EUROPEAN COMMISSION. Comments pursuant to Article 7(3) of Directive 2002/21/EC

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1 EUROPEAN COMMISSION Brussels, C(2017) 4500 final Český telekomunikační úřad (ČTÚ) Sokolovská 219 P. O. Box Praha 025 Czech Republic For the attention of Mr Jaromír Novák Chairman of the Council Dear Mr Novák, Fax: Subject: Commission decision concerning Cases CZ/2017/1985 and CZ/2017/1986: Wholesale local access provided at a fixed location and wholesale central access provided at a fixed location for massmarket products in the Czech Republic Comments pursuant to Article 7(3) of Directive 2002/21/EC 1. PROCEDURE On 26 May 2017, the Commission registered two notifications from the Czech national regulatory authority, Český telekomunikační úřad (ČTÚ) 1, concerning the market analyses for wholesale local access and wholesale central access for massmarket products provided at a fixed location 2 in the Czech Republic. A national consultation 3 ran from 25 October 2016 for one month. On 7 June 2017, the Commission sent a request for information to ČTÚ to which an answer was received on 13 June Under Article 7 of Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services (Framework Directive), OJ L 108, , p. 33, as amended by Directive 2009/140/EC, OJ L 337, , p. 37, and Regulation (EC) No 544/2009, OJ L 167, , p. 12. Corresponding to market 3a and 3b in the Commission Recommendation 2014/710/EU of 9 October 2014 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services (Recommendation on Relevant Markets), OJ L 295, , p. 79. In accordance with Article 6 of the Framework Directive. Commission européenne/europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË - Tel

2 Pursuant to Article 7(3) of the Framework Directive, national regulatory authorities (NRAs), the Body of European Regulators for Electronic Communications (BEREC) and the Commission may make comments on notified draft measures to the NRA concerned. 2. DESCRIPTION OF THE DRAFT MEASURE 2.1. Background The market for wholesale local access at a fixed location was previously notified to and assessed by the Commission under cases CZ/2010/1070 (1 st round) and CZ/2014/1647 (2 nd round) 4. In its last market analyses for markets 3a and 3b 5, ČTÚ defined a retail product market for residential broadband access, including copper xdsl lines, fibre optic cables, cable TV networks (CATV) and radio networks operating on unlicensed frequency bands (Wi-Fi) 6. ČTÚ excluded mobile broadband, fixed radio networks on licenced frequency bands (including WiMax), satellite broadband, and access through power lines from the retail market definition. In addition, it concluded that there is no separate market for bundles. On the basis of this retail market definition, ČTÚ calculated that in 2013 the SMP operator O2 Czech Republic a.s. (O2, formerly Telefónica) controlled 32.2% of the retail market 7, whereas Wi-Fi operators collectively controlled 32.3%, cable operator UPC controlled 16%, alternative cable operators controlled 2.6%, alternative FTTx operators collectively controlled 11.1%, alternative operators relying on O2's Wholesale Broadband Acces (WBA) offer 8 controlled 4.1%, and alternative operators relying on LLU unbundling only 1.7%. Market 3a In 2014 ČTÚ included in the market for wholesale local fixed infrastructure access unbundled access products and services provided through the legacy copper network, as well as over fibre, including Fibre to the Home (FttH), Fibre to the Building (FttB) and Fibre to the Cabinet (FttC) (together, FttX) and excluded CATV and Wi-Fi network solutions from the relevant wholesale market. The relevant geographic market was defined nationally and comprised the entire territory of the Czech Republic C(2014) 7537 final. CZ/2014/ ; C(2014) 7537 final. ČTÚ considered at the time that Wi-Fi is the second most widespread type of internet access in the Czech Republic, and that according to its research end-users who choose Wi-Fi are price sensitive customers who prefer it on the basis of their long term experience of the technology and low price. It controlled 29.3% of the retail market through its xdsl offer, and the remainder through either FttX or Wi-Fi offers provided though its own brand or through its subsidiary Internethome. Both regulated and offered commercially. 2

3 ČTÚ designated O2 as the only operator having SMP on the relevant wholesale market based on the market share of above 75% 9 of broadband accesses 10, the overall size of the undertaking, control of an infrastructure that is not easily duplicated, product/services diversification, economies of scale and scope, vertical integration, barriers to entry 11 and to the development of competition 12. ČTÚ imposed a full set of remedies on the designated SMP operator, O2, including (i) a general obligation of wholesale physical access, as well as access to passive infrastructure and dark fibre 13 ; (ii) a general obligation of transparency as well as the obligation to publish Key Performance Indicators (KPIs) and the requirement to provide Service Level Agreements (SLAs); (iii) a non-discrimination obligation, including an obligation of Equivalence