 1 above. 8 DIRECTIVE 2002/19/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on access to, and interconnection of, electronic communications networks and associated facilities (Access Directive) OJ [2002] L 108/7. 9 DIRECTIVE 2002/20/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on the authorisation of electronic communications networks and services (Authorisation Directive) OJ [2002] L 108/ DIRECTIVE 2002/22/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on universal service and users' rights relating to electronic communications networks and services (Universal Service Directive) OJ [2002] L 108/ DIRECTIVE 2002/58/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 12 July 2002 concerning the processing of personal data and the protection of privacy in the electronic communications sector (Directive on privacy and electronic communications) OJ [2002] L 201/ Communications Act 2006, Act No. 15, Please note this legislation implemented the latest regulatory reform package of Body of European Regulators of Electronic Communications. 8

11 Section 39 of the Act requires the GRA to take due account of all applicable guidelines and recommendations which have been issued or made by the European Commission in pursuance of the provisions of a European Community instrument. Therefore, the GRA should take due account of the Commission Recommendation of 9th October 2014 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC (the Recommendation). Once the GRA has defined relevant markets, it shall analyse the state of competition within these markets to determine whether they are effectively competitive or not. Where markets are deemed to be effectively competitive or will become effectively competitive within the lifetime of the review, any existing regulation must be withdrawn 14. Where markets are deemed to be uncompetitive, the GRA must consider appropriate regulatory obligations on any undertaking which has SMP. The main purpose of a market review is to identify the competitive conditions prevailing in a market by assessing systematically the competitive constraints which are faced by undertakings in the market. A market review commences by defining a market, which is then analysed to assess the degree of effective competition. In accordance with European Commission Guidelines, the market analysis procedure is prospective that is, it must be forward-looking. The period covered by this review is three years from the date of the GRA s final decision. The GRA may initiate a new review at any time during this period, should significant market changes occur which are not in line with the analysis set out in this review. A market review has three main components: Definition of the relevant market(s) susceptible to ex-ante regulation Assessment of competition in each market, in order to identify competitive constraints and assess whether any undertaking(s) has SMP Where market power is identified, consideration of the appropriate SMP obligations in relation to that market. The GRA followed the approach recommended by the European Commission, and took account of the various guidelines and recommendations published by the European Commission, as well as the experience of other European National Regulatory Authorities (NRAs). The Recommendation has been taken into account when deciding which markets will be reviewed. It is important to recognise that the wholesale markets in this review are already subject to regulation. In order to take this into account, the European Commission recommends the use of a modified greenfield approach, where markets are analysed absent regulation 15, except when that regulation is not in relation to an SMP obligation, or is related to another market. 14 Please note that regulation at retail level may depend on regulation at the wholesale level. 15 At the retail level, any existing regulation at the wholesale level will be included in the analysis. 9

12 The European Commission s Recommendation defines four relevant markets as being susceptible to ex ante regulation. These are: Market 1: Market 2: Market 3: Wholesale call termination on individual public telephone networks provided at a fixed location Wholesale voice call termination on individual mobile networks a) Wholesale local access provided at a fixed location b) Wholesale central access provided at a fixed location for mass market products Market 4: Wholesale high-quality access provided at a fixed location. This review took into account two of the markets above in Gibraltar: Market 3(a) Wholesale local access provided at a fixed location (WLA) Market 3(b) Wholesale central access provided at a fixed location for mass-market products (WCA). This review considered Market 3(a) and Market 3(b) of the Recommendation and collectively referred to these markets as the Wholesale Broadband Access Markets. It is the GRA s view that, whilst these markets are separate, the current market conditions in Gibraltar mean that conditions within these two markets are similar enough to be considered at the same time in this review. Additionally, this review covered the retail broadband market. 10

