Comments pursuant to Article 7(3) of Directive 2002/21/EC 1

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1 EUROPEAN COMMISSION Brussels, 26/03/2008 SG-Greffe (2008) D/ Rundfunk und Telekom Regulierungs- GmbH (RTR) Mariahilferstraße A-1060 Wien Austria For the attention of: Mr. Georg Serentschy Mr. Wolfgang Beran Fax: Dear Sir, SUBJECT: Case AT/2008/0757: Wholesale broadband access in Austria I. PROCEDURE Comments pursuant to Article 7(3) of Directive 2002/21/EC 1 On 26 February 2008, the Commission registered a notification from the Austrian regulatory authority, Telekom-Control-Kommission ("TKK"), concerning the second review of the wholesale broadband access market in Austria, corresponding to market 5 in the Commission s Recommendation 2. TKK proposes to define a national geographic market, albeit recognising certain geographic variations in competitive conditions when defining the remedies. The national consultation 3 runs in parallel with the Community consultation under Article 7 of the Framework Directive. The deadline for the Community consultation is 26 March On 6 March 2008, a request for information 4 was sent to TKK and its response was received on 11 March 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 (the Framework Directive ), OJ L 108, , p Commission Recommendation of 17 December 2007 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services OJ L 344, , p (the Recommendation ). 3 In accordance with Article 6 of the Framework Directive. 4 Pursuant to Article 5(2) of the Framework Directive. Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2)

2 Pursuant to Article 7(3) of the Framework Directive, national regulatory authorities ("NRAs") and the Commission may make comments on notified draft measures to the NRA concerned. II. DESCRIPTION OF THE DRAFT MEASURE II.1. First-round notification The first review of this market was notified to and assessed by the Commission under case AT/2005/0312. At the time, TKK designated Telekom Austria ("TA") with significant market power ("SMP") and imposed a number of regulatory obligations, to be applied nationally. The Commission, in its letter, commented on the inclusion of cablebased services in the market definition based on the indirect pricing constraint exercised on DSL-based services at the retail level. It drew TKK s attention to the fact that indirect constraints should be taken into account in the context of the SMP analysis rather than at the market definition stage. However, the Commission concluded that the exclusion of cable from the product market definition would not have altered the conclusions reached by TKK as regards the findings of SMP. II.2. Second-round notification In the present notification, the relevant product market is defined as incorporating the provision of wholesale broadband access by means of DSL, cable and fixed wireless access (WLAN, WLL) 5. In addition to external wholesale provision, self provided services by vertically integrated undertakings are included. While referring to the provision of wholesale broadband access services by LLU and cable operators, albeit in limited terms, the inclusion of self supply by vertically integrated operators is based largely on the indirect competitive constraints exercised via their retail products 6. In the market definition, Fibre to the Node type products ("FTTN") are included to the extent that products offered in this way will not differ sufficiently from existing products using exclusively copper-based networks. According to TKK, this does not apply to Fibre to the Home ("FTTH"), since the products provided via FTTH have so far had no sufficiently disciplined impact on the products included in the relevant market. Although mobile broadband access (over UMTS and/or HSDPA) is experiencing strong growth at the retail level 7, it is not included in the relevant product market at this stage. According to TKK, this is due to uncertainty regarding the extent to which mobile broadband connections are used as substitutes rather than as complements for fixed broadband connections as well as uncertainty regarding their future development. 5 The Austrian Regulatory Authority for Broadcasting and Telecommunications ("RTR") completed a review of the relevant market definition (previously defined in 2005) on 14 May TKK has the competence to then determine whether in the relevant market one or more undertakings have significant market power and (if necessary) to impose specific obligations. 6 Based on the high share of the wholesale price in the retail broadband price (70-80%) and the high retail price elasticity in Austria, TKK considers that if a hypothetical monopolist of bitstream raised its prices, ISPs would be forced to raise their retail prices, leading to a sufficient number of retail consumers switching to products provided by vertically integrated undertakings. 7 Strong growth was experienced in particular after the introduction of HSDPA in As of the end of July 2007, approx. 20% of all retail broadband connections in Austria were provided via a mobile broadband access connection. 2

