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

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1 EUROPEAN COMMISSION Brussels, 22/07/2010 C(2010) 5215 SG-Greffe (2010) D/11369 National Communications Authority (NHH) Ostrom u H-1015 Budapest Hungary For the attention of: Mr Ferenc Bánhidi Vice-president Fax: Dear Mr Bánhidi, Subject: Commission decision concerning case HU/2010/1095: Retail access to the public telephone network at a fixed location for residential and nonresidential customers Comments pursuant to Article 7(3) of Directive 2002/21/EC 1 I. PROCEDURE On 21 June 2010, the Commission registered a notification from the Hungarian national regulatory authority, Nemzeti Hírközlési Hatóság (NHH), concerning the market for retail access to the public telephone network at a fixed location for residential and nonresidential customers. The national consultation 2 was held between 16 April and 7 May On 2 July 2010 a request for information 3 was sent to NHH and the reply was received on 7 July 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 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. In accordance with Article 6 of the Framework Directive. Pursuant to Article 5(2) of the Framework Directive. Commission européenne/europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË - Tel

2 II. II.1. DESCRIPTION OF THE DRAFT MEASURE Background NHH has notified two full market reviews of the market for retail access to the public telephone network at a fixed location 4. In its 2007 notification NHH concluded that home-zone products 5 and leased lines or broadband access lines over which voice over broadband (VoB) services can be provided should not form part of the relevant product market within the timeframe of the market review. NHH delineated five geographic markets corresponding to the operating areas of the incumbent local network operators and designated each of them 6 as undertakings with significant market power (SMP) on their respective markets. Consequently, NHH imposed the following remedies on each of these operators: (i) CS/CPS obligation, (ii) prohibition of unjustifiably high fees by imposing an annual ceiling of price increase equivalent to the consumer price index and (iii) prohibition of unjustifiable discrimination of consumers. In its comments letter the Commission invited NHH to examine in its final measure the question of substitutability between traditional fixed telephony and convergent offers in more detail taking into account functionality and prices, and it also urged NHH to consider imposing a wholesale line rental (WLR) remedy. II.2. Market definition The notified draft measure concerns the 3 rd round review of the market for access to the public telephone network at a fixed location for residential and non-residential customers 7. NHH includes in the relevant product market the following access products which fulfil at least the four basic functions of fixed telephony access 8 irrespective of the underlying Previous notifications included the following cases: HU/2005/0130 and HU/2005/0131, SG-Greffe (2005) D/ (1 st round review); HU/2007/0662 and HU/2007/0663, SG-Greffe (2007) D/ (2 nd round review). The so-called Home Zone service, provided via the mobile radio telephone network, using the mobile terminal equipment enables the subscriber - in the mobile radio telephone cell that is intended to provide radio telephone services at the subscriber's permanent residence (apartment, office) - to make calls towards the subscribers of the fixed location network for a fee not significantly different from the tariffs of fixed location calls, by selecting a fixed location number, as well as to receive calls arriving to his/her fixed location geographical number within the cell free of charge. Home zone products make up currently a share of [ ]% of the total number of fixed telephony access subscriptions. This product has been launched in autumn 2006 in Hungary. Magyar Telekom Nyrt. (local incumbent in thirty-six numbering areas), Invitel Távközlési Szolgáltató Zrt. (nine numbering areas), Hungarotel Távközlési Zrt. (five numbering areas), Emitel Távközlési Zrt. (three numbering areas) and Monor Telefon Társaság Kft. (one numbering area). Corresponding to market 1 of Commission Recommendation 2007/879/EC 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 (Recommendation), OJ L 344, , p. 65. (i) establishing access and putting it into operation at a determined geographical location; (ii) ability to make and receive telephone calls; (iii) receiving telephone calls from other subscribers of the national and international telephone network, on the basis of the fixed or substitution number of the access determined in the national numbering plan; (iv) access maintenance and troubleshooting according to quality requirements specified in legal regulations. 2