13 3. Market Definition 3.1 Methodology The market definition procedures are designed to identify in a systematic way the competitive constraints encountered by providers of electronic communications networks and services. Market definition is not an end in itself it is concerned with identifying the boundaries of a market so that the competitive conditions can be assessed, and, if appropriate, ex ante regulation can be put in place, or maintained. According to the European Court of Justice 16, a relevant product market comprises all products or services that are sufficiently interchangeable or substitutable with its products, not only in terms of the objective characteristic of those products, their prices or their intended use, but also in terms of the conditions of competition and/or the structure of supply and demand for the product in question. In essence, this leads to a definition of the market s boundaries. The process involves considering constraints arising on both the demand and supply sides of a market (and their interaction). The constraints are those which would apply to a so-called hypothetical monopolist 17, such that the hypothetical monopolist would be constrained in price setting behaviour. Hence, critical to the market definition process is the degree of substitution identified on the demand and supply-sides of the market. The Act requires the GRA to take due account of all applicable guidelines and recommendations which have been issued by the European Commission relating to market identification and analysis 18. As per the European Commission s guidelines on market analysis and the assessment of SMP, demand-side substitutability is used to measure the extent to which consumers are prepared to substitute other services or products for the service or product under investigation. Supply-side substitutability indicates whether suppliers other than those offering the product or service in question would switch in the immediate to short term their line of production to offer the relevant products or services without incurring considerable additional costs. The European Commission s guidelines also require the geographic coverage of markets to be considered. A relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products and/or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas. The GRA s proposed definitions for the WLA and WCA are set out below. 16 See, for example, Case 322/81, Michelin v. Commission [1983] ECR 3461, as well as the Commission Notice on the definition of relevant markets for the purposes of Community competition law ( the Commission Notice on Market Definition ) OJ 1997 C 372/3, and the SMP Guidelines. 17 A method for identifying market boundaries is known as the hypothetical monopolist test (also known as the SSNIP test, small but significant non-transitory increase in price test). This test assesses whether a hypothetical monopolist is able to increase price profitably for a product or service. 18 Section 39(1). 11

14 3.2 Retail broadband market The retail market definition exercise identifies the set of products that could potentially form part of the market or markets under investigation. In order to define the boundaries of products and services in the retail broadband market, the GRA considered the following: Are residential and corporate broadband services in the same market? Are retail broadband products provided over DSL and fibre in the same market? Are retail broadband products of differing speeds in the same market? Are fixed-line retail broadband products in the same market as mobile broadband products? Are residential and corporate broadband services in the same market? NRAs should specifically analyse whether two retail products which would significantly differ in terms of quality of service levels, features and product characteristics such as (dedicated) capacity, availability, contention and the guaranteed repair times, could be regarded as substitutes from an end-user perspective. The NRAs should also conduct a supply-side analysis to determine whether providers of mass-market services are capable of offering bespoke highquality services within a short time period and without incurring significant additional costs. It seems likely that, based on such differences in demand and where mass-market providers are unable to easily switch to offering tailored business products, NRAs will find that there is no substitutability between these products. In such cases, NRAs should define two separate retail markets, as described below. The European Commission usually identifies two separate markets for residential and corporate services, considering that contractual details and services offered in these markets may differ significantly. Residential services are in most cases restricted to non-professional usage. Residential and non-residential services usually differ significantly in terms of characteristics (virtual private network, security options, etc.), usage (quality of service, availability and data rate) and tariffs (residential services are generally cheaper than business services). In Gibraltar, SMEs can purchase packages that are fairly similar to those of residential customers, with minor additions such as multiple addresses and web hosting facilities. These connections are asymmetric in nature and are provided at similar speeds to residential packages. However, larger corporations purchase significantly different products (leased lines) that provide much higher bandwidth, security and quality of service. Such products are usually superior to standard broadband packages and priced significantly more expensively than residential products. The GRA considered that, in line with the European Commission, the business broadband options available to SMEs in Gibraltar do not fall into the same market as the leased line products available to larger entities. The two are not substitutes for each other, given the significant difference in level of service and price. 12