of Inputs (EoI) 14 on access provided over NGA networks 15, and an obligation to ensure technical and economic replicability 16 of services provided on both copper and NGA networks; (iv) a price control remedy in the form of cost orientation for access to the legacy copper network 17, but not to O2's FttX networks 18 ; and (v) accounting separation. Market 3b The last market review of the wholesale broadband access market (now wholesale central access for mass-market products) in the Czech Republic was notified to and assessed by the Commission under case CZ/2014/ ČTÚ identified a nation-wide market for wholesale broadband access to electronic communication networks at a fixed location, comprising wholesale broadband Other operators active within the wholesale market are smaller operators that have deployed alternative FttX infrastructures. Thus excluding O2's PSTN connections. If all active lines are included, O2's market share is almost 85%. Particularly sunk costs required to deploy alternative networks across the national territory. Represented by O2's acquisition of certain local Wi-Fi and fibre networks since Access to civil engineering and dark fibre had not been a regulatory obligation previously and was first introduced in case CZ/2014/1647. ČTÚ provided an indicative roadmap for the imposition of EoI, envisaging a process lasting 11 months, which was to be filled in with further details in the implementing measure. ČTÚ also stated that it would use its legal powers to remedy any failure to implement the imposed obligations. ČTÚ indicated that it considered optical access networks to include not only FTTH networks but also any other access networks that enable the provision of services with the minimum speed of 30 Mbit/s. To be tested by the performance of economic and technical replicability tests, the details of which were to be provided in subsequent measures. On the basis of a 2012 BU-LRIC+ cost model where assets are valued at current costs, including the use of up-to-date technology (MEA). ČTÚ indicated that the monthly fee for full access at the time had a price cap of around 6.5. Further, ČTÚ imposed a general obligation to apply cost oriented prices to access to passive infrastructure. C(2014) 7537 final. 3

4 access over xdsl and FTTx. ČTÚ did not, at the time, include access over CATV and Wi-Fi network solutions as part of the relevant wholesale market. ČTÚ designated O2 as the only operator having SMP on the relevant wholesale market arriving at its conclusion on the basis of high market shares which, given the low take-up of Market 3a unbundling products 20, is only marginally lower than the market share in Market 3a at 72.4%. The SMP finding was supported by the overall size of the undertaking, its control of an infrastructure that is not easily duplicated, product/service diversification, economies of scale and scope, vertical integration, barriers to entry and to the development of competition. ČTÚ imposed a full set of remedies on the designated SMP operator, O2, including (i) a general obligation to provide bitstream access, as well as a new access point located at the level of the regional Ethernet network (REN) 21 ; (ii) general obligation of transparency as well as the obligation to publish Key Performance Indicators (KPIs) and the requirement to provide Service Level Agreements (SLAs); (iii) a non-discrimination obligation, including EoI for access to O2's NGA networks 22 and obligations to ensure technical and economic replicability; and (iv) accounting separation. ČTÚ did not impose any specific price control obligations in Market 3b, therefore continuing the regulatory approach to price control based on pricing flexibility subject to a margin squeeze test 23. ČTÚ stated in 2014 that it considered but excluded the geographic segmentation of remedies, because it did not find significantly stable boundaries between territorial units to justify it. Nonetheless, it considered at the time that the constraints exercised nationally by alternative operators 24, the lack of any stable regionalised retail pricing differentiation by O2, together with the application of a margin squeeze test, justified its decision to continue the existing regulatory approach. The Commission noted at the time, inter alia, that ČTÚ's analysis suggested that competitive pressures are homogeneous at a national level, and that ČTÚ was not Representing less than 4% of total broadband accesses at the wholesale level, or 1.7% of the retail broadband market (which, as stated above, includes cable and Wi-Fi). So that wholesale services will no longer be available only at a single access point in Prague. The process described for imposing EoI in Market 3b is equivalent to that described in Market 3a. ČTÚ argued at the time that the imposition of a price control obligation would be disproportionate in the circumstances of the Czech market. In particular, it considered that it had not identified a problem of excessive pricing in the Czech Republic, by observing a downward trend of unregulated prices over the years, despite the increase in the speed of connections 23. It also pointed to the constraint on retail prices exercised by retail competition, in particular by alternative infrastructures, and by the need for O2 to reflect the pressure of retail constraints at the wholesale level by the application of a margin squeeze test by ČTÚ. Alternative Wi-Fi operators were present nationally in 85% of all municipalities covering 97.6% of the Czech population (although rollout did not necessarily cover the entirety of the municipality), whereas CATV and FTTx infrastructures were only present in certain populated areas (CATV in 4% of municipalities covering 51% of the Czech population, FttX in 6.4% of municipalities including some 58.9% of the Czech Population similarly to Wi-Fi, these alternative technologies were not necessarily available throughout the territory of the municipality). 4

