Enterprise communications: Discussion paper

Transcription

1 WIK-Consult Paper Prepared for Single Market in Enterprise services roundtable 28 January 2014 Enterprise communications: Discussion paper Author: Ilsa Godlovitch WIK-Consult GmbH Rhöndorfer Str Bad Honnef Germany Bad Honnef, 28 January 2014

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3 Enterprise communications: steps towards an internal market Management summary The usage of ICT by major enterprises has been brought into focus in recent debates surrounding the introduction of a proposed regulation aimed at achieving a Connected Continent (the Connected Continent Regulation) as well the planned revision of the European Commission Recommendation on relevant markets. In this paper, prepared in conjunction with the January 2014 WIK Roundtable on the single market for enterprise communications, we summarise recent research on this subject and provide case studies and additional data from interviews with TVH, a global supplier of industrial machinery parts, and BT Global Services, a provider of communications services to enterprises. We conclude with a review of ongoing policy initiatives affecting enterprise communications and provide Recommendations drawing on our research. The benefits from ICT integration for European Businesses Usage of ICT by European corporations presents an important opportunity to stimulate growth in the European economy. Reports 1 suggest that enabling innovation in ICT services to major enterprises in the EU could deliver benefits ranging from 35-90bln per annum. What do companies need and what can they get? Enterprises commonly aim to link all sites (as well nomadic workers) to a common platform or wide area network (WAN) over which they can access and share important services, including not only telephony and Internet access, but also bespoke applications available in the cloud for example relating to the supply chain, human resources, or accounting, which underpin their business. However, this is an area in which the EU single market may not have achieved its potential. Surveys 2 indicate that the majority of large businesses would prefer to buy integrated communications services from a single provider across the EU, but many face challenges in doing so. Sourcing fixed and mobile communications from the same supplier, or reaching all sites with consistent levels of quality, have been cited as particular problems. In the context of complex multi-site contracts, switching supplier can also be difficult. Survey results from WIK and ERG 3 suggest that nearly half of responding end-users did not have a choice or more than 1 or 2 suitable suppliers. A survey of Spanish enterprises by CMT 4 found that market shares for the incumbent increased in relation to the size of the company and the number of sites it covered. 1 WIK (2013a), Ecorys/TU Delft/TNO (2011) 2 WIK (2013a), ERG (2009) 3 Idem 4 CMT (2011)

4 - 2 - Enterprise communications: steps towards an internal market TVH: a case study on industrial applications of ICT Interviews with individual companies such as the global industrial parts supplier TVH highlight that the focus of end-users is not on communications but on innovation in business processes, such as just in time provisioning, or integrated systems for personnel and financial functions. However, these innovations can be hampered by the basic connectivity (access links) needed to connect sites to a common network. TVH cites delays in provisioning of 3 months or more in serving key sites such as warehouses, with a knock-on effect on TVH s company-wide ordering systems. How are business communications solutions supplied? In response to demand from customers, suppliers to large enterprises focus on providing tailored communications solutions (sometimes also encompassing IT). These typically involve building a common platform across multiple sites, sometimes in different countries, and offering associated services such as telephony, Internet access and web hosting. The main technology used to provide secure connections today for a wide area network is MPLS (multi-protocol label switching). Virtual private networks (VPNs) via the Internet are also increasingly being used for some sites, for example as a back-up connection or to connect sites for which security may be less critical. In order to support their offerings, most business communications providers maintain extensive fibre backbone networks spanning many countries as well as fibre access lines in certain districts in which there is significant and consistent business demand. These elements of the service are competitively supplied. However, access links to all sites are needed in order to build a communications platform and communications providers are reliant on third party access for the majority of these connections. Amongst four large business providers interviewed in the context of WIK s 2013 study on business communications 5, providers relied on third party access for more than 90% of circuits in countries in which they did not have an incumbent operation, and sourced more than 75% of these lines from local incumbents. Business suppliers use different types of access for different purposes depending on the size and traffic requirements of each site. Data collected from three major global suppliers of enterprise communications in the context of this paper and previous WIK research suggests that the main types of access used to serve dispersed fixed locations for large enterprises are: Dedicated (uncontended) symmetric circuits with business-critical QoS (leased lines): used for large sites (eg multiple employees) and/or large traffic flows (data centres). Within the category of leased lines, traditional interface 5 WIK (2013a)

5 Enterprise communications: steps towards an internal market leased lines are being replaced by modern Ethernet leased line equivalents which offer higher speeds at lower cost. Asymmetric contended circuits preferably with business-grade SLA and higher quality specifications (ie business-grade bitstream): used for outlets with more limited communications needs such as retail outlets, branch offices, or as back-up to leased line connections Local access solutions such as VULA, unbundled copper or unbundled fibre (where available) can also be used to serve business customers, but only in areas in which the supplier has scale. This is mostly relevant in those countries where enterprise providers operate a complementary residential broadband business. Because few enterprise providers have deep networks in the same countries, it is unlikely that such remedies alone would deliver competitive outcomes in pan-european business communications. Depending on the types of site and requirements of the customer a contract for a large business might contain a different mix of these types of access. Data from three suppliers provided in the context of this paper and previous WIK research shows a clear trend away from traditional towards Ethernet leased lines, but no significant change in the usage of DSL-based access. MPLS or Internet services can be installed on either leased lines or DSL-based access. The choice of access type depends more on the nature and volume of the traffic (eg whether it is symmetric, what are the bandwidth requirements) rather than the choice of platform (MPLS vs Internet VPN) used to connect the site to the Wide Area Network (WAN). BT Global Services: a case study on enterprise supply conditions BT Global Services (BTGS) is one of the largest providers of enterprise communications solutions to large businesses in Europe. In the course of interviews conducted for this discussion paper, BTGS provided the following data to illustrate its usage of access when supplying European corporations. While not representative, the data from BTGS concerning costs and access usage are consistent with data from other providers active in this segment which WIK received in the context of previous research. Access costs are significant in relation to wider networking costs. They represent on average around 60% of total networking costs for BTGS MPLS clients in the EU (excluding the UK). This compares with access costs to BTGS of around 45% in the UK based on wholesale products supplied internally by BT Openreach and BT Wholesale. Ethernet leased lines are substituting traditional interface, and DSL is expected to stay stable or slowly decline. Data from recent years and forecasts suggest that traditional interface leased lines will decline from 50% of

6 - 4 - Enterprise communications: steps towards an internal market all EU MPLS circuits in 2012/13 to 43% in 2014/15. It predicts a corresponding increase in Ethernet leased lines from 15% of all EU MPLS circuits in 2012/13 to 27% in 2014/15. There will be a trend towards uptake of higher speed connections, which will reinforce the move towards Ethernet leased lines. Nearly 100% of leased line connections =<2Mbit/s are supplied via traditional interfaces, while nearly 100% of leased line connections at speeds over 50Mbit/s are supplied via Ethernet leased lines. As an example, BTGS describes how different types of access are used to supply one of its customers, a European multi-national integrated oil and gas company. BTGS is contracted to supply the company s global Wide Area Network connecting all its sites over a secure platform as well as security services and web filtering. The company has significant presence in Germany, France and the US and dispersed sites elsewhere in Europe and globally. Out of nearly 800 access circuits used to serve this client, 53% are leased lines (dedicated capacity) of which more than half use modern Ethernet technology, and the remaining 47% of lines are provided via DSL. 70% of the DSL connections are concentrated in a single country where the company is headquartered. This is because of the high concentration of retail outlets (petrol stations) in this country. Regulatory conditions for access Access used for multi-site and multi-national business communications is largely covered within markets 6 (terminating segments of leased lines including Ethernet leased lines) and market 5 (wholesale broadband access) of the 2007 European Commission Recommendation on relevant markets. In principle, at present, both these markets are considered to be susceptible to ex ante regulation and must therefore be reviewed by national regulatory authorities. In practice the approaches taken at national level to market definitions and remedies for both leased lines and bitstream vary widely, due to different approaches towards the segmentation of these markets and the treatment of modern technologies such as ethernet. For terminating segments of leased lines: Certain countries segment by speed variously at 2Mbit/s (common in Eastern Europe), 155Mbit/s (eg Germany), 1Gbit/s (formerly in the UK) whereas other countries do not segment by speed A few countries segment geographically eg the carve out of business district in and surrounding London by Ofcom, whilst most do not