15 The GRA considered that, given the similar characteristics and price points, residential broadband and business broadband available to SMEs should fall within the same market. Given that networks already provide coverage throughout Gibraltar, the GRA considers that it would be relatively easy for an existing provider to start offering residential or business services following a non-transitory 5% to 10% increase in price. Preliminary conclusion Following the analysis above, the GRA concluded that residential and business broadband services fall within the same relevant product market. Are retail broadband products provided over DSL and fibre in the same market? The GRA observed that Gibtelecom, Gibfibrespeed and U-mee all compete directly with each other despite their networks being physically different: Gibtelecom uses fibre-to-the-node and VDSL Gibfibrespeed uses fibre-to-the-home and coaxial U-mee uses fibre-to-the-home. In terms of functional characteristics, fibre and DSL broadband are perceived by customers as being the same regardless of technology used. They both exhibit similar quality of service and similar additional services such as VoIP and IPTV can be provided. Preliminary conclusion The GRA s provisional conclusion was that the retail broadband market includes both DSL and fibre and therefore fall in the same relevant market. Are retail broadband products of differing speeds in the same market? Broadband products in Gibraltar are available in an incremental range of speeds. The GRA did not consider there to be any speeds available in the range of products on offer to end-users that do not classify as substitutes for other products. Given the increase in the speed of the lowest available packages over the years, the vast majority of day-to-day uses for broadband internet can be accomplished on the lowest speed packages available 19 and therefore the GRA does not believe that any products fall into different markets based on their functionality. Additionally, the range of available speeds are priced incrementally, meaning that a small increase in price in one speed would likely lead some customers to adjust their choice of speed. Preliminary conclusion It was the GRA s preliminary conclusion, given the incremental nature of the speeds and the prices for broadband products, that products of different speeds are substitutes of each other (using the principle of the chain of substitutability) and therefore fall within the same market mbps offered by GibFibreSpeed is sufficient for streaming video-on-demand content. 13

16 Are fixed-line retail broadband products in the same market as mobile broadband products? Mobile products in Gibraltar are currently set at 3G and 4G+ speeds. Whilst these mobile services will have theoretical bandwidths similar to some fixed-line broadband services, mobile broadband services do not offer speeds as high as those offered in the fixed market and data limits are often applied. Service reliability, resilience and availability of mobile broadband services are generally lower than for fixed-line products and the pricing is considerably higher. Most consumers will therefore not see mobile products as a viable substitute for fixed-line alternatives. Preliminary Conclusion The GRA considered that the characteristics of mobile broadband services differ sufficiently from fixed broadband services for these products to fall within a separate market to fixed-line broadband products. Geographical market According to established case law, the relevant geographic market comprises an area in which the conditions of competition are similar across the area, and which can be distinguished from neighbouring areas where the conditions of competition are different. The GRA believes that the geographic market for all retail broadband is Gibraltar. There are no significant differences in the conditions of demand or supply within Gibraltar, and similar services are offered on the same terms and conditions throughout. Proposal: the geographical boundary for the retail broadband market defined above is all of Gibraltar Summary of retail broadband market definition According to the analysis above and the evidence available to the GRA, the following preliminary conclusions are set out below: Residential broadband and corporate broadband are in the same relevant market, with leased line products for business constituting a separate market Retail broadband products provided over DSL and fibre are in the same relevant market Separate speeds of retail broadband do not constitute separate relevant markets The geographical scope of all markets is Gibraltar Three-criteria test In addition to identifying the boundaries of markets, the European Commission s guidelines require that NRAs apply a specific test, known as the three criteria test. The European Commission guidelines require that the answer to each of the three criteria questions should be yes. If one is answered no, then the market does not qualify as a market susceptible to ex ante regulation. 14