5 able to identify territorial sub-units so as to differentiate remedies and, for example, apply a price control remedy in the least competitive areas of the Czech Republic. At the same time, the Commission observed that for a substantial number of municipalities, end customers only have access to O2's xdsl network and alternative Wi-Fi networks whilst the increase of alternative FttX solutions may provide robust and probably durable competitive constraint at the retail level in other areas. As a result, the Commission pointed to the fact that Wi-Fi competitors that do not choose to deploy FttX may find it increasingly hard to compete outside of the most price-sensitive brackets of the market. It was the Commission's view at the time that for certain geographic areas where cable and FttX are not present, there may be the risk that O2 could find it increasingly attractive to apply excessive prices both at the retail and at the wholesale level, particularly for its higher speed products, which are less constrained by WiFi. The Commission considered that, in such cases, the current margin squeeze test alone may no longer be able to prevent excessive prices at wholesale level and urged ČTÚ to maintain a close observation of geographic price variations at retail and wholesale level, not just in the aggregate for the whole wholesale market but also for different brackets of products, and to analyse the appropriateness of future price intervention should the need arise. Voluntary separation of CETIN and O2 In April 2015, O2's shareholders voluntarily agreed to separate the previous vertically integrated SMP operator's business into two distinct companies, i.e. the operator of the wholesale infrastructure network, CETIN, and the retail operator, O2 25. The separation became effective on 1 June ČTÚ explains in the present notification that both companies are whilst (majority) owned by the same investment fund (PPF group) 26 are supposed to be two legally and economically separate companies with a distinct management and supervisory structure, as well as separate headquarters, workforce, IT systems and accounting records. ČTÚ perceives the split-up as a procompetitive measure, essentially based on the assumption that, on the one hand, CETIN is solely driven by the incentive to sell wholesale products having characteristics that allow access seekers to effectively compete on the retail market and, on the other hand, O2 is not granted a preferential treatment by CETIN and thus competes on equal footing with the other retail operators relying on CETIN s wholesale inputs. As a consequence of the separation, all remedies previously imposed on the vertically integrated O2 are now applicable to CETIN only. Moreover, as further described below, in the current proposal ČTÚ considers that the removal of vertical links between O2 and CETIN makes the imposition of certain remedies (namely, The separation implied the transfer of O2 s physical telecommunications network and prior wholesale offers to the new wholesale-only entity, CETIN. The PPF group acquired O2 in January 2014, a Czech investment group active in a variety of sectors across Europe, Asia and the USA. 5

6 copper price control in market 3a, the KPI obligation and the economic replicability test) no longer appropriate Current proposal Relevant retail market The retail product market is defined by ČTÚ as comprising broadband access provided through copper xdsl lines (including FttC solutions), fibre optic cables (FttB/H), cable TV networks (CATV), radio networks operating on unlicensed frequency bands (Wi-Fi), and LTE mobile networks with limited mobility and allowing nomadic access 28. As in CZ/2014/1647, ČTÚ concludes that the retail market does not encompass neither mobile broadband, nor broadband access through fixed radio networks on licenced frequency bands, satellite and power lines. Further, ČTÚ confirms that there is no separate market for bundles. ČTÚ notes that, as of 2016 (2 nd quarter), O2 controlled 25.88% of the retail market, cable operator UPC had a market share of 14.57%, whereas Wi-Fi operators collectively held the largest portion of the market (34.45%) 29. The rest of the retail market was controlled by alternative FttX operators (16.75%) 30, alternative operators relying on CETIN s xdsl access products (4.96%) and alternative cable operators (3.39%) 31. In the reply to the RFI, ČTÚ clarified that in the 2 