3 As regards business services, SDSL and high-end ADSL products are included in the market definition mainly on the basis of supply-side substitution. In particular, TKK outlines in its response to the Commission s request for information that once broadband is implemented in the network, an operator can usually offer several bandwidths and symmetric as well as asymmetric products. TKK also considers that there is a potential chain substitution effect from the demand side. The relevant geographic market is considered by TKK to be national. While geographic variations in competitive conditions arise, TKK notes that wholesale broadband access in Austria is still predominantly characterised by a common pricing constraint with only limited geographic price differentiation to date. According to TKK, until the end of 2005 TA provided its retail products nationwide at uniform conditions. Since the end of 2005, however, a number of special offers were made with respect to naked DSL (the product aonpur), through which the product could be purchased for lower prices in certain metropolitan areas. According to TKK, however, only one tariff was involved, which, because of its price and product characteristics, is attractive only to a limited group of customers. RTR's market definition report, provided in response to the Commission s request for information, shows that between there were five regional actions involving the product aonpur, two of which were also extended to the wholesale level. RTR s market definition report notes further, that customers in metropolitan areas are increasingly confronted with different conditions than customers in less populated areas and frequently have a greater choice and, depending on their user profile, lower prices 8. Nevertheless, a common pricing constraint is still concluded given TA s nationwide presence and that, for the most part, it sets nationally uniform prices. According to TKK, one can therefore assume that every regional provider is restricted in the same way by the nationwide provider TA. II.3. Finding of significant market power ( SMP ) In its analysis of single dominance, TKK concludes on the basis of factors such as market share developments, barriers to market entry, control of infrastructure not easily duplicated, countervailing buyer power, product differentiation, vertical integration and price-setting behaviour that TA has SMP in the wholesale broadband access market in Austria. As to the assessment of market shares, TKK notes that the market shares of the individual competitors have reached a relatively stable level 9. As of March 2007, TA had a nationwide market share of 47%. UPC, the main cable operator 10, had a market share of 30% (based on cable and LLU inputs), while no other individual competitor had attained a 8 For example, according to RTR's market definition report, there are frequently offers from cable network operators for heavy users which for comparable prices offer significantly higher bandwidth than TA. RTR s report notes further, that the end user market for broadband access is dynamic with higher download rates and speeds increasingly being provided by operators for the same price. To understand the development of prices vis-à-vis product characteristics over time, the different offers of TA and three other large operators (UPC, Inode and LIWEST) were analysed over the period May 2002 to July The regression showed that overall prices declined sharply over that time period and that TA was more expensive than the other operators. 9 The largest nine operators by market share in Austria include TA, UPC (cable, unbundling), Tele2 (unbundling, bitstream), as well as cable network operators, LIWEST, Salzburg AG, Kabelsignal, Telesystem Tirol, B.net and Cablecom. 10 Since the first review, UPC has bought the main LLU operator, Inode, and thus provides broadband services based on LLU as well as cable. 3

4 market share of above 5% 11. It is believed that approximately 95% of Austrian households can be serviced by ADSL. At the end of 2006, more than 60% of Austrian households also had DSL available via ULL infrastructure while the proportion of households with access to broadband over CATV networks is estimated to be about 50% 12. Alternative operators based on cable, ULL or FWA are mainly active in metropolitan areas 13. Furthermore, according to TKK, TA's market share shows geographically strong differences and is significantly smaller in metropolitan areas than in more thinly populated areas 14. Due to the high sunk costs required to roll out a broadband access infrastructure, TKK considers barriers to market entry and to potential competition to be high. While market entry by cable and LLU operators has already occurred in metropolitan areas where economies of scale are easier to realise, TKK estimates that no further significant roll-out of alternative infrastructure is to be expected outside of these areas over the period of its review. According to TKK, the competitive significance of fixed wireless access is currently limited in terms of market share at the retail and wholesale level. Since TA is the only operator with a comprehensive nationwide access