17 The three criteria are: Is there the presence of high and non-transitory barriers to entry? Does the market structure not tend towards effective competition within the relevant time horizon? and Is competition law alone insufficient to adequately address the market failure(s) concerned? High and non-transitory barriers to entry Barriers to entry may be structural, legal or regulatory. Structural barriers exist when the market is characterised by absolute cost advantages, substantial economies of scale/scope, capacity constraints and high sunk costs. These characteristics create asymmetric conditions between operators, obstructing market entry or expansion of competitors. Historically, Gibraltar has been characterised by the existence of a single infrastructure capable of offering local access products on a national scale. The high sunk costs and time needed for potential entrants to replicate the infrastructure of such a ubiquitous access network meant that the barriers in this market were considered high and non-transitory. As a result, this market was deemed susceptible to ex-ante regulation and, as a result of an SMP finding on Gibtelecom, regulations were imposed further upstream in wholesale markets. The situation in Gibraltar is changing. Whilst Gibtelecom s network is in the process of being replicated by two market entrants, it is still at great cost to the alternative providers. Entering the retail market with their own fibre services has required substantial investment by the alternative providers 20 and it remains to be seen if the competitors can reach the required economies of scale to successfully compete with Gibtelecom in the longer term. Given the existence of the ubiquitous network of Gibtelecom, along with its associated sunk costs 21, it will require the new providers to reach significant shares in the customer base to be able to obtain the same economies of scale and thus compete at the same cost level as the incumbent. Tendency towards effective competition within relevant time horizon Whilst Gibfibrespeed and U-mee are deploying fibre networks, it remains uncertain whether this will result in effective sustainable competition over the period of this review and beyond. There have been instances in the past 22 whereby alternative providers have entered the market on the back of large infrastructure investments and have subsequently exited the market. As discussed in the section above, in order to successfully compete with the incumbent, new alternative providers will have to attain significant market share to compete with both the economies of scale of the incumbent and make up for the fact that the incumbent has already covered many of its sunk costs in the past, whilst new providers will have to cover this cost. 20 Sapphire Networks spent an estimated 15m on their fibre network: 21 That the costs for will already have been recovered new providers will still have to cover these costs. 22 CTS Gibraltar Limited launched a WiMax service in 2008 that subsequently went out of business. 15

18 Whilst efficiency gains from having newly designed network topologies, taking into account the latest technological considerations will mean that they may be able to compete with slightly lower market shares than the incumbent, they may still need to take a significant share of the market. Given that the alternative operators combined only control 27% 23 of the market, the GRA cannot conclude with any level of certainty that the market will tend towards being competitive within the period of this review or beyond. Competition law There is no competition legislation in Gibraltar and so, by default, competition law in Gibraltar is inadequate to address market failure. The market therefore passes this test. This market satisfies the three criteria test and the GRA considers this market to be susceptible to ex ante regulation. Question 1: Do you agree with the definition of the retail broadband market and that it satisfies the three criteria test? Please provides reasons for your answer. Views of Respondents Gibfibrespeed commented that the company is clear that residential and SME broadband services fall within the same relevant product market. The company understands that they compete in this market with Gibtelecom and U-mee using fibre based systems, whilst Gibtelecom use a hybrid copper and fibre system. However, Gibfibrespeed state that there appears to be no differentiation in the nature of the service provided and all the technologies apply to the same market criteria. Gibfibrespeed would agree that there is a unique high end, high use, high value market which may be separate and the GRA must ensure that Gibtelecom does not leverage dominance in the residential and SME market to create dominance in the high end market. Gibfibrespeed considers that it will only be a matter of time before mobile broadband products catch up with fixed line products and these may have to be considered in future reviews as part of the broadband residential and SME market. Gibfibrespeed also mention that there is a presence of high and non-transitory barriers given the need to build its own network in order to compete. Therefore, the company believes that at present, the criteria points towards a susceptibility to ex-ante regulation. Gibtelecom does not agree with the GRA s decision to review the retail broadband market. Consequently, it does not agree with the definition of the retail broadband market, that the three criteria test is satisfied, or the application of SMP obligations on Gibtelecom. The company believes there are a number of shortcomings with regards to the GRA s views on the review of the retail broadband market concerning a lack of detail and justification, unprecedented application of retail ex-ante measures, the application of the three criteria test, market share data and the conflation of TV services with retail broadband. 23 This figure was quoted as approximately 24% in public consultation C02/17. 16

