EUROPEAN COMMISSION Brussels, 5/10/2009 C(2009)7720 SG-Greffe (2009) D/6009 Rundfunk und Telekom Regulierungs-GmbH (RTR) Mariahilferstraße 77-79 A-1060 Wien Austria For the attention of: Mr Georg Serentschy and Mr Wolfgang Beran Fax: +43 1 58 058 9191 Dear Mr Beran, dear Mr Serentschy, Subject: Case AT/2009/0970: Wholesale broadband access in Austria Opening of Phase II investigation pursuant to Article 7(4) of Directive 2002/21/EC 1 I. PROCERDURE On 3 September, the Commission registered a notification from the Austrian National Regulatory Authority, Rundfunk und Telekom Regulierungs GmbH (RTR) concerning the market definition for the third review of the market for wholesale broadband access in Austria 2, under case number AT/2009/0970. The national consultation 3 ran from 3 September until 28 September 2009. The deadline for the Community consultation is 5 October 2009. On 11 September 2009 a request for information was sent to RTR. The response was 1 2 3 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, 24.4.2002, p. 33. Corresponding to market 5 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 communication networks and services, OJ L 344, 28.12.2007, p. 65, (the Recommendation). In accordance with Article 6 of the Framework Directive. Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2) 299 11 11.
received on 16 September 2009. Pursuant to Article 7(4) of the Framework Directive, the Commission may inform national regulatory authorities (NRAs) that it has serious doubts as to the compatibility of the notified draft measure with Community law. II. DESCRIPTION II.1. Previous notifications In the previous notification 4, the relevant product market was defined as including the provision of wholesale broadband access by means of DSL, cable and fixed wireless access (WLAN, WLL). In addition to external wholesale provision, self provided services by vertically integrated undertakings were also included. Fibre to the Node (FTTN) type of products were included to the extent that they would not differ sufficiently from existing products using exclusively copper-based networks, whereas Fibre to the Home (FTTH) products were excluded as they had not had a sufficient impact on the relevant market. Moreover, mobile broadband access was not included, due to uncertainties regarding the extent to which mobile broadband connections were to be considered substitutes rather than complements for fixed broadband connections, as well as their unclear future development. The relevant geographic market was considered to be national. In that measure, RTR decided to designate Telekom Austria (TA) as having significant market power (SMP) on the relevant market, but noted that competition problems mainly arose in areas with a more limited presence of alternative infrastructure operators. RTR consequently proposed to address such differing competitive pressures by dividing the country in two areas 5. Access, price-control, non-discrimination and cost-accounting obligations were maintained in Area 2, whereas all obligations were removed from Area 1 with the exception of accounting separation. The Commission commented on the strenght of indirect constraints from vertically integrated operators, as well as the geographic differentiation of remedies, the SMP assessment and future possible constraints, and the sustainability of competition from alternative providers. The imposition of remedies by RTR was subsequently annulled in court with the consequence that the initially imposed remedies are currently applied, without a geographic differentiation 6. II.2. Description of the draft measure II.2.1. Retail Market definition In order to properly define the wholesale broadband access market, RTR starts its analysis by examining the corresponding retail market. RTR proposes that, due to 4 5 6 Case AT/2008/0757, SG-Greffe (2008) D/201384 Area 1 including MDF areas where there are 3 or more large operators where the MDF serves more than 2,500 households and where TA s share is below 50%; and Area 2 including all other MDF areas. Decision of the Administrative Court (Verwaltungsgerichtshof) of 17.12.2008. Currently the remedies of decision M 1/05-59 imposed following the first round notification in case AT/2005/0312 are applied, i.e. access, price-control based on retail minus, non-discrimination, reference offer, cost accounting, accounting separation. 2
profound variations in prices and differences in product characteristics and service levels, retail DSL products for business customers on the one hand and for residential customers on the other hand do not belong to the same market and consequently defines separate retail broadband access markets for residential customers and for business customers, respectively. In particular, RTR argues that business customers consider factors such as experience, reputation, offer of complementary services, repair and maintenance, quick response times or wide area coverage to a much greater extent than residential customers, and such needs cannot be met by other specialised operators in a short time. 7 Conversely, the residential market requires specific know-how and adequate investments regarding marketing or advertising processes. On the grounds of this consideration on lack of supply side substitutability, RTR concludes that it is inadequate to consider residential and business products in the same relevant market. Similarly, as regards demand-side substitution, RTR argues that business customers require particular product characteristics or services 8 that differentiate their needs from residential customers 9. Consequently, at the retail level, two different markets were analysed, one concerning residential customers and another one concerning business customers. II.2.1.1. Residential Customers Retail Broadband Access Market RTR notes that DSL-bitstream connections currently amount to 40.7% of the residential retail market, while Cable TV (CATV) connections amount to 22.5% and mobile connections to 35.3% 10. RTR adds that Mobile connections amounted to only 12% in Q1 2007 and that only one quarter of Mobile broadband connections is purchased as a complement to DSL-bitstream connections, while the remaining three quarters is purchased as a substitute. In order to define the relevant product market RTR carries out a SSNIP test (small but significant non-transitory increase in prices), as a result of which mobile broadband 11 and CATV are indicated as adequate substitutes of DSL connections 12. RTR also adds that past switching behaviours would indicate an increasing number of users switching from fixed to mobile connections 13. 