network, and in many very thinly populated areas it is the only operator, TKK considers that the network of TA cannot be easily duplicated. Furthermore, countervailing buying power by Internet Service Providers ("ISPs") is limited in those areas where alternative wholesale providers are absent or competitive pressure is limited. If more operators are active in an area, however, the incentive for access refusal is less and the level of countervailing buyer power rises with the number of alternatives. Regarding prices, TKK notes that, as a nationwide provider facing heterogeneous competitive conditions across geographic areas, TA faces a trade-off in its nationally uniform pricing strategy. This trade-off results in it charging a national price which is, according to TKK, below the monopoly price but still higher than the competitive price. In that regard, an analysis covering the years 2003 to 2007 showed TA to be more expensive than its competitors throughout that period 15. The fact that TA s market share has remained rather stable despite its relatively high prices is considered by TKK as an indicator of market power The development of market shares over the period October 2004 to March 2007 shows a levelling off at just below 50% for TA at the beginning of 2006 and has dropped slightly since Autumn 2006 while UPC's market share dropped from about 34% to about 30%. According to TKK's market analysis report, Tele2's market share witnessed an increase over the same time period. 12 In RTR's market definition document, provided in response to the Commission's request for information, a comparison of the distribution of broadband access technologies in the Austrian enduser market in September 2006 shows that DSL from TA accounted for 40%, bitstream 9%, unbundling 12%, CATV 37%, and other technologies 2% of access connections. 13 Cable and LLU are the main alternative infrastructures considered by TKK. In its response to the Commission s request for information, TKK acknowledges that although mobile broadband is not included in the relevant wholesale market, it has experienced recent strong growth. However, since mobile broadband has only been available to the mass market for about a year, TKK considers it difficult to make accurate predictions regarding its likely future development at this stage. 14 See FN 17 below. 15 TKK notes however the possibility of increased pricing pressure from mobile broadband connections in the future. 16 However, the price difference to other operators has in the last (financial) quarters led to a slight loss of market shares by Telekom Austria. According to TKK, this is accounted for primarily by competitive pressures in metropolitan and heavily populated areas. 4

5 II.4. Regulatory remedies TKK considers that TA has SMP on a national level but that competition problems arise mainly in areas with a more limited presence of alternative infrastructure operators. TKK underlines that market share distributions differ between densely populated areas, where several infrastructure operators are competing, and less populated areas, where frequently only TA is present 17. Furthermore, TKK considers the incentives for access refusal by TA to be less in areas where it competes with other infrastructure-based operators: if TA were to refuse to provide bitstream in those areas, not necessarily all ISPs' retail customers would migrate to TA instead of moving to competitors. TKK consequently proposes to address these differing competitive pressures by differentiating remedies. For these purposes, TKK divides the country into two areas based on the following criteria: (i) the number of large operators 18 present in the footprint of each of the 1480 Main Distribution Frames ( MDFs ) operated by TA; (ii) the customer density of the MDF area 19 ; and (iii) TA's market share in each of the MDF areas. This leads to the following geographic distinction: - Area 1: includes MDF areas where there are 3 or more large operators and where the MDF serves more than 2,500 households and where TA's share is below 50%; 20 and - Area 2: includes all other MDF areas. 21 TKK intends to maintain existing remedies on TA in Area 2 22 including: access, pricecontrol (on a retail minus-basis), non-discrimination, and cost accounting. Existing obligations on TA pertaining to Area 1 will be removed with the exception of accounting separation which will continue to apply in the whole of the national territory (i.e., in Areas 1 and 2). TKK considers this appropriate to prevent the extension of TA's 17 For example, if a small operator is found in an MDF area next to a large operator (including TA), TA has an average market share of 80%. If two large operators are active in an MDF area, the market share of TA drops to about 65%. If three large operators are active in an MDF area, TA's market share drops to about 28%. Also, while TA has an average market share of about 80% in the MDF areas connecting 1,000-2,000 households, its market share drops to 23% in the MDF areas connecting more than 10,000 households. 