19 Gibtelecom says that the retail broadband market has never been listed by the European Commission as a market susceptible to ex-ante regulation and the GRA has never taken action prior to this market review of applying SMP measures to it. The company continues that SMP procedures and practice require an NRA, the GRA in our case, to make a special showing before applying SMP to a market not listed in the European Commission s market recommendations. The EU recommendations also presume that when both a retail market and its upstream wholesale market are not effectively competitive, SMP measures should be applied only to the wholesale market, as had been the case with the previous wholesale broadband access review in 2007/08. Again, Gibtelecom believes specific circumstances are needed to also in parallel apply SMP measures to the retail market. The company stated that EU recommendations rely instead on SMP remedies imposed on the upstream wholesale market. It is only when the wholesale remedies prove inadequate in that there is no tendency towards competition in the relevant market, that the SMP legal framework supports the added imposition of SMP remedies on the retail market. Gibtelecom believes that the GRA, to the degree it is justified in holding the company to have SMP status, should only impose SMP obligations on the wholesale broadband markets. The company mentions there is no evidence that the intervention by the GRA at the wholesale broadband access market level since 2008 has been unsuccessful. Gibtelecom has had regulatory approved wholesale unbundling and broadband access offers on the table for other authorised operators to make use of since the requirement to have these documents made available were first instituted a number of years ago (Gibtelecom s RUO was first made available in 2009). The fact that these have not been taken up by competitors is not a showing in and of itself that the market has failed, but rather commercial decisions taken by these alternative providers. To Gibtelecom s knowledge, there is no precedent for declaring the retail broadband market as relevant and subsequently finding SMP in such market. Gibtelecom is also of the view that the GRA fails to make any substantive argument to demonstrate its position that the retail broadband market does not tend towards effective competition in the review period or beyond. In applying the Three Criteria Test necessary to conclude whether a market should be susceptible to ex-ante regulation, the GRA centres its main discussion on the high and nontransitory barriers to entry and tendency towards effective competition criteria. According to Gibtelecom, the GRA seems to hold that, despite the competitive entry of U-mee and Gibfibrespeed, there is little chance that entry barriers will be overcome and effective competition will be established within the timeframe of the current review, which in accordance to EU rules and guidelines, should be three years. The company feels that the GRA appears to downplay the rate at which Gibtelecom s network is being replicated by other operators and over-emphasises the high cost of deployment. As concerns the GRA s discussion of the geographic market definition, Gibtelecom states that the GRA admits that both competitors should have almost full coverage of Gibraltar s endusers within the timeframe of the review. Even if a full rollout takes longer, the prospect of such full ability to compete should be a major factor in the competitive assessment (that is, whether effective competition may arise). Gibtelecom is therefore firmly convinced that there are no high and non-transitory barriers to the Gibraltar retail broadband access market. Gibtelecom also commented on the levels of market share being quoted by the GRA. The company explains that the GRA estimates Gibtelecom has around 75% (they believe this number to be lower) of the retail broadband market. The company asks if Sapphire Network s 17