3 technology: (i) Analogue separate line access, (ii) Analogue twin-line access, (iii) Wireless local loop (WLL) access, (iv) "Home Zone" mobile network access 9, (v) ISDN BRA 10 basic speed access, (vi) ISDN PRA 11 and other bundled digital access, (vii) Cable programme distribution network access, (viii) Satellite exchange access of residential parks, (ix) Broadband wireline (DSL) access, (x) Broadband radio access, (xi) Leased line access, (xii) Optical (FTTH) access. In its reply to the Commission's request for information NHH explained that beside their functional inter-changeability, applied prices for telephony access are technology neutral, i.e. incumbent operators charge the same or similar fees for their traditional PSTN, digital or CATV telephone access lines 12. NHH includes both stand alone and bundled telephony access in the relevant market whereby only the telephony access element of the bundle would fall under the scope of regulation. Furthermore, NHH claims that as regards IP-based telephony access, the subscriber s access to a network operating under IP protocol is a technical prerequisite for the VoB telephone access/service and thus for the purchase of a (stand alone) IP-based telephony access product. This means that at present end customers can only purchase IP-based telephony access products a) either as stand alone products on top of already existing subscriptions to the internet or to IPTV services, or b) in bundle with such services. NHH identifies three separate geographic markets, each corresponding to the respective operating areas of the incumbent local network operators/their successors 13, which together cover the 54 numbering areas in Hungary: (i) Magyar Telekom Nyrt. (Magyar Telekom) in 39 numbering areas; (ii) Invitel Távközlési Szolgáltató Zrt. (Invitel) in 14 numbering areas and (iii) UPC Magyarország Telekommunikációs Kft. (UPC) in 1 numbering area. II.3. Finding of significant market power As a result of its market analysis, NHH proposes to designate each of the three incumbents as having SMP on their respective markets on the basis of inter alia the following criteria: (i) market shares, (ii) size of undertakings, (iii) control of infrastructure not easily duplicated, (iv) economies of scope and (v) vertical integration. Market shares of SMP operators in their respective operating areas remained high with shares of other operators not exceeding 5% See footnote 5. Basic rate ISDN. Primary rate ISDN. Prices for stand alone telephony subscriptions range between HUF (approx EUR); whereas the price of telephony access within the price of bundled offers amount to HUF (approx EUR), irrespective of the underlying technology. It must be noted, however, that an end customer must purchase an additional electronic communication service in order to be able to subscribe to an IP-based telephony access for the above indicated price. 1 EUR= HUF (the Hungarian National Bank's official currency exchange rate on 12 July 2010). Since the last review of the market by NHH in 2007 two significant mergers took place, Magyar Telekom incorporated its cable affiliate T-Kábel Magyarország Kábeltelevíziós Szolgáltató Kft., and one former SMP operator, Monor Telefon Társaság Távközlési Szolgáltató Kft. merged into UPC, which is a significant cable operator. The former SMP undertaking, Emitel Távközlési Zrt.merged into Magyar Telekom in October