18 The large operators considered by TKK are the largest nine operators in Austria by market share (see FN 9 above). Furthermore, cable and FWA are taken into account only in the MDF areas where they cover at least 65% of the households connected to the MDF. TKK considers that with regard to the number of large operators present in an individual MDF area, TA's market shares differ significantly in areas with three or more large operators than those MDF areas where there are two or less large operators present (see FN 17). 19 According to TKK, evidence indicates that 2,500 households usually represents the minimum size of a MDF area for unbundling and that unbundling activities are generally concentrated in areas with more than 2,500 households. 20 This area includes 131 MDFs and TA had an average market share of about 28% in this area as of the end of March More recent estimates suggest an average market share at the end of March 2007 in the region of 25.5%. 21 This area includes 1349 MDFs and TA had an average market share of about 75% as of the end of March More recent estimates suggest an average market share at the end of March 2007 in the region of 73%. 22 TKK has identified the following potential competition problems in Area 2: (i) the establishment of barriers to entry; (ii) leveraging of market power; and (iii) excessive pricing (although limited by the national pricing policy of the incumbent). 5

6 market power and it also considers it proportionate given the cost oriented obligations on TA in other regulated markets and that the incremental costs of this obligation are low. Apart from accounting separation, it is proposed to lift the current obligations on TA in respect of Area 1 after a transition period of 6 months. III. COMMENTS On the basis of the notification and the additional information provided by TKK, the Commission has the following comments: (1) Market Definition a) Strength of indirect constraint from vertically integrated competitors While direct wholesale constraints are noted in the assessment, TKK primarily considers that the indirect competitive constraint exercised by vertically integrated competitors, e.g. by cable and LLU operators, at the retail level has a sufficient impact at the wholesale level to justify its inclusion in the wholesale broadband access market. The Commission has previously noted that competition at the retail level from vertically integrated undertakings may be such as to exert an indirect constraint on the market for wholesale access services and that such indirect pricing constraints, where they are found to exist, should be taken into account in the context of the SMP assessment. As already underlined by the Commission in the context of previous cases, it is essential that the strength of the constraint posed by vertically integrated companies is correctly estimated in the assessment and the Commission has set out appropriate criteria against which the nature of such indirect substitution effects may be assessed 23. In that respect, TKK refers to the high share of the wholesale price in the retail price (i.e., 70-80%) suggesting that a significant price increase at the wholesale level would translate into a significant price increase at the retail level. Further, TKK finds the price elasticity of demand at the retail level to be high, which suggests that sufficient retail substitution would occur in response to such a price increase such as to warrant the inclusion of self-supplied services by vertically integrated undertakings within the scope of the market definition 24. As already pointed out in the context of the first round review, the Commission notes that the inclusion or exclusion of indirect constraints at the market definition stage does not have an impact on the results of TKK's SMP analysis. Even with the inclusion of such indirect constraints in the market definition, and therefore within the market share estimation, TA is still found to have SMP on the relevant market. The Commission notes, however, that TKK's inclusion of such indirect constraints influences the geographic boundaries drawn for the purposes of applying remedies. Nevertheless, the geographic variations in competitive conditions deriving from the presence of these constraints would still have been identified in the course of the overall competitive assessment 23 Explanatory Note to the Commission Recommendation 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 (C(2007) 5406), pp See also cases UK/2003/0032, NL/2005/0281, AT/2005/0312, and UK/2007/ As further outlined in its response to the Commission s request for information. 6