7 Enterprise communications: steps towards an internal market Some countries apply cost orientation or price caps on Ethernet on the basis that it is a modern efficient technology while others such as Spain and Portugal consider such services to be new and apply retail minus controls. France does not apply cost orientation on leased lines >10Mbit/s For bitstream, most countries do not distinguish between residential and businessgrade bitstream, but Austria has defined a separate business segment, and the Netherlands has incorporated analysis of high-quality bitstream in their wider review of business connectivity. Commercial conditions for access Based on benchmarks of incumbent reference offers for leased lines in five EU countries carried out in May 2013, WIK found significant differences in changes for Ethernet leased lines, especially at higher bandwidths. For example, based on a reference benchmark for 5km charges for 1GBit/s Ethernet in Spain and Germany were more than double those in the UK and Netherlands, while no reference offer was available for this speed in Italy. Differences were even more pronounced for longer lines. Factors such as differences in cost could play a role in explaining the differences, but it is also possible that differences may stem from differences in the regulation of higher speed lines, or treatment of Ethernet in different countries. We also noted significant divergences in provisioning and repair times and associated penalties. Reference offer benchmarks revealed provisioning times of up to 90 days and more in certain countries as well as widely varying penalty clauses. This finding is consistent with practical experiences regarding long provisioning times such as those reported by TVH. In areas where the incumbent is the only or primary supplier of access lines for business use, providers of enterprise services are likely to be compelled to rely on such reference offers. We note however that there may be geographic variations in supply conditions for high speed lines, in particular in dense business districts in which there is extensive competitive provision of fibre access. Interviews conducted by CSMG for Ofcom 6 of users (end-users and communications providers) of very high bandwidth leased lines (>1Gbit/s) in the UK found satisfactory supply conditions within London business districts, but not elsewhere. Implications for policy Evidence from end-user surveys suggests that there is a significant cross-border component in retail communications services to enterprises, particularly for large enterprises with multi-national presence. Enterprise communications suppliers also typically operate on a pan-european or even global basis. However, the basic inputs 6 CSMG (2013)

8 - 6 - Enterprise communications: steps towards an internal market used by business providers (such as wholesale leased lines) are supplied by different operators largely along national (or even local) lines. This can lead to regionally fragmented service provision in what should be a single market.. These dynamics have important policy implications. They suggest that harmonisation (or at least consistent principles) in the underlying national wholesale markets may be needed to achieve an effectively functioning cross-border retail market in which suppliers can compete with each other to offer services to multi-national enterprises regardless of their centre of operations. The European Commission has acknowledged this in its justification for the proposed Connected Continent Regulation. Its proposed solution in that context is harmonised virtual access products. However, as noted in a recent European Parliament study authored by WIK, TNO and RAND Europe, the Connected Continent proposals combine residential and business access products in a way which may be confusing and do not prioritise the business products by setting a deadline for the publication of further guidelines. They also do not address the question of how consistency can be implemented and enforced in market reviews for business access markets at a national level. If this consistency is not ensured, it is unclear how harmonised virtual access product specifications could be delivered. Consistency in the approach towards wholesale market definitions for business could conceivably be ensured through the parallel (and likely more short-term) review of the European Commission Recommendation on relevant markets. Priorities for the Relevant Market Recommendation should be to clearly define and distinguish the product markets relevant for wholesale business access, and tackle existing inconsistencies in the segmentation of markets and treatment of Ethernet, by setting out harmonised principles for the analysis of this market. Concerning product markets, there is evidence from several suppliers of complementary demand for (i) symmetric dedicated circuits and (ii) asymmetric contended circuits preferably with business-grade SLA. These should be treated as separate markets or market segments within the Relevant Market Recommendation. Symmetric dedicated circuits should include Ethernet leased lines and successor interfaces. Provided newer interfaces offer the same or better services at lower cost compared with traditional interfaces, there is no reason in principle why they should be considered as a new market subject to different regulatory principles, for example as regards risk. Concerning segmentation, there is evidence to suggest that speed is unlikely to be the main determinant for different competitive conditions, both from end-user interviews and from an analysis of the underlying costs. Rather, in countries where segmentation is

9 Enterprise communications: steps towards an internal market pursued, it may be more appropriate to base it on the existence of multiple fibre lines and commercial wholesale offers in dense business districts a geographic approach specific to business markets. Pending the outcome of the Connected Continent negotiations, the European Commission could also usefully benchmark prices and service conditions for leased lines, as an update to the exercise it conducted for the 2005 Recommendations on Leased lines and make recommendations on best practice on that basis. Recommendation 1 Connected Continent: Refocus virtual access products around business access. Require harmonisation of specifications and approach towards relevant market definitions associated with business access. Recommendation 2 Relevant Market Recommendation: Provide guidance for the consistent treatment of wholesale business access. Ensure separate analysis of dedicated symmetric capacity (leased lines) and high-quality asymmetric contended (business-grade bitstream). Align approaches towards segmentation with a focus on distinguishing dense business districts rather than speeds. Clarify treatment of Ethernet leased lines should not be treated as a new market Recommendation 3 Business access Recommendation: adopt recommendation on business access updating previous 2005 guidance on best practice provisioning and prices for Ethernet leased lines EU-wide.

10 - 8 - Enterprise communications: steps towards an internal market Contents 1 Enterprise communications: the policy context Background The experience of end-users Supply-side issues Regulatory approaches Economic benefits The European policy response Our analysis 16 2 Multi-national enterprises as users of communications Using communications as a lever for business TVH a case study in communications innovation What services does TVH provide? TVH s use of technology How access supports the service TVH s perception of the single market 18 3 Supplying services to a global corporation: case studies from industry Global business communications an overview Which retail services do business providers supply? Which access products are used? From whom is access sourced? Regulated access: product characteristics BT Global Services: a case study Industrial applications of ICT: oil and gas a supply-side case study A supplier s view of the EU single market 31 4 Implications for single market policy What policies are required to support enterprise communications? An analysis of current (and past) policy instruments Proposals for a Connected Continent (2013) European Commission Recommendation on Relevant markets (2007) Consistency with connected continent 37

11 Enterprise communications: steps towards an internal market European Commission Recommendation on cost methodologies and nondiscrimination (2013) European Commission Recommendations on leased lines (2005) Overall assessment 42 5 Recommendations 43 6 References 45