nd quarter of % of the retail residential broadband accesses were bundled with one or more services, of which the most demanded bundle was the double play (fixed broadband in combination with pay-tv) In response to the Commission's request for information, ČTÚ clarified that, even though it lacks the legal power to directly enforce the terms and conditions, including the commitments, of the voluntary separation agreement, any serious departure from such conditions would lead ČTÚ to review the outcome of the market analysis and take appropriate regulatory action. In comparison to the previous market analysis, ČTÚ has broadened the defined retail product market to include access over LTE mobile networks with limited mobility. ČTÚ explains that this form of access is offered by mobile operators on the market as an alternative to fixed broadband access to subscribers with low to average data consumption, at prices that are comparable to basic xdsl products. Such "nomadic" LTE offers with limited mobility are provided via LTE modems, which create a home WiFi network, and tend to offer higher monthly data allowance limits ( GB per month) if compared with "standard" LTE offers. Given their large number, ČTÚ estimates that ca Wi-Fi operators provide retail broadband services in the Czech Republic to approximately 1 million customers. However, the markets shares of each individual Wi-Fi operator are marginal. In the reply to the RFI, ČTÚ explains that it expects the market presence of Wi-Fi to remain stable or slightly decrease during the forward-looking period of this market review. ČTÚ estimates that over 500 providers offer retail broadband access through FttB/H solutions to approximately customers. In the reply to the RFI, ČTÚ also indicates that several operators are currently planning to roll out additional FttB/H lines, including 18 new entrants expected during the forward-looking period of this market review. According to ČTÚ, there are 62 local cable operators (including UPC) providing retail broadband access to approximately customers. 6

7 Thus, operators providing retail broadband access other than O2 on the basis of regulated wholesale inputs based on CETIN's infrastructure (through markets 3a or 3b) represent only 5% of the retail market. ČTÚ defines the retail geographic market as national in scope Market 3a Market definition The market for wholesale local access provided at a fixed location is defined by ČTÚ as comprising unbundled access products and services provided over copper xdsl (including FttC), as well as over fibre (including FttB/H) 32. As in the 2014 market review, access products and services to CATV and Wi-Fi networks are not considered by ČTÚ as substitutes for copper- and fibrebased access and are therefore not included in the relevant wholesale product market 33. Despite acknowledging that the retail competition exercised by CATV and Wi-Fi providers might be found to constrain to a degree CETIN s behaviour on market 3a, ČTÚ opted not to analyse indirect constraints at the stage of market definition, but to consider them only within the SMP assessment (below) in view of the Commission's position expressed in case CZ/2012/ In response to the Commission's request for information, ČTÚ confirmed that, as far as the indirect constraint test is concerned, if such assessment would be carried out now as part of the market definition, it would be done in a very similar way as proposed in 2012, on the basis of similar evidence and similar market conditions. As regards any direct constraints, in response to the Commission's request for information, ČTÚ clarified that it did not expect the introduction of DOSCIS 3.1. in the timeframe of the market review as UPC did not provide any specific information in this respect. ČTÚ included therefore the year of 2018 as an indicative timing for the start of UPC's network upgrade in the Czech Republic. This estimation is confirmed by a recent declaration by UPC that this technology is prepared for implementation within the Liberty Global Group. The relevant geographic market is defined nationally and comprises the entire territory of the Czech Republic. 32 Local access products provided on the relevant wholesale market include copper LLU, SLU and VULA, as well as fibre LLU and fibre VULA. 33 Solutions for access to LTE networks and to passive infrastructure are likewise excluded from market 3a. 34 In CZ/2012/1322 the Commission vetoed a proposed partial deregulation of the wholesale central access market on a geographic basis (geographic sub-markets) - in those areas where the cable and WiFi networks were deemed by ČTÚ to exercise sufficiently strong indirect constraints from the retail level - due to insufficient evidence provided by ČTÚ to substantiate this approach. 7