7 (irrespective of whether that took place in the market definition or market power assessment) and would in any case need to have been factored into the regulatory obligations accordingly. b) Geographic market definition TKK defines a national market but proposes to differentiate its remedies geographically on the basis of geographic variations in competitive conditions. When drawing a distinction between different geographic areas, TKK takes a number of factors into account including the level of customer density capable of supporting sustainable entry in a given MDF area, actual or planned entry in individual MDF areas and local market share distributions. Using these indicators, TKK observes differing levels of competitive intensity in different geographic areas and notes that this provides TA with varying incentives to provide wholesale broadband access services - the incentive to provide access being stronger in areas where multiple operators are present and weaker in those areas where fewer competitive alternatives exist. Notwithstanding the comparatively stronger competitive dynamic in certain more densely populated areas, TKK notes that TA largely continues to apply the same pricing policy at the national level. TKK thus proposes to recognise the observed heterogeneity in competitive conditions via the application of differentiated remedies. In that respect, TKK proposes to reduce regulation in those MDF areas where it observes greater competitive pressure from alternative infrastructurebased operators (Area 1) while retaining remedies in those areas subject to fewer competitive constraints (Area 2). The evidence based on recent entry and market share data and an absence of significant impediments to customers switching 25 suggests increasing competitive pressure in Area 1. Despite the above indications of evolving variations in competitive pressure, TKK proposes however to retain a degree of regulatory oversight by continuing to apply an accounting separation measure in Area 1. The Commission would like to draw attention to types of structural and behavioural evidence noted in previous cases as relevant to assessing geographic variations in competitive conditions for the purposes of defining different geographic markets, namely the distribution and evolution of local market shares over time as well as the pricing of both incumbent and alternative operators and its evolution over time in the relevant areas. In addition, differences in the functionalities or types of products being offered, the marketing strategies being pursued or the entry conditions in different areas may further reflect regional/local differences in demand and supply conditions for the purposes of geographic market segmentation. It is also important that any proposed market boundaries would be sufficiently stable over time 26. The Commission takes note of TKK's observations concerning the geographic variations in competitive conditions in wholesale broadband access services. However, in the view of the national pricing by TA, TA's fairly stable market position at the national level and the absence of evidence on the existence of sufficiently established and stable differences in competitive conditions, allow to conclude that TKK's finding of a national geographic market and the imposition of differentiated remedies is based on sufficiently coherent and cogent evidence. 25 As confirmed by TKK in its response to the Commission s request for information. 26 See case UK/2007/

8 On the latter point, the Commission notes that the regulatory framework does not preclude the imposition of different remedies in the same relevant market 27. Based on the general principle that remedies should be tailored and proportionate to the identified competition problem, it can be appropriate for NRAs to impose remedies which take account of locally/regionally differentiated competitive conditions while retaining a national geographic market definition. The geographic differentiation of remedies may be appropriate in those situations where, for example, the boundary between areas where there are different competitive pressures is variable and likely to change over time, or where significant differences in competitive conditions are observed but the evidence may not be such as to justify the definition of sub-national markets. In addition, differentiation of remedies may be appropriate where premature removal of ex ante regulation could have significant detrimental consequences for consumers and the competitive process. Nevertheless, the Commission would like to call upon TKK to continue to monitor the competitive trend in different MDF areas in Austria. Were the market to develop in such a way that there would be evidence of sustained heterogeneous competitive conditions (e.g. at the stage of the next market review) the Commission would invite TKK to consider defining sub-national markets.. (2) SMP assessment and future possible constraints TKK proposes to designate TA with SMP in the Austrian wholesale broadband access market on the basis of a number of structural and behavioural factors. These include the presence of high barriers to entry and control of infrastructure not easily duplicated as well as the ability of TA to set prices higher than its competitors for a sustained period of time. While these factors tend to point towards the presence of SMP on a national basis, the Commission also notes that UPC represents a relatively sizeable competitor with a 30% market share at the national level. In that respect, TKK refers to the more restricted geographic presence of UPC 28 and indicates that it does not anticipate further significant rollout by cable or LLU-based networks, particularly in more