20 market share has been included in this calculation. If not, the company feels the exclusion is a factual error. U-mee is given a 14% market share and Gibtelecom then asks what the combined market share of Sapphire Networks and U-mee is. The company stated that the same can be said of Gibfibrespeed, and their sister company, Gibsat. According to Gibtelecom, Gibfibrespeed are now promoting an upgrade service whereby Gibsat customers can transfer over to the former. They are doing this by leveraging the existing Gibsat coax infrastructure with the Gibfibrespeed fibre-to-the-home network. Additionally, Gibtelecom expressed its views regarding the conflation by local alternative service providers of TV services with retail broadband products. The company believes that this bundling of TV over a regulated electronic communications network using electronic communications services is having an appreciable effect on the market and the way competition in this space is progressing. Gibtelecom said that the company is seeing a real change in retail broadband market share numbers. Finally, Gibtelecom pointed out that it also has a 16mbps download Superswift broadband product. The product was introduced recently when Gibtelecom in parallel automatically upgraded all its 4 and 8mbps customers. The Authority s position The GRA acknowledges Gibfibrespeed s general agreement with the proposed definition of the retail broadband market. The GRA notes Gibtelecom s disagreement in reviewing the entire retail broadband market together with its definition of this market and assessment of the three criteria test. Gibtelecom presented its comments with regards to the definition of the market together with other comments on the market analysis and SMP obligations. The GRA would therefore like to clarify that it will only be providing comments relating to the definition of the market in this section as posed by the consultation question. All other comments will be provided under their relevant section. The GRA does not agree with Gibtelecom in that the retail broadband market should not be reviewed. In accordance with the European Commission Recommendation on relevant markets 24, the starting point for the identification of wholesale markets susceptible to ex ante regulation is the analysis of corresponding retail markets. This retail analysis is done by taking into account demand-side and, where appropriate, supply-side substitutability from a forward-looking perspective over a given time horizon. In its three criteria test, the GRA stated that the economies of scale enjoyed by Gibtelecom were much larger than the competing operators and that the cost of replicating Gibtelecom s network was very high. Furthermore it will require the new providers to reach significant shares in the customer base to be able to obtain the same economies of scale and thus compete at the same cost level as the incumbent. 24 Commission Recommendation of 9 th October 2014 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. 18

21 Even though it was acknowledged by the GRA that the competing operators had deployed their networks at a respectable rate, in order to successfully compete with the incumbent, new alternative providers would have to attain significant market share to compete with both the economies of scale of the incumbent and recover their sunk costs in rolling out their networks. Market shares of alternative operators have been increasing but given that these operators only jointly hold a market share of 27% 25, the GRA could not assess with any level of confidence that the market would tend towards being fully competitive within the period of the review. In terms of Gibtelecom s concerns regarding Sapphire Networks, its market share was calculated at around 3% and has been taken into account in the GRA s calculations. Therefore, based on this information, the GRA disagrees that Sapphire has, a strong influence over their [customers] future choice of retail broadband services 26. In terms of Gibfibrespeed s customer base, the GRA is mindful of the fact that existing Gibsat customers (local cable TV operator owned by A.J Sheriff Electrical Ltd) may transfer their TV services to Gibfibrespeed yet these subscribers may also move to U-mee for the same reasons. The GRA also welcomes Gibtelecom s factual correction in which they point out that it also has a 16mbps Superswift broadband product which was not included in the consultation. In summary, the GRA agrees with Gibtelecom that there is some element of competition present in the retail broadband market, yet on a forward looking basis it is the GRA s view that competition will not be at such a level as to consider the market fully competitive within the lifetime of this review. 3.3 Wholesale broadband access markets The wholesale market definition exercise identifies the set of products that could potentially form part of the market or markets under investigation. In each market, products are only utilised for self-supply; that is, each retail operator currently uses its own network infrastructure to provide its own vertically integrated end-to-end service. However, whilst there is not an active market for wholesale products, the wholesale services do exist in principle, as parts of each operator s vertically integrated business. As a result, the characteristics that define the market structure for both the WLA and WCA markets are dictated by the characteristics of the downstream retail market. 25 This market share was quoted as approximately 24% in public consultation C02/17. The new figure of 27% now includes Sapphire Networks market share of 3% in addition to U-mee s, Gibtelecom s and Gibfibrespeed s share. 26 Gibtelecom s response to Question 1 (page 5 in their response document dated 8th June 2017). 19