8 SMP Assessment ČTÚ proposes to designate CETIN as the single operator holding SMP on market 3a 35 in view of its high wholesale market share of 67.3% 36, as well as the overall size of the undertaking, control of an infrastructure that is not easily duplicated, the level of wholesale prices 37, privileged access to financial resources or capital markets, economies of scale and scope, low countervailing buying power, switching costs and barriers to entry. However, ČTÚ finds that strong infrastructure competition on the retail market and related combined indirect competitive constraints of CATV and Wi-Fi infrastructures exercise a notable competitive constraint on CETIN, resulting in CETIN not being able to charge excessive prices. According to ČTÚ this is principally due to the significant retail market share of the CATV and WiFi networks (with shares of 18% and 32.3% in the retail market, respectively), historical and expected developments of services based on these networks, relatively low market share of xdsl's retail accesses based on CETIN's infrastructure and national pricing of the most important operators present on the retail market. In particular, ČTÚ confirms that in areas where CATV technology is available alongside xdsl, XDSL's share at the retail market is 28.3% whereas the nation-wide average is 34.5%. In addition, ČTÚ finds that the currently available bandwidth of WiFi networks is comparable to (or even higher than) the xdsl network of CETIN for many small operators and is provided at a (comparable) or a lower price which explains why this technology is so prominent at the retail level. Remedies In market 3a, ČTÚ proposes to continue imposing on CETIN the following obligations: (i) a general obligation to provide physical access (SLU and LLU), VULA when LLU is not technically or economically possible, as well as access to passive infrastructure and dark fibre; (ii) a general obligation of transparency and to publish a Reference offer; (iii) a non-discrimination obligation, including an obligation of Equivalence of Inputs (EoI); and (iv) accounting separation. In comparison to the remedies previously imposed, ČTÚ proposes to lift the price control obligation for access to the legacy copper network 38. ČTÚ notes that as opposed to previous analyses of the market 3a, a market failure of In the light of the abovementioned separation of CETIN and O2, ČTÚ considers that, as a retail-only operator, O2 cannot be found (unlike CETIN) to hold SMP in the relevant wholesale market. As of 31 December The remaining part of market 3a (32.7%) is covered by the self-supply of the numerous alternative FTTB/H operators. ČTÚ analysed one-off connection fees as well as monthly access fees for dedicated and shared LLU access and observed that the wholesale price levels remained relatively stable since 2013 (with the exception of a dedicated LLU, which decreased slightly in the relevant period.) The situation remains unchanged for fibre access products, in relation to which ČTÚ has not imposed a price control obligation in the past. 8

9 excessive wholesale pricing can no longer be observed. In this respect, ČTÚ considers that CETIN's separation model significantly mitigates the potential of excessive pricing. In addition, ČTÚ also finds that CETIN no longer sets its wholesale prices at the top of the price cap (without passing on any cost savings through decreasing wholesale access prices). It appears to be ČTÚ's view that CETIN's wholesale prices (as set out in the MMO reference offer) are now generally based on underlying costs for the provision of the service. However, ČTÚ intends to maintain a price control remedy in the form of cost orientation for access to passive infrastructure, dark fibre and collocation (based on a BU LRIC+ model), which was first introduced in Whilst at the time it had not immediately adapted its cost model to set maximum prices but relied on a general cost orientation obligation, it now proposes to use a BULRIC+ model to set wholesale prices for passive infrastructure access. In the reply to the Commission's request for information, ČTÚ clarified that there has not been any demand for access to the passive infrastructure since the imposition of the access obligation to passive infrastructure but it believes that a price control for passive access, as proposed, can ease entry of new providers into the market. Further, ČTÚ intends to withdraw the obligation to ensure economic replicability between wholesale inputs provided on market 3a and retail offers; instead, it envisages an economic space test between market 3b products and market 3a products. Finally, ČTÚ no longer imposes upon CETIN the obligation to publish KPIs Market 3b Market definition The market for wholesale central access provided at a fixed location for massmarket products is defined by ČTÚ as comprising wholesale central access (bitstream) over copper xdsl and fibre (FttX). As with market 3a, ČTÚ finds that access over CATV and Wi-Fi network solutions are not part of the relevant wholesale product market and chose to analyse indirect constraints only at the stage of SMP assessment (see more above for Market 3a). The relevant geographic market is defined nationally and comprises the entire territory of the Czech Republic. SMP Assessment ČTÚ proposes to designate CETIN as the single operator holding SMP on market 3b in view of its high wholesale market share of 65% 40, as well as the overall size of the undertaking, control of an infrastructure that is not easily ČTÚ justifies the non-imposition of both the KPI obligation and the economic replicability test on the grounds that, following the separation of CETIN and O2, such requirements would be inapplicable to a wholesale-only provider (i.e. one that lacks a retail arm) such as CETIN. As of 31 December Alternative copper LLU providers (2.4%) and the self-supply of the numerous alternative FTTB/H operators (32.6%) account for the remaining portion of market 3b. 9