sparsely populated areas, over the period of its review. The Commission recalls that the SMP assessment is based on a sufficiently forward-looking market analysis based on existing market conditions and nonetheless invites TKK to monitor the ongoing evolution of alternative competitors and, in particular, their ability to appreciably constrain TA in the relevant market over the timeframe of this review. Furthermore, whilst not including mobile broadband access services within the scope of the market definition at this stage, TKK notes that mobile broadband access has experienced significant growth at the retail level in recent years and may give rise to pricing pressure on TA in the future. However, it considers this development is still too recent and the effects on fixed network connections are too uncertain to determine its actual competitive constraint. TKK, however, indicates that it will closely monitor these developments 29. The Commission welcomes this commitment to monitor the ongoing development of mobile 27 For example, differentiated remedies have been applied in cases UK/2003/ , AT/2006/0508, FR/2005/ UPC covers approximately 60% of Austria using LLU and cable-based inputs, with its cable network covering less than 50% of Austria. 29 A consumer survey is planned for the end of

9 broadband access services in Austria and would like to invite TKK to consider, in particular, whether the development of these services lead it to pose a sufficient constraint on the incumbent s commercial behaviour such that it may need to be taken into account at the stage of the next market review. (3) Sustainability of competition from alternative providers TKK argues in respect of its identified Area 1 that TA is subject to competitive pressure from several operators which use their own infrastructure (i.e., ULL, cable) and that its market share is notably lower in this area (i.e., approx. 25%). Accordingly, it suggests that in the absence of access regulation, TA s commercial incentives for wholesale access refusal are much less in Area 1 than in Area 2. This is because a refusal to supply bitstream to ISPs in Area 1 could involve a risk of some of those ISPs customers switching to other vertically integrated operators rather than to the retail arm of TA. Furthermore, TKK argues that other infrastructure-based operators could either offer (residential/business) broadband services themselves using self-supplied inputs and/or provide ISPs with the relevant wholesale inputs for those services. Nevertheless, the Commission would like to invite TKK to closely monitor the overall level of wholesale competition and the provision of wholesale broadband access services in Austria to ensure effective competition to the benefit of both business and residential users over the timeframe of its review. Potential risks to the sustainability of this competition from alternative providers going forward could include future developments in access technologies such as NGA investment. While the exact consequences of the development of NGA technologies are not fully known yet, it cannot be excluded at this stage that in future access networks the unbundling of local loops could prove technically and economically difficult. In its response to the request for information, TKK commits to monitoring the development of these alternative access technologies 30. In that respect, the Commission welcomes this commitment and would like to invite TKK to consider, in particular, the extent to which these alternative technologies might impact on the various sources of wholesale broadband competition identified as part of the current assessment. Pursuant to Article 7(5) of the Framework Directive, TKK shall take the utmost account of comments of other NRAs and the Commission and may adopt the resulting draft measure and, where it does so, shall communicate it to the Commission. The Commission s position on this particular notification is without prejudice to any position it may take vis-à-vis other notified draft measures. Pursuant to Point 12 of Recommendation 2003/561/EC 31 the Commission will publish this document on its website. The Commission does not consider the information contained herein to be confidential. You are invited to inform the Commission 32 within three working days following receipt whether you consider, in accordance with Community 30 It notes possible alternatives which are being discussed, should unbundling at the MDF no longer prove viable, such as unbundling at the street cabinet, access to ducts or fibre or new bitstream products (other than those that currently exist). 31 Commission Recommendation 2003/561/EC of 23 July 2003 on notifications, time limits and consultations provided for in Article 7 of Directive 2002/21/EC, OJ L 190, , p Your request should be sent either by INFSO-COMP-ARTICLE7@ec.europa.eu or by fax:

10 and national rules on business confidentiality, that this document contains confidential information which you wish to have deleted prior to such publication. You should give reasons for any such request. Yours faithfully, For the Commission, Philip Lowe Director-General 10