12 10 Enterprise communications: steps towards an internal market 1 Enterprise communications: the policy context 1.1 Background Significant focus has been given in recent years to the deployment and uptake of superfast broadband by residential consumers, stimulated in part by the adoption of challenging targets for broadband in the Digital Agenda for Europe 7. More recently, the distinct needs of corporate users of communications and the potential for ICT to transform business productivity, have been highlighted in a number of studies for regulators and industry. These include a January 2013 study by WIK for INTUG and ECTA on business communications, economic growth and the competitive challenge 8, February 2013 research by CSMG for Ofcom on Very high Bandwidth Connectivity 9, a 2011 study by Ecorys and TU Delft on steps towards a truly Internet Market for e-communications 10, and end-user surveys conducted by the Spanish national regulatory authority CMT in and by the European Regulators Group (ERG forerunner to BEREC) in Taken together, the research provides a detailed picture of user perceptions of communications services as well as the conditions of supply and regulatory approaches The experience of end-users Several of the studies included surveys and/or interviews with corporate end-users of communications services, revealing the service requirements of business end-users, their experience in procuring services and switching suppliers. 7 Digital Agenda for Europe European Commission Communication sets out targets of universal availability of 30Mbit/s broadband and 50% take-up of 100Mbit/s broadband by WIK study on Business communications, economic growth and the competitive challenge ws%5d=1495&tx_ttnews%5bbackpid%5d=85&chash= f7c6bdf8d2852d0e56392c5f7 9 CSMG for Ofcom Research on Very High Bandwidth Connectivity 10 Ecorys/TU Delft/TNO (2011): Steps towards a truly Internal Market for e-communications, November Informe de los Servicios de la CMT sobre la situación competitiva en el segmento empresarial, MTZ 2011/652, retrieved on 25th of October under: fa6ce453d69c&groupid= ERG (2009): Report on the regulation of access products necessary to deliver business connectivity services, ERG (09) 51, December 2009

13 Enterprise communications: steps towards an internal market 11 Surveys of business end-users 13 indicate that the majority of large businesses with multiple sites have bespoke requirements for communications, and prefer to source a tailored bundle of communications services (in some cases combining fixed and mobile and/or IT services) from a single supplier. The nature of the bundle may vary depending on the needs of the customer. Where multiple suppliers are used, this can be for reasons of resilience or related to the separate purchase of fixed and mobile services. Only in the minority of cases do multi-site businesses prefer to source services for each site and service separately. Surveys and end-user interviews suggest that competition in the provision of tailored services for multi-site businesses is less well developed than might be expected. Responses to both the surveys conducted by WIK and ERG 14 suggest that in many cases no more than one or two suppliers were able to meet end-user requirements. Data from the survey of corporations by Spanish NRA CMT 15 suggests that market shares for the incumbent operator were higher, for enterprises with a larger number of sites. A review by CSMG 16 for Ofcom of end-user experiences with very high bandwidth leased lines (considered to be all lines above 1Gbit/s or lines using WDM equipment (ie optical interface)) based on detailed interviews, concluded that while such lines were available on competitive conditions in business districts in and around London 17, the majority of users considered that such lines were not in general competitively supplied elsewhere within the UK 18. If replicated elsewhere, these types of varied geographic conditions could help to explain why companies with a large number of site distributed across a wide geographic area may be less well served than those requiring connectivity only within business districts. Switching suppliers was identified as a major area of concern for end-users in the context of the WIK 2013 research as well as CSMG (2013). Partly on the basis of survey and interview evidence of demand for crossborder enterprise communications that could not adequately be substituted by national provision, WIK19 concluded that the retail market for business communications contained a significant cross-border aspect. In a report for the European Commission on Future electronic communications markets subject to ex ante regulation, Ecorys/IDATE/icri note the existence of cross- 13 WIK (2013a), ERG (2009) 14 Idem 15 CMT (2011) 16 CSMG (2013) 17 Western. Eastern and Central London Area (WECLA) region, Ofcom BCMR (2013) 18 CSMG (2013) para 1.35

14 12 Enterprise communications: steps towards an internal market border demand and supply for business-grade services20, and acknowledge that this may have implications at the wholesale level Supply-side issues A number of studies have examined supply-side issues for business connectivity, including the perceptions of business communications suppliers about the conditions for connectivity in Europe, product availability, service levels and pricing, and the usage of different types of access products for business connectivity. Based on interviews with four multi-national providers of business communications identified as major players within the Gartner magic quadrant of global communications providers 21, WIK 22 found that there were concerns about lack of availability or poor conditions for wholesale access products for business in certain countries within Europe. In its 2011 study for the European Commission 23, Ecorys and TU Delft concluded that lack of consistent availability of a wholesale business bitstream product was hampering the provision of services to multi-national corporations. In data collected from providers of business communications 24, as well as in a subsequent benchmarking exercise 25,,WIK found that the highest expenditure on wholesale access products used for the supply of services to multi-national business was for leased lines, which WIK defined in a technologically neutral manner as being symmetric dedicated capacity with business critical levels QoS parameters such as jitter and delay. Data from WIK s research 26 suggested that traditional interface leased line products were increasingly being substituted by alternative interface leased lines using Ethernet technologies and in some cases optical WDM technologies. On the basis of usage trends, there was less evidence of substitution of leased lines with wholesale broadband access/bitstream, defined as asymmetric contended capacity with sub-business critical levels of QoS, although some substitution might be occurring at the margins. In benchmarks of reference Ethernet leased line service levels and prices for five countries presented at a WIK Enterprise roundtable in June , WIK 19 WIK (2013a) 20 Ecorys/IDATE/icri (2013) section 8.3 and following 21 Gartner (2012): Magic Quadrant for Pan-European Network Service Providers, April 2012, retrieved on 25th of October 2012 under: 22 WIK (2013a) 23 Ecorys/TU Delft (2011) 24 WIK (2013a) 25 WIK (2013b) 26 WIK (2013a) 27 WIK (2013b)

15 Enterprise communications: steps towards an internal market 13 found significant divergences in pricing levels, provisioning and repair times. Differences in charges were particularly marked for higher bandwidth Ethernet leased lines (see Figure 1). Reference offer benchmarks revealed provisioning times of up to 90 days and more in certain countries as well as widely varying penalty clauses. Figure 1: Wholesale Ethernet leased line benchmark charges, May Idem

16 14 Enterprise communications: steps towards an internal market Regulatory approaches The differences in access conditions may in part be explained by significant variations in the regulatory treatment of Ethernet leased lines identified in WIK s January 2013 research 29. This concluded that there were widely differing approaches towards price controls applied on Ethernet leased lines and towards segmentation of leased lines markets. Many countries have segmented the market by speed and excluded higher speed lines from regulation, whilst others had not segmented, or segmented by geography. Ethernet leased lines were subject to price caps or cost-orientation in some countries on the basis that it is a modern technology that is more cost-effective than traditional interfaces, but to retail minus approaches in others, on the basis that some NRAs considered it to be an emerging technology entailing risks. Table 1: Regulatory approaches to market 6 (terminating segments of leased lines/ethernet) WIK (2013a) 30 Idem. In 2013, the UK and Sweden adopted decisions which effectively lifted speed caps which previously existed in leased line markets

17 Enterprise communications: steps towards an internal market 15 Country Regulated PPCs available? Cost orientation? AT Geographically segmented with major cities excluded and no regulation >155Mbit/s BE Yes, awaiting BIPT decision following consultation Yes CZ No regulation >2Mbit/s (3 criteria test not met) No price control DE Yes, but no regulation >155Mbit/s Yes DK Yes Copper <2Mbit/s but not above ES Yes (but no lines >70km traditional interfaces or >35km Ethernet interfaces) Copper traditional, retail minus for Ethernet FR Yes No cost orientation >10Mbit/s HU No regulation >2Mbit/s (3 criteria test not met) No price control IE IT Yes, but no regulation >155Mbit/s for trunk between certain listed cities. Terminating segment of leased lines are regulated (but lines to mobile operators excluded) NL Yes Yes PL Yes Yes Yes Yes, price cap (less stringent for WES and >155Mbit/s) PT Yes Yes, but not WES (retail minus) RO No regulation >2Mbit/s (3 criteria test not met) No SE Yes (proposed up to 30Mbit/s, DWDM unregulated) Yes (where regulation applied) UK Yes (limited geographic segmentation), no remedies >1Gbit/s Yes Different regulatory treatment was also seen for bitstream in the context of business service provision. RTR in Austria segmented the market and defined a separate segment for business-grade bitstream. OPTA in the Netherlands included high-quality bitstream within its review of wider business connectivity effectively combining the analyses of market 5 as regard business, and market 6 relating to terminating segments of leased lines, although distinct remedies were maintained 31., Economic benefits Two recent studies have highlighted the economic benefits that could be gained from achieving an effectively functioning single market for corporate communications in 31 See consultations by OPTA regarding FTTO ( and WBA/leased lines (