10 duplicated, prices 41, privileged access to financial resources or capital markets, economies of scale and scope, switching costs and barriers to entry. The same indirect constraint analysis as in market 3a is part of the analysis related to market 3b. Remedies 3. COMMENTS In market 3b, ČTÚ proposes to maintain the following obligations on CETIN: (i) a general obligation to provide (national) bitstream access at the level of the IP layer, as well as regional access at the level of the regional Ethernet network (REN); (ii) a general obligation of transparency and to publish a Reference offer 42 ; (iii) a non-discrimination obligation, including EoI; and (iv) accounting separation. According to ČTÚ due to the applicable nondiscrimination obligation, which requires an EoI standard, any advantageous offer negotiated between CETIN and an access seeker, which goes beyond the Reference offer applicable at the time, has to be automatically included in a new reference offer to the benefit of the remaining access seekers. ČTÚ considers that the stable wholesale access prices in the Czech market,are a sign that CETIN cannot charge disproportionately high prices at wholesale level which could translate in high retail prices for the end users, In addition, ČTÚ is of the view that as shown by an international price comparison prices at retail level are below whilst NGA coverage is above average compared with other EU markets 43. As in market 3a, ČTÚ proposes to withdraw the obligation to publish KPIs, previously imposed on CETIN. In line with the regulatory approach adopted in the past market reviews, ČTÚ does not impose any specific price control remedy in market 3b (nor does it lay down an economic replicability test between market 3b and the retail market). 44 The Commission has examined the notification and the additional information provided by the ČTÚ and has the following comments: Wholesale access prices in market 3b have seen an overall significant decline prior to 2013 and have been stable since with a further slight decrease in the 25 Mbit/s segment. Agreements based on the current reference offer are currently signed by CETIN with 7 undertakings. In its response to the Commission's request for information, ČTÚ clarified that 5 operators (including [ ] and [ ]) have concluded access agreements for seven-year duration. ČTÚ bases its EU benchmarking on 2016 data from Cullen International In addition, according to ČTÚ an international comparison with OECD data (OECD 2015 Digital Economy Outlook) suggests that, also applying an OECD benchmark, retail broadband prices in the Czech Republic are slightly below average. Data from the Commission's own digital single market index indicates that retail prices in the Czech Republic are not only below EU average but have witnessed steady and significant decline, in particular in the higher speed segment ( Mbps), whereas the NGA broadband coverage per households is above the EU average. See the atypical economic replicability test imposed in market 3a. In accordance with Article 7(3) of the Framework Directive. 10

11 Assessment of indirect constraints of CATV and WiFi solutions The Commission takes note of the fact that ČTÚ excludes CATV and Wi-Fi based solutions from the relevant wholesale market while recognising at the same time that those alternative infrastructures exercise a notable competitive pressure on the designated SMP operator in the wholesale markets for both local and central access. In this respect, the Commission would like to re-iterate its position expressed in previous cases 46 and its Recommendation on Relevant Markets, that competitive pressure stemming from alternative platforms at retail level, should lead to the inclusion of such platforms in the wholesale markets based on indirect constraints where the following three conditions are met: First, access seekers are forced to pass a hypothetical wholesale price increase onto their consumers at the retail level based on the wholesale/retail price ratio. Secondly, sufficient demand substitution exists at the retail level based on indirect constraints such as to render the wholesale price increase unprofitable. And, thirdly, customers of the access seekers do not switch to a significant extent to the retail arm of the integrated hypothetical monopolist, in particular if the latter does not raise its own retail prices. In the Commission's view, where the above-mentioned criteria are met, (indirect) constraints should be deemed to be strong enough so that the platform concerned is included in the market. In order to estimate the degree of strength of indirect constraints, NRAs should carry out, inter alia, a qualitative and a quantitative assessment of factors including the effective pass-through from wholesale to retail prices (including