4 Residential access Non-residential access Areas of incumbent undertaking (estimated) (estimated) Magyar Telekom 86.78% 82.7% 88.57% 84.7% Invitel 81.91% 75.0% 93.44% 91.2% UPC 96.06% 94.9% 96.00% 92.7% II.4. Regulatory Remedies NHH proposes to impose the same set of remedies on the SMP operators as in the 2 nd round market review, namely (i) CS/CPS obligation 14, (ii) the prohibition of unjustifiably high fees by imposing an annual ceiling of price increase equivalent to the consumer price index 15 and (iii) prohibition of unjustifiable discrimination of consumers. Furthermore, NHH explains that unbundled access services to the local loop (LLU) have shown low development in Hungary with only 0.5% of access lines being offered on the basis full unbundling. Nevertheless NHH does not intend to impose a WLR remedy as according to its regulatory strategy it primarily wishes to promote infrastructure based competition. NHH also states that alternative operators have not expressed interest in WLR products 16. III. COMMENTS On the basis of the notification and the additional information provided by NHH, the Commission has the following comments 17 : Inclusion of IP-based access products in the access market definition As defined in the Recommendation, the retail market for access to the public telephone network at a fixed location for residential and non-residential customers includes the provision of a connection or access to the public telephone network for the purpose of making and/or receiving telephone calls and related services. The Explanatory Note to the Recommendation further clarifies that access and related publicly available telephone services may be supplied by several possible means in respect of the undertaking providing the service and the technology that is used. Although broadband connections are also capable of facilitating delivery of telephone services, customers generally will not switch from a narrowband to a broadband connection for the sole purpose of accessing voice services. Consumers switch from narrowband to broadband connections primarily to get access to higher speed Internet services. So far, many customers when switching to a broadband connection have kept their narrowband Although in operators provided CS/CPS services, traffic has been continuously decreasing since In its reply to the Commission's request for information NHH confirmed that the detailed methodology, established in its draft measure for the control of the price cap obligation, ensures that with regard to bundled offers, which include both regulated and un-regulated products, only the prices of the regulated fixed access product fall under the price control obligation. The likely reason for the lack of demand is, according to NHH, that alternative operators have primarily business customers whereas WLR is more appropriate to ease market entry on the residential market. In accordance with Article 7(3) of the Framework Directive. 4

5 connection, indicating that both access products are used as complements rather than substitutes. The Commission is not convinced that the arguments and the evidence put forward by NHH demonstrate conclusively that IP telephony can be included in the market for retail telephony access if they can only be provided either on top of already existing subscriptions to the internet or to IPTV services, or in bundle with such services. NHH's arguments in this respect are even less convincing taking into account that broadband penetration in Hungary is below the EU average 18. The Commission however takes note of NHH's substitutability analysis between IP-based products and traditional narrowband access lines, which is based on similarities in terms of functionality, prices and intended use of these products. Furthermore, NHH includes the telephony access component of bundled offers in the relevant market whereby only the telephony access element of the bundle would fall under the scope of regulation. Against this background the Commission acknowledges that even if IP-based telephony is provided together with other products, the regulatory outcome would remain unchanged as NHH would not regulate services, which do not fall under its proposed market definition. In this context however, the Commission invites NHH to closely monitor market developments and adapt its market definition and regulatory intervention accordingly should the market structure of the fixed access market change as regards (i) the substitutability between access products based on different technologies (particularly in terms of their functionalities and pricing), (ii) the further take up of bundled offers and their substitutability with traditional stand alone narrowband access products. Non-imposition of a wholesale line rental remedy The Commission takes note of NHH's argument that alternative operators in Hungary have not expressed interest in WLR access products despite the extremely low take up of LLU, and the development of infrastructure based competition in the relevant market is still at the early stages. When imposing WLR it is important to ensure that the mandated WLR conditions do not reduce incentives for competitors to invest in alternative facilities, which would secure more competition in the long-term. Specifically, WLR conditions must avoid a margin squeeze while not discouraging investments in LLU in geographic areas where such investment would be economically feasible. However, the Commission recalls that WLR may well support infrastructure competition in the short run by making it easier for alternative operators to climb the ladder of investment towards full unbundling. In addition, WLR allows alternative operators to bundle their products and services in the retail markets (i.e., retail access and telephone services via carrier selection/carrier preselection). The Commission hence invites NHH to monitor market developments and reconsider imposing WLR should demand, especially from current and potential CS/CPS operators, arise for this service. 18 In January 2010 fixed broadband penetration in Hungary reached 18.7% compared to the EU average of 24.8%. See Volume 1 of the Commission staff working document "Progress Report on the Single European Electronic Communications Market 2009 (15th Report)", SEC (2010) 630/1. 5

6 Pursuant to Article 7(5) of the Framework Directive, NHH shall take the utmost account of the 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 15 of Recommendation 2008/850/EC 19 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 20 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 21. You should give reasons for any such request. Yours sincerely, For the Commission, Robert Madelin 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 INFSO-COMP-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. 6