18 16 Enterprise communications: steps towards an internal market Europe. Ecorys and TU Delft 32 concluded that annual gains of 35-55bln could be achieved through standardisation measures which support pan-european premiumquality services. In an analysis which included potential knock-on effects of better communications on business productivity, WIK-Consult 33 estimated that the benefit of achieving a single market for enterprise communications could reach 90bln per annum after 10 years. It is notable that both studies highlighted consistency in the availability of wholesale business inputs across Europe as a key driver of economic benefits. 1.2 The European policy response The European Commission has responded to recent research concerning enterprise communications by including proposals in its September 2013 draft Regulation for a Connected Continent 34 to harmonise specifications for certain access products on the basis that these products could help to enable cross-border entry and the provision of cross-border communications services 35. [ Moreover, the ongoing review of the European Commission Recommendation on Relevant Markets is expected to give guidance on how NRAs should assess wholesale markets for business-grade access products at a national level potentially by defining a wholesale market for high-quality services. Remedies imposed on operators with SMP in the relevant market could then in theory be harmonised as proposed in the Connected Continent Regulation. 1.3 Our analysis In this paper, prepared for presentation at the January 2014 WIK roundtable on a single market for enterprise communications, we expand on the available data to provide case studies from a multi-national end-user and supplier of business communications services. We then relate these experiences, together with previous research, to current proposals, so as to provide an analysis of current legislative and soft law measures, and Recommendations on how to achieve a single market for enterprise communications. 32 Ecorys/TU Delft/TNO (2011) 33 WIK (2013a) 34 Draft Regulation laying down measures concerning the European single market for electronic communications and to achieve a Connected Continent 35 See Connected Continent Impact Assessment

19 Enterprise communications: steps towards an internal market 17 2 Multi-national enterprises as users of communications 2.1 Using communications as a lever for business Large businesses are relying increasingly on sophisticated communications to make their businesses function internally and as channels to the outside world. We may naturally think of telecommunications as involving fixed and mobile telephone services and Internet access. Businesses rely heavily on these, but their requirements can extend far beyond these basic services. For example: Businesses typically require all their sites, sometimes in disparate locations, to be linked together via a secure network. In addition nomadic workers need to be able to connect to the system. Businesses may require machine to machine communications for functions such as just in time management of their stock. Businesses may rely on high-quality video conferencing as a means of reducing travel and costs Connectivity may increasingly be used to manage files as businesses move towards applications hosted in the cloud. Company web services also need to be supported. These kinds of capabilities can be crucial to a businesses productivity, ability to win a competitive edge and serve its clients. 2.2 TVH a case study in communications innovation It is well-understood that communications is playing a vital role in transforming retailing, entertainment and other related sectors. However, communications is also playing a central role in supporting the growth of European industry. TVH, a Belgian-based midsized multi-national, is a case in point What services does TVH provide? TVH 36 is a global leader in replacement parts and accessories for material handling and in-plant industrial vehicles, new and used lift trucks, new and used aerial platforms and internal handling equipment.. TVH is also specialized in the access rental business having the second largest fleet of aerial working platform and forklift trucks in Europe TVH has customers in more than 170 countries and a local presence more than 30 countries. It has nearly 1bln of annual turnover (of which around 60% is in Europe) and 36 TVH:

20 18 Enterprise communications: steps towards an internal market employs 4,000 people worldwide. 1,500 staff are based in Belgium, but TVH also employs 700 people in a call centre in Kansas US and has a further significant presence in Australia. Its smallest sites can have as few as 2-3 people. Its data centres are currently located in Belgium and the US with smaller local data centres in Spain and the Netherlands focused on its rental business, In addition, TVH has a large mobile travelling salesforce who need to be connected with the centre system TVH s use of technology TVH uses technology throughout its provisioning process. Orders can be placed online and support is available via online telephony and messaging. Its warehouses automatically receive information about what is required and where, orders are consolidated and the details are automatically transmitted to a transport company. At every stage of the process customers can get feedback on the progress of their order through track and trace. TVH also uses connectivity for its IT services. At the beginning of 2013, it transferred its systems to use the Google enterprise platform. Its mobile salesforce accesses applications stored in the cloud, and e-invoices are issued based on a cloud solution How access supports the service Behind this sophisticated just in time system, lies an extensive communications network. Around 100 of TVH s premises are connected via a corporate wide area network (WAN). The choice of connectivity for each site depends on its requirements. Large sites are typically connected to the WAN with two fibre lines offering symmetric bandwidth and MPLS functionality. For sites with more than 10 people, a main MPLS main line may be complemented with another, less performant, solution such as Internet access as back-up. Elsewhere, Internet access provided over business-grade DSL alone may suffice. TVH indicates that roughly 30% of its sites rely on DSL Internet alone, with the majority having a fibre line with DSL Internet as back-up. Ultimately, TVH is not concerned with the type of access or bandwidth, but only with the applications it uses such as its programmes for ordering, HR, financial applications and web services. Its SLA with its communications provider enables it to see how its applications are performing TVH s perception of the single market TVH recently tendered to change their communications supplier. They wanted a single provider worldwide, who could offer a service based on their specific requirements. They found very few providers able to meet these needs and came down to a shortlist

21 Enterprise communications: steps towards an internal market 19 of two, out of which they selected Easynet. They found larger communications providers less responsive and flexible. However, for the smaller providers, addressing connectivity needs in countries such as the US, Mexico and Brazil was a challenge. They are satisfied with their current communications provider, but are conscious of numerous underlying issues within Europe over which their provider has no control. A particular headache is reaching sites outside urban areas or the time it takes to get connectivity after moving office. They quote delivery times of 100 working days for a line to their new warehouse in an industrial area, just outside Liege in Belgium. They found similar problems with a site close to Milan. It took more than 3 months until the fibre was delivered in the industrial area in where the Italian headquarters was moved. They note that where national providers are the single players they are defining the rules. In the Netherlands, they waited more than 2 months to pass the cable from one side of the road to the other. In order to have a cost-effective solution, their Swedish company was obliged to co-operate with other companies from the same industrial area to have a fibre installed. TVH notes that in several European countries is difficult to get Internet connection from two different providers. In most cases providers rely on the same cable to provide access, which increases the risk of service failure. A major concern for TVH in today s single market is that they have to plan everything according to connectivity, rather than according to their primary business needs. 3 Supplying services to a global corporation: case studies from industry 3.1 Global business communications an overview In response to the demands of multi-national corporations for seamless and integrated services, a number of communications providers have specialised in the provision of outsourcing and professional services to major enterprises. Gartner 37 identifies a number of companies, which are specialised in offering ICT services to large multi-site and multi-national corporations on a global basis see Figure 2. The companies listed include a number of providers specialised in connectivity and associated services such as BT Global Services and Vodafone, as well as companies operating in the downstream software and IT services segment such as IBM and Accenture. 37 Gartner (2013)