an assessment of the wholesale/retail price ratio), the (in)ability of operators to absorb wholesale price increases depending on competitive conditions at retail level, as well as the effective willingness of retail consumers to switch their operator in response to the price increase. Similarly, when assessing the inclusion of cable to the wholesale market at the market definition stage based on direct constraints, the technical and commercial viability of a potential new entry should be duly assessed. The Commission notes that ČTÚ did not assess in detail whether those criteria are, indeed, met in the case of wholesale local and central access in the Czech Republic and refrained from considering the inclusion of CATV and Wi-Fi based solutions in the relevant wholesale markets. Instead, ČTÚ assessed the presence and strength of indirect constraints emanating from these two alternative platforms at the stage of its SMP assessment. The Commission remains of the view that NRAs should undertake the assessment of the above mentioned criteria and include alternative platform in the wholesale product market definition, where these criteria are met. The Commission recognises that in its 2012 veto decision 47 it stated that ČTÚ had not provided sufficient evidence to prove that the indirect constraints emanating from CATV and WiFi solutions are sufficiently strong to warrant their inclusion in the relevant wholesale market. As a result, and based on the information available at the time, the Commission asked ČTÚ to reassess the possibility of taking the See cases CZ/2012/1322as well as UK/2003/0032, NL/2005/0281, AT/2005/0312, UK/2007/0733, UK/2010/1065 and UK/2010/1123. CZ/2012/

12 indirect constraints into account at the stages of (i) SMP analysis and (ii) when identifying the most appropriate and effective remedies, rather than at the market definition stage. However, this assessment is not in contradiction to the general view set out above and NRAs should, first, undertake the assessment of the above mentioned criteria to determine whether such indirect constraints warrant consideration at the stage of market definition. Yet, in the particular circumstances of the present case and in light of the functional restrictions of broadband access delivered over Wi-Fi, it appears at least questionable whether any competitive pressure exercised by this platform would be sufficiently sustainable over the period of the market review to warrant the inclusion of Wi-Fi-based solutions in the relevant wholesale markets. Similarly, based on the information available, the Commission acknowledges ČTÚ's assertion that due to the limited geographic coverage of CATV networks this particular platform is also unlikely to be able to exercise a sufficiently strong competitive check on CETIN to justify an inclusion of CATV in the wholesale markets at this stage and based on a nation-wide market definition. Nevertheless, the Commission asks ČTÚ to set out in its final measure, why it considers that following an assessment of the above mentioned criteria the inclusion of CATV and Wi-Fi based solutions in the relevant market is not justified. In addition, the Commission urges ČTÚ to assess at the occasion of the next market review, in view of future competitive development of alternative platforms at retail level and based on the above mentioned criteria, the ability of alternative platforms to exercise a sufficiently strong indirect constraint at the retail level on the ability of CETIN to act independently of its competitors at the wholesale level. This could lead ČTÚ to include, where appropriate, said platforms in the relevant wholesale market. In parallel with considerations concerning the potential inclusion of alternative platforms in the wholesale market definition, and given that, on a forward looking basis, infrastructure based competition (including various alternative technologies) appears to develop more dynamically in some geographic areas of the Czech Republic than others, the Commission invites ČTÚ at the occasion of the next market review to collect data at a more granular level with a view to assess whether the increasing heterogeneity of competitive conditions at retail level would speak in favour of delineating geographic sub-markets or a geographic differentiation of wholesale remedies. Appropriate price control remedies The Commission takes note of the fact that, similar to its approach in market 3b, ČTÚ now also proposes to lift the price control remedy for the legacy copper network in market 3a. The Commission would like to draw attention to the fact that under certain circumstances the lifting of a strict price control for network access can be in line with the Commission's 2013 Recommendation on Non-Discrimination and Costing Methodologies 48, in particular in the presence of competitive checks 48 Commission Recommendation of on consistent non-discrimination obligations and costing methodologies to promote competition and enhance the broadband investment environment; C(2013) 5761 final; OJ L 251, , p