22 20 Enterprise communications: steps towards an internal market Depending on customer preferences large enterprises may source IT separately from providers specialised in this segment, or they may prefer to purchase integrated ICT solutions, which are often provided by communications providers operating in conjunction with software and hardware providers. Figure 2: Gartner magic quadrant for communications outsourcing and professional services October Which retail services do business providers supply? From a technical perspective, in order to meet client needs for a wide area network for the delivery of voice, data and other services, business communications providers must create a common virtual platform across the various sites, enabling each to communicate with each other. An established mechanism for doing this is the use of multiprotocol label switching (MPLS), which effectively creates an intelligent overlay on top of the connectivity used to connect the sites and enables traffic to be directed or routed efficiently within and between them. When IP MPLS platforms are installed to create a wide area network all the communications traffic (voice and data) flowing across different business premises is translated into Internet Protocol (IP) format. Alternatively a wide area 38 Item

23 Enterprise communications: steps towards an internal market 21 network may be created using a common ethernet interface across all sites. In both cases a discrete network has been created internal to the company with a single technical interface (IP or Ethernet) for all the traffic flowing across it. Telephone services are typically offered over this platform, allowing internal routing of calls throughout the company as well as external calls, which are delivered through interconnection arrangements the provider has with other telecommunications operators. In most cases large enterprises also require access to the public Internet. Internet access for all sites can be offered from a single point in the wide area network, or there can be multiple local break-outs to the Internet. Secure connectivity can be provided to sites outside the wide area network via the public Internet through Virtual Private Network connections. 3.3 Which access products are used? Providers of communications to multi-national enterprises are specialised in the provision of WANs, Internet access and services provided via these mechanisms such as corporate voice, video-conferencing and web hosting, and may offer or collaborate with others to offer locally installed applications as well as mechanisms to enable the use of applications provided via the cloud (ie applications such as word processing or bespoke corporate applications which are hosted in at a remote location rather than on each individual s hardware). In order to ensure effective global connectivity, communications providers also typically each have an extensive backbone network connecting many countries with additional points of presence inside certain countries of particular significance for their customerbase. Business providers may also have fibre rings in some dense business districts such as financial centres or city centres having a high concentration of business clients. However, in order to connect customer sites to its global backbone and provide value added services, communications providers must source basic connectivity for each site. The choice of connectivity - whether used to connect a site to the wide area network or to the open Internet depends on the requirements of each site and available options. The main parameters are: - Bandwidth: how many employees are there? Does the main function of the site by its nature require high bandwidths eg web hosting? - Downstream vs upstream requirements: will traffic to and from this site be balanced or is it mainly downstream or indeed upstream - Quality of connection (contention rates, jitter, latency): to what extent is business-critical quality of connectivity important, or can the site afford some delays or interruptions in the flow of data. For example, an uncontended dedicated link (end to end connection) will have a much higher degree of quality

24 22 Enterprise communications: steps towards an internal market and reliability than a contended link in which part of the connection runs over a shared network. In addition, because corporate clients demand high levels of services, it is important for all connections used for business to have business-grade service level agreements (SLAs) which ensure a fast installation and repair time for faults for example a few hours rather than within one or more days. The aggregation point available for the product ie whether it is picked up at local level (close to the customer), regional or national level is also relevant. An enterprise provider aiming to reach many countries is unlikely to have a dense network in all of those countries. Therefore they may require regional or national aggregation points to enable them to reach all customer sites From whom is access sourced? In countries where a business communications provider has incumbent operations, they will already have a dense access network which can be used to provide business communications to most or all sites. However, outside countries in which providers have incumbent operations, they must build or buy all access connections relevant to a corporate customer contract. For particularly significant sites, a provider may install its own fibre access. Elsewhere it will need to rely on access from third parties. Interviews with four cross-border providers of business communications 39, revealed that for those providers 90% of connections outside countries in which they had incumbent operations were sourced from third parties of which more than 75% came from incumbent operators. The use of access is especially important in the provision of services to multi-national clients because the distribution of client sites is widespread this means that providers will not have the density of demand in all locations required to justify self-build. Moreover sites can be added or changed at short notice, for example when a new retail outlet is opened Regulated access: product characteristics Business access products are known by many different names in each jurisdiction, and whilst terms for business access have often been used at European level to describe types of access such as leased lines, ethernet services or bitstream, no uniform definition has been given to these services. 39 WIK (2013a)

25 Enterprise communications: steps towards an internal market 23 In the context of an enterprise benchmarking project 40, WIK identified the following typical technical characteristics for a range of different access products. Table 2: Typical characteristics for wholesale business access products 41 From analysing product usage for three providers of enterprise services, we concluded that the main access products relied upon in practice by providers of business communications were: 1. Leased lines: dedicated (uncontended) symmetric capacity 2. Business-grade bitstream: contended asymmetric capacity The definitions have been given on a technologically neutral basis. However, as in residential access, technological trends are apparent. Leased lines offering speeds >10Mbit/s have for some time been provided over end to end fibre connections. Therefore technological developments on leased lines have mostly related to increase efficiency in the active equipment used to convey data over the fibre. There was a preference in interviews with providers for ethernet interfaces as this was considered to provide high speeds and greater flexibility at lower cost. This preference for Ethernet was confirmed in volume trends from the three companies showing a decline in the use of traditional interface leased lines, matched by a corresponding increase in Ethernet leased lines. 40 WIK (2013b) 41 Idem

26 24 Enterprise communications: steps towards an internal market Data from the same three companies showed that the use of bitstream (typically provided today via ADSL on copper networks, with a trend towards hybrid fibre copper VDSL networks) was roughly stable. This corresponded with statements from the companies that bitstream (as defined) was used as a lower grade complement to leased lines and was not a significant substitute, except at the margins. Interviews with business providers suggested that regional access points (or longer circuits in the case of leased lines) were preferred in countries and regions in which the provider did not have dense network reach, whilst local access was preferred in those regions where they benefited from more dense network build-out. The density of coverage by country was not however consistent amongst providers of business communications ie each provider may have a more extensive network in a given country, but these tended to be in different countries in each case. This means that at least regional and preferably also local connectivity would normally be required to enable competition amongst communications providers specialising in the provision of enterprise services. 3.4 BT Global Services: a case study BT Global Services (BTGS) is one of the global suppliers of enterprise communications identified in the Gartner Magic Quadrant (2013). BT provides enterprise services such as Wide Area Networks, corporate telephony, virtual private networks, internet, videoconferencing and other services across nearly 200 countries. BTGS has an extensive fibre backbone network which connects 2,227 points of presence globally and it operates 25 city fibre networks focused on business districts outside the UK. BT is the incumbent telecoms operator in the UK and as such operates an extensive access network nationwide including fibre access for business use. Due to the regime in place for functional separation of BT in the UK, BTGS sources most of its wholesale access lines directly or indirectly from BT Openreach, using the same ordering systems as are available to its competitors. Outside the UK, except in very dense business locations where it has its own fibre access, BTGS typically rents access from third parties to connect customer sites, with the majority coming from local incumbents, if available. Figure 3gives an illustrative example of how different types of access may be used for different sites depending on the characteristics of the site. This may range from own fibre for the main office, through to dedicated symmetric access (leased lines/ethernet) for other significant offices and data centres, through to xdsl connections for a smaller office or outlet or even satellite (VSAT) in an office in a remote location which is not served by fixed infrastructure. For an office with less stringent security requirements, a

27 Enterprise communications: steps towards an internal market 25 connection to the wide area network could be made via a secure channel over the open Internet. However. It should be noted that some form of access xdsl or leased line is still needed for the Internet connection over which the private network is configured. Figure 3: Combining business access mechanisms in a Wide Area Network (WAN) Source: BT Global Services Figure 4 shows that access costs represent a significant proportion of BTGS s overall costs, constituting around 60% of network-related costs in the EU (excluding the UK), and as much as 80% in certain cases such as parts of Central and Eastern Europe. Access costs as a proportion of total networking costs for BTGS in the UK are by comparison around 45%. Apart from access other significant networking costs relate to the core network and customer premise equipment (CPE). It should be noted that access costs may vary legitimately by country depending on the proportion of each type of access procured (cheaper DSL vs more costly leased lines/ethernet), or according to the depth of BTGS core network in the relevant country. Costs may also vary for a given product from one country to the next based on the network topology. It is also possible however, that differences in the access costs may be influenced by differences in regulation of leased lines or Ethernet equivalents, which constitute a major portion of these costs. For example, costs could be expected to be lower in a

28 26 Enterprise communications: steps towards an internal market country where a higher proportion of leased lines can be provided by means of Ethernet technology. Although no firm conclusions can be drawn on the basis of aggregated data of this kind, it is interesting to note that despite having similar or higher proportions of cheaper DSL technology compared with leased lines/ethernet, average access costs in France, Germany, Spain and Italy (see Figure 6), were higher than those in the UK One explanation could be the higher usage of and lower charges for Ethernet in the UK compared with the other countries. Figure 4: BTGS access costs % total networking costs by country Q1-Q3 2013/14 Source: BTGS As discussed in paragraph0, and shown in Figure 5trends show a decline in the usage of traditional leased lines (LL) and a corresponding increase in Ethernet leased lines consistent with a transition from legacy to modern technology. The figures shown indicate access technologies for MPLS 42, a core enterprise product supplied by BTGS and other operators active in this market. DSL continues to be used for sites for which there is a less critical requirement (eg no need for symmetric bandwidth, high QoS standards) or as a back-up solution. There is no or little substitution in this case with leased lines (symmetric dedicated circuits). Figure 5: access mechanisms for BTGS EU MPLS access circuits / Multi-protocol label switching a mechanism by which traffic can be efficiently routed across different types of access, with an IP interface /15 figures represent estimates

29 Enterprise communications: steps towards an internal market 27 Source: BTGS The choice of circuit for Internet access would also be governed by volumes and traffic flows (downstream vs upstream), meaning that an asymmetric contended service would not substitute for a symmetric dedicated line. The proportion of BTGS s usage of DSL varies by country, as can be seen infigure 6. BTGS indicates that this can largely be explained by the requirements of clients in the countries concerned (for example whether they have a large number of branch offices in certain countries), and by the availability of products such as ethernet leased lines in the market. Figure 6: BT MPLS access type by country

30 28 Enterprise communications: steps towards an internal market Source: BT Global Services The usage of Ethernet leased lines as compared with traditional interface leased lines might depend on the terms under which wholesale Ethernet leased line services are supplied by the incumbent and by competitors in those areas where competitors are active (typically major business districts). Providing it is available on reasonable terms, ethernet is preferred for speeds >10Mbit/s, and is the predominant technology used by BTGS for such speeds seefigure 7. Usage of Ethernet leased lines might be lower than would otherwise be expected in countries in which they are available on less attractive terms. Figure 7: BTGS EU MPLS access circuits by type

31 Enterprise communications: steps towards an internal market 29 Source: BTGS As customers are migrated from traditional leased lines to modern Ethernet equivalents the uptake of higher speeds is also expected to increase, as shown in Figure 8. Figure 8: Trends in speed: Ethernet for MPLS BTGS EU extrapolated to 2014/15

32 30 Enterprise communications: steps towards an internal market Industrial applications of ICT: oil and gas a supply-side case study When analysing how markets function in practice, it can be useful to examine concrete examples. For the purposes of this paper, we will discuss a case study showcasing industrial applications of ICT the oil and gas sector. The provision of oil and gas for commercial and domestic use involves a number of stages. A full-service company in this sector may engage in the following activities. In turn, each of its sites may have distinct connectivity requirements based on the services they need. Company headquarters and major distribution offices o These are typically based in city centres or larger metropolitan areas o They require high capacity and business-critical quality standards for voice, data and video-conferencing as well as internal communications o These sites will be supplied through dedicated fibre access lines, often with resilience (ie two parallel lines or back-up connectivity). Depending on the location of the office self-build may be possible Exploration o These sites are typically remote and inaccessible, and may be offshore o They require voice and data to enable them to communicate with the wider business, but fixed line infrastructure is unlikely to be available o Satellite (VSAT) solutions may be used Petrol stations o These small sites may be widely geographically dispersed o Their requirements are for low volume voice, data and financial transactions (credit card processing). Security is important, but highgrade quality is not vital o DSL lines may be used, preferably with business grade SLA Web hosting (public interface with customers) o The www service of a global company is likely to receive heavy traffic. The flow of traffic will be predominantly on the uplink pushing data to clients, whereas bandwidth requirements for the link with the corporate VPN (the downlink) will be much more limited. o A fixed high symmetric bandwidth dedicated fibre connection will typically be used Call centres and data centres o These large sites are often outside major metropolitan areas (eg to reduce costs for call centres) o High bandwidth is required often in the range of 1-10GBit/s o Dedicated fibre connections will be needed. One of BTGS s customers is a European multi-national integrated oil and gas company. BTGS is contracted to supply their global Wide Area Network connecting all the sites

33 Enterprise communications: steps towards an internal market 31 over a secure platform as well as security services and web filtering. The company has significant presence in Germany, France and the US and dispersed sites elsewhere in Europe and globally. Out of nearly 800 access circuits used to serve this client, 53% are leased lines (dedicated capacity) of which more than half use modern Ethernet technology, and the remaining 47% of lines are provided via DSL. 70% of the DSL connections are concentrated in a single country where the company is headquartered. This is because of the high concentration of retail outlets (petrol stations) in this country. 3.5 A supplier s view of the EU single market BTGS has expressed in interviews that it considers the EU single market as fragmented. It has particular concerns over what it considers to be poor access conditions (high prices and poor supply conditions) for high speed Ethernet leased lines in certain countries, where these lines are subject to no or less stringent regulation. BTGS states that it also faces challenges sourcing products including bitstream with a consistent business-grade service levels across the EU. While its customers demand standard levels of service in their bespoke contracts, BTGS cannot obtain similar guarantees from all of the access providers from whom it sources connectivity. BT is subject to strict regulatory conditions in the UK, where it has incumbent operations, including functional separation of the access business named Openreach, which supplies wholesale leased lines, as well as price caps on leased line access 44. BTGS has expressed concerns that the absence of similar regulatory conditions in other countries may affect the conditions of competition for enterprise communications across the single market. For example an incumbent in a country with less stringent business access regulation than the UK would be likely to be in a better competitive position to serve multi-nationals with a significant presence in its home country as it can benefit from its own infrastructure which is not subject to strict regulation as well as regulated access to BT s network in the UK. The effect is likely to be damaging to multinational corporations with sites in countries subject to weaker regulation, as they would tend to receive fewer attractive communications offers from competitors to their incumbent, including foreign competitors. The result in this scenario would be nationally fragmented competition for pan-european business communications services rather than a true single market. National regulatory authorities in Europe are obliged to set regulatory conditions only in markets in which one or more players is found to have significant market power (SMP). Elsewhere, market forces are assumed to deliver effective outcomes. However, BTGS 44 Ofcom: Business Communications Market Review 2013 final statement