13 from alternative infrastructures and where an EoI standard is applied as a nondiscrimination obligation. However, the Commission would also like to point out, that in such cases it would still recommend the application of an economic replicability test as a minimum safeguard against the risk of excessive pricing. In the present case, the Commission takes note of the fact that ČTÚ proposes to withdraw the obligation for such a test and to replace it with a different approach, namely a so-called "economic space test", aimed at ensuring an appropriate margin between the wholesale access price in Market 3b and the one in Market 3a. ČTÚ appears to justify its approach with two main arguments: First, due to the recently agreed degree of separation of CETIN and the retail operator O2, ČTÚ considers the risk of excessive pricing by CETIN in Market 3a to have further decreased. Secondly, ČTÚ is of the opinion that the competitive pressure on wholesale prices in Market 3b demonstrated by the fact that terms and conditions for wholesale central access are, often, commercially agreed between the access provider and the access seeker, and which have seen a steady decline over the past decade and are below the EU average is sufficiently strong also to curtail the risk of excessive pricing of network access in the upstream Market 3a. The Commission takes note of these arguments and the fact that the share of operators at retail level reliant on regulated wholesale access is small 49. The Commission further understands that the contractual framework based on the reference offer (influenced through the commercial agreement of terms and conditions for access) in combination with an EoI obligation, in particular for the pricing of wholesale central access products, could act as a competitive constraint, which, together with (a) the degree of separation of the wholesale and retail operator in the Czech Republic, (b) the indirect constraints of WiFi and CATV networks emanating from the retail level, and (c) the "economic space test" between local and central access products, are likely to mitigate to a degree CETIN's ability to charge excessive prices for its wholesale local access products. This assumption, however, is reliant, inter alia, on the voluntary separation commitments being adhered to. In this respect, the Commission asks ČTÚ to observe the compliance of O2 and CETIN with their voluntary separation commitments, in particular the distinct management and supervisory structure, as well as separate headquarters, workforce, IT systems and accounting records, and to re-visit the appropriateness of its proposed set of remedies in the event that it observes potential violations of said commitments. In addition, the Commission also observes that the copper- and fibre-based wholesale central access products were not subject to a price control obligation in the most recent market review. Pricing of these products, including discount schemes, are currently based on terms and conditions negotiated between CETIN and the access seekers (which are subsequently included in the reference offer). The negotiated conditions are often subject to seven-year long agreements, which appear to provide a predictable framework for access seekers. The Commission recognises that ČTÚ, with the current proposal and its acknowledgement of commercial 49 In particular, if one excludes O2, which shares the same owner as the SMP operator, the market share of retail operators reliant on regulated wholesale access is around 5% only. 13

14 agreements, intends to take into account the existence of market developments, which appear to increase the likelihood of the relevant market tending towards effective competition. However, the Commission would like to invite ČTÚ to monitor the market situation in Markets 3a and 3b, both to ensure (a) that the commercial agreements in Market 3b are sustainable and foster market entry or expansion and (b) that its chosen approach (e.g. pricing flexibility with an "economic space test"), indeed, leads also to an improvement in competitive conditions in Market 3a, indicated, for example, through new market entry or expansion based on inputs obtainable on the wholesale local access market. Pursuant to Article 7(7) of the Framework Directive, ČTÚ shall take the utmost account of the comments of other NRAs, BEREC and the Commission and may adopt the resulting draft measure; 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 15 of Recommendation 2008/850/EC 50 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 51 within three working days following receipt whether you consider that, in accordance with EU and national rules on business confidentiality, this document contains confidential information which you wish to have deleted prior to such publication. 52 You should give reasons for any such request. Yours sincerely, For the Commission, Roberto Viola Director-General Commission Recommendation 2008/850/EC of 15 October 2008 on notifications, time limits and consultations provided for in Article 7 of 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 301, , p. 23. Your request should be sent either by CNECT-ARTICLE7@ec.europa.eu or by fax: The Commission may inform the public of the result of its assessment before the end of this three-day period. 14