34 32 Enterprise communications: steps towards an internal market claims that it has not experienced positive conditions for wholesale business access in unregulated markets, with the exception of certain business districts in which competitors have parallel fibre infrastructure. This leads it to question whether the SMP analysis has accurately reflected the competitive conditions in all countries. 4 Implications for single market policy 4.1 What policies are required to support enterprise communications? Evidence from our previous end-user survey (as well as that previously conducted by the ERG) suggests that there is a significant cross-border component to the provision of retail services to enterprises, particularly for large enterprises with multinational presence. Nearly 70% of respondents to the survey said that they preferred to source communications services from a single supplier including cross-border. The case studies for demand and supply of communications services presented in this paper are consistent with the survey results. Alternative case studies could no doubt be identified, but these are unlikely to reflect the requirements of the majority of multinational corporations. Equally, there is evidence that certain communications providers have become specialised in serving the enterprise segment on a multi-national basis. These providers are likely to have similar requirements for access connectivity across the EU in order to serve their customers. Wholesale markets for business access are typically national, in part due to the presence of different access suppliers (incumbents) operating in each national territory. However, the existence of cross-border demand (multi-national procurement) and supply (multi-national provision) in retail communications to multi-national enterprises, strengthens the case for a harmonised approach towards national wholesale markets for business access across the EU. Such a harmonised approach could include a common specification of core products used to supply multi-national corporations (which are also likely to be relevant to national corporations). However, a common specification alone is not sufficient to ensure the uniform availability of core products on reasonable terms. To achieve such a uniform availability, the approach towards definition and analysis of busand the application of remedies should be more closely aligned across the EU. In other words, common specifications for wholesale products used for pan-european enterprise customers need to be backed up by consistent regulatory obligations which ensure that products are mandated on reasonable terms in circumstances where market forces would be insufficient to ensure their provision on fair terms.

35 Enterprise communications: steps towards an internal market An analysis of current (and past) policy instruments Proposals for a Connected Continent (2013) In September 2013, the European Commission put forward proposals for a Regulation concerning the European single market for electronic communications and to achieve a Connected Continent (the Connected Continent proposals). One the stated aims of the Regulation is the attainment of productivity gains associated with ICT use, which it implies may be achieved through a greater choice and quality of business inputs 45.. The European Commission impact assessment associated with the proposal 46 makes reference to the challenges faced by corporate end-users and potential economic benefits as reported in the WIK 47 and Ecorys/TU Delft 48 studies. The Connected Continent proposals seek to address these identified problems primarily through provisions on Authorisation which aim to allow pan-european providers to register in a single country and benefit from the potential intervention of their home national regulatory authority when operating elsewhere 49 and through provisions on virtual wholesale access products 50, which seek to provide harmonised specifications for three products across Europe. These products cover: Offer 1: Virtual local unbundled access (VULA) Offer 2: IP bitstream. Offer 3: Dedicated circuits (terminating segments of leased lines) Under the Commission proposals, it would be obliged to issue binding implementing measures to specify the terms of offer I (VULA) by 1 January However, there is no similar obligation for the Commission to harmonise the specifications for the other products. In addition, Connected Continent puts forward proposals aimed at reducing what are perceived as excessive charges for cross-border mobile roaming 51 and to prohibit blocking of over-the-top services such as unmanaged VoIP, whilst permitting the development of specialised services 52, and to facilitate co-ordination in the allocation of spectrum across Europe. These provisions, while not specific to business, are also 45 See Connected Continent Regulation explanatory memorandum Connected Continent Impact Assessment 47 WIK (2013a) 48 Ecorys/TU Delft/TNO (2011) 49 Connected Continent Chapter II Single EU Authorisation 50 Connected Continent Chapter III European Inputs section ii European virtual access products 51 Connected Continent Article Connected Continent Article 23

36 34 Enterprise communications: steps towards an internal market highly relevant to business users. Mobile issues and the associated regulatory challenges are however beyond the scope of this paper Our analysis In a November 2013 study prepared by WIK, TNO and RAND for the ITRE Committee of the European Parliament 53, which examined the Connected Continent proposals as well as the European framework for electronic communications as a whole, we expressed our support in principle for provisions on wholesale virtual access products, which aim to standardise specifications for key wholesale inputs across the EU. We highlighted the importance of these provisions for the supply of services to pan- European businesses. However, we noted that the European Commission had not clearly distinguished between products which were likely to be mainly or exclusively used for business purposes from those which were more residential in nature. Moreover the proposals failed to prioritise those services which would be most clearly relevant to the single market ie products used for the supply of cross-border enterprise communications. We recommended that a deadline should be set to harmonise specifications for products specifically used for business communications in particular offer 3 (dedicated circuits leased lines) 54 In contrast we noted that specifications for VULA might not need to be subject to strict harmonisation to the same degree due to differing architectures in different countries 55. Moreover we highlighted that harmonisation was needed not only of the product specifications, but also to align the approach towards market analysis for business products across the EU. In other words the Connected Continent proposals were a step in the right direction, but were insufficient on their own. Concerning the authorisation regime, on the basis of interviews with telecommunications providers, we did not consider that the existing authorisation regime presented a significant barrier for providers of pan-european enterprise communications, and therefore measures to correct it were not urgent. We favoured a single template for national registrations over the regime proposed by the European Commission, which we considered overly complex 56. We believe our previous conclusions remain valid. 53 European Parliament (2013) chapter European Parliament (2013) Section 8 Recommendation 9 55 European Parliament (2013) Section 8 Recommendation European Parliament (2013) Section 8 Recommendation 4

37 Enterprise communications: steps towards an internal market European Commission Recommendation on Relevant markets (2007) Achieving a consistent approach towards defining relevant markets which are susceptible to ex ante regulation across the EU is in principle ensured through the 2007 European Commission Recommendation on Relevant Markets 57 (Relevant Market Recommendation), a non-binding instrument, which however, national regulators must take into utmost account. The quasi-binding nature of this Recommendation is reinforced by provisions in article 7 of the Framework Directive 58 ], which give the European Commission the power to veto market definitions and SMP designations, which the Commission considers are contrary to competition principles and have a significant impact on the single market. The main market in the current recommendation that is relevant to business use is socalled market 6, the market for terminating segments of leased lines, which incorporates traditional and modern Ethernet interfaces. Although it has the scope to intervene on market definitions, in practice, we note that the Commission has accepted deviations in national approaches towards this market (see section 1.1.3). The main areas of difference are: Certain countries segment by speed variously at 2Mbit/s (common in Eastern Europe), 155Mbit/s (eg Germany), 1Gbit/s (formerly in the UK) whereas other countries do not segment by speed A few countries segment geographically eg the carve out of business district in and surrounding London by Ofcom, whilst most do not Some countries apply cost orientation or price caps on Ethernet while others such as Spain and Portugal consider such services to be new and apply retail minus controls The European Commission has also to date accepted differences in national approaches towards business-grade bitstream ie bitstream offered with higher quality specifications and service levels. Most countries have not distinguished between residential and business-grade bitstream in their market analysis. However, Austria has identified it as a separate segment within the wholesale broadband access market, and the Netherlands has incorporated high-quality bitstream into a single high quality access market which also incorporates leased lines (although separate remedies are applied to both). The European Commission is currently working on an update to the Relevant Market Recommendation which is expected to be publicly released in the coming weeks. It can 57 European Commission Recommendation on Relevant product and service markets within the electronic communications sector susceptible to ex ante regulation 58 Directive 2002/21/EC as amended

38 36 Enterprise communications: steps towards an internal market reasonably be expected to include at least one market for wholesale business-grade access which is considered susceptible to ex ante regulation. However, the scope of that market (ie which products it covers), and the degree to which the Commission will give accompanying guidance on how the market may or may not be segmented, is not yet clear Our analysis The existing guidance for terminating segments of leased lines in the explanatory memorandum to the 2007 Relevant Market Recommendation focuses on leased lines offered to single sites, and makes no reference to the provision of complex tailored retail communications services to multi-site corporations at a national level and crossborder. This is a significant omission. The lack of discussion on cross-border aspects of business communications, may also explain why there has been less activity by the Commission under the article 7 proceedings aimed at ensuring consistent approaches in wholesale input markets for business compared with termination markets and markets primarily targeted at residential consumers. The review of the Relevant Market Recommendation presents an important opportunity for the European Commission to update the guidance in the explanatory memorandum to the revised Recommendation both to acknowledge the significance of cross-border aspects of enterprise retail markets and to harmonise underlying approaches to defining product markets including harmonising the wholesale product definitions and the conditions under which market segmentation may be justifiedas discussed in section 3.3.2, we consider that there is a strong case to identify two separate non-substitutable products which are primary inputs for the provision of retail business communications packages. These are: Dedicated (uncontended) symmetric access circuits offered with businesscritical QoS and business-grade SLAs (this corresponds with what is commonly referred to as a leased line); and Asymmetric contended access circuits offered with business-grade SLA and potentially with business-grade specifications (such as lower contention ratios than are typical for residential products) The TVH and BTGS case studies (sections 2.2 and 3.4) clearly serve to illustrate the complementarity of these products, which are often used in combination to deliver on major enterprise contracts. Concerning approaches towards segmentation, we are concerned that conclusions reached in some countries on the competitiveness of high speed leased lines resulting in the deregulation of such lines in several countries, may not be robust, if they have failed to consider what are likely to be very different competitive conditions in certain

39 Enterprise communications: steps towards an internal market 37 business districts from those outside. While only a rerun of the market analysis process with different parameters could reveal the outcome, we postulate, on the basis of evidence from CSMG 59 and interviews conducted in the context of our own studies that there may be intense competition in high speed fibre access lines for business, which is limited to particular business districts or even particular streets, with little availability and/or competition in very high speed leased lines elsewhere. As an example, we highlight in Figure 9 the different conclusions that might be reached concerning market competitiveness in a scenario of geographically restricted competition in high speed lines depending on whether market shares are calculated on a nationwide basis or separately in very dense business districts where several fibre access lines coexist. Figure 9: Effective of geographic segmentation on market shares indicative illustration Lines Business district Non-business district Low speed High speed Low speed High speed Incumbent Competitor Market shares High speed (nationwide) Low speed (nationwide) Business district Non-business Incumbent 37% 77% 36% 83% Competitor 63% 23% 64% 17% We conclude that if any segmentation is to be considered, competitive conditions in wholesale leased lines markets (symmetric dedicated access) may be better assessed on a geographic basis (very dense business districts vs elsewhere) without speed limitations rather than on a nationwide basis according to speed bands. The Ofcom business communications market review 60 also interestingly finds limited cost differences on the basis of speed for Ethernet leased lines Consistency with connected continent We also note that there is an important issue of consistency that requires attention. Harmonising the definitions for product markets for wholesale business access through the Relevant Market Recommendation (or another mechanism) is in effect an essential complementary step that is needed to achieve the European Commission s aim of achieving standardised wholesale products as proposed in Connected Continent. Viewing the linkage from the other direction, a product Offer in Connected Continent, should at the least correspond to one of the markets to be identified in the Relevant Market Recommendation. 59 CSMG (2013) 60 Ofcom BCMR 2013

40 38 Enterprise communications: steps towards an internal market However, in practice, this may not have been achieved in a forward-looking way. Offer 3 61, which clearly refers to terminating segments of leased lines corresponds relatively well with market 6 in the existing Recommendation on Relevant Markets. Offer 2 62 (IP bitstream) corresponds with market 5 in the existing Recommendation on relevant markets, but is defined in a broad manner that does not distinguish between business and residential variants of the product, which might conceivably be treated in a different way under a revised Relevant Market Recommendation European Commission Recommendation on cost methodologies and non-discrimination (2013) A key element in the provision of regulated wholesale products is the decision taken on which is the appropriate methodology, if any, to set the wholesale price. Stricter methods might include cost-orientation or a price cap. Less stringent controls could be to set the wholesale price on the basis of retail minus or more flexibly subject to obligations not to create a margin squeeze. Price is a particularly significant issue in the context of business access, because wholesale access costs constitute a significant proportion of total costs of provision. Moreover, there is evidence that, in the absence of stricter charge controls, charges for higher bandwidth leased lines in particular tend to be set at high levels. Provisioning conditions and service levels are also critical for business, who require high levels of service quality and reliability. As part of the package of measures introduced in September 2011, the European Commission adopted a Recommendation on cost methodologies and nondiscrimination 63. This Recommendation is explicitly targeted at current markets 4 (wholesale physical access) and 5 (wholesale broadband access) of the Relevant Market Recommendation. It advocates that for next generation access networks, wholesale charges of SMP operators could be left flexible in circumstances where there are sufficient competitive constraints from copper-based unbundling and/or cable combined with rules to enforce non-discrimination and ensure technical and economic replicability Our analysis The costing and non-discrimination recommendation is targeted at markets 4 and 5 of the Relevant Market Recommendation. It does not aim to address issues within market 61 Connected Continent Annex I 62 Idem 63 Commission Recommendation on consistent non-discrimination obligations and costing methodologies

41 Enterprise communications: steps towards an internal market 39 6 (terminating segments of leased lines). There are a number of reasons as to why the principles for residential access and leased lines would differ: Next generation access for residential customers is relatively new, and therefore its demand characteristics are not fully known in all countries. Conversely, fibrebased access is well-established for business access and demand is secure and enduring Dedicated symmetric business access lines, especially at high speeds (those requiring fibre access) are not a substitute for, nor are they significantly constrained by the pricing of residential copper-based access, cable or mobile. Checking margins on individual wholesale leased lines is challenging in the presence of complex multi-site retail services. It is not therefore pragmatic to use a margin assessment to gauge the reasonableness of leased line charges, or at least such an assessment may only be based on retail charges for single leased lines, which may not be representative of the prices charged for multi-site provision. One area which is unclear, is the extent to which this Recommendation is intended to apply to business-grade bitstream, which has been found by some NRAs such as the Austrian regulator, to be within market 5. Our analysis is that high-quality bitstream, clearly aimed towards business users would lack certain price constraints that may apply to residential customers, for example from cable or mobile. Moreover, it is questionable whether residential LLU would exert a constraint on business-grade bitstream. If business-grade bitstream is found to be a distinct market or segment from residential bitstream, it may be better treated as outside the scope of this Recommendation. Separate from the discussion on pricing, the recommendation on cost-methodologies and non-discrimination contains important principles concerning non-discrimination which are clearly relevant in a business context where product specifications and quality are of significant importance in provisioning to customers. The presence of this Recommendation concerning pricing principles and nondiscrimination enforcement on residential access products, merely serves to highlight the absence of similar guidance tailored towards business access.

42 40 Enterprise communications: steps towards an internal market European Commission Recommendations on leased lines (2005) It should be noted that Recommmendations concerning leased lines are not entirely lacking. In 2005, the European Commission published a Recommendation in two parts covering pricing and supply conditions for terminating segments of leased lines 64. Part I of the Recommendation concerning supply conditions recommends that contract include SLAs which cover all relevant aspects of provisioning such as ordering, migration, delivery repair time, reporting and dissuasive financial penalties. It also sets recommended ceilings on delivery times for leased lines, based on benchmark values (see Figure 10). The Recommendation provides a proposed ceiling of 30 calendar days for 2Mbit/s unstructured traditional interface leased lines and 52 calendar days for 34Mbit/s unstructured leased lines. Figure 10: European Commission 2005 leased line Recommendation benchmarks for delivery times 34Mbit/s leased lines Part II of the Recommendation concerning pricing 65 defines terminating segments of leased lines, recommends cost-oriented pricing and sets out maximum charge ceilings for lines up to 155Mbit/s (presumed to be traditional interface). This Recommendations /57/EC: Commission Recommendation of 21 January 2005 on the provision of leased lines in the European Union (Part 1 Major supply conditions for wholesale leased lines) 65