7 8 9 10 11 12 13 RTR further adds that, according to the 2009 operator survey, many alternative operators were able to gain a significant market share in the residential market segment, whereas they were unable to do so in the commercial market segment (section 4.1 of the notification). RTR mentions, inter alia, static IP addresses, virus protection, domain, larger web space, larger number of e-mail addresses, QoS (Quality of Service). RTR further adds that, according to the Customers Survey, January 2009, business customers would also be willing to pay much higher prices. Moreover, only 13% of the business customers would use a residential product (figure 3, p.20 of the notification). Data referring to March 2009, per household. As regards fixed and mobile broadband substitution, in its reply to the Request for Information ("RFI") received by the Commission on 16 September 2009, RTR provides further details of retail mobile broadband offers in terms of (i) monthly fee ( 9-15); (ii) maximum download speed (3.6-7.2 Mbit/s or even 21 Mbit/s), which is rarely achieved in practice; (iii) download volume 3-15 GB). In comparison, TA's duo-play offer (voice + internet) with 8Mbit/s download speed costs 19.90-29.90. For the SSNIP test consumers were questioned about their reactions in case prices of DSL connections were to increase by 10% (section 4.2.1.2 of the notification). According to the Customers Survey, January 2009, 7% of consumers have switched from DSL to mobile connections (as opposed to 2.9% for the opposite trend), while 7.9% have switched from DSL 3
RTR defines therefore the relevant product market as including DSL-bitstream connections as well as mobile and CATV connections. The relevant geographic market is defined as national. II.2.1.2. Business Customers Retail Broadband Access Market As regards the retail broadband access market for business customers, RTR notes that DSL-bitstream connections still represent about 71.7% of the market, whereas CATV connections only amount to 14.5% and mobile connections to 15.5% 14. As a result of the SSNIP test, however, RTR finds that over 60% of the business customers would maintain their DSL-bitstream connections even though DSL prices were to be increased by 10%, and only 17% would switch to another type of access 15. The low elasticity 16 resulting from the test for CATV and mobile connections, as well as the relatively low market shares of alternative infrastructure, lead RTR to conclude that CATV and mobile are not to be considered as adequate substitutes to DSL connections. Past switching behaviours would also be in line with this finding. RTR defines therefore the relevant product market as including only DSL-bitstream connections. The relevant geographic market is defined as national. II.2.1.3. Three Criteria Test Subsequently, RTR carries out the three criteria test 17 with regard to both retail broadband access markets. In both cases RTR concludes that the three criteria test is not met and the retail broadband access markets are hence not susceptible to ex ante regulation. With regard to the retail broadband access market for residential customers, RTR stipulates that although high, non-transitory barriers to entry of structural, legal or regulatory nature exist, a trend towards effective competition in the relevant market can be identified, i.e. that the second criterion is not fulfilled 18. Furthermore, RTR concludes also that the retail broadband access market for business customers does not warrant ex ante regulation, because of its finding that although high and non-transitory barriers exist and no tendency towards efficient competition could be 14 15 16 17 18 to CATV connections (as opposed to 5.2% for the opposite trend). Results based on the Customers Survey, January 2009, multiple answers allowed. RTR further adds that, unlike the residential customers market, three quarters of mobile connections are to be considered complementary to fixed broadband connections, whereas only one quarter is used as substitute. 4% would switch to CATV and 2% to mobile connections. See Section 4.3.1.2 of the notification. RTR assesses whether i) the market is characterized by high, non-transitory barriers to entry, (ii) the market lacks a tendency to effective competition, (iii) competition law alone is insufficient to address the market failure. Although TA's market share based on number of connections sold, only when a volume of at least 250 MB is available under the monthly basic charges, or at least 750 MB per Quarter - amounts to ca. 35% (43% including the market share of the subsidiary Mobilkom), according to RTR, neither TA nor Mobilkom would be able to behave independently of their competitors on the market, mainly due to competitive constraints from the alternative mobile broadband operators. Prices have been decreasing considerably from April 2007. TA is therefore facing strong and increasing competitive pressure from alternative mobile operators, as well as competition from CATV and LLU operators. RTR also adds that a trend towards effective competition would be identified even in absence of wholesale bitstream regulation, as the market share of bitstream connections is only 2% and declining. 4
identified, competition law would be an adequate and sufficient means to address the competition problems arising in the market, i.e. that the third criterion is not met. RTR comes to this conclusion because it takes the view that existing regulatory obligations at the wholesale level can prevent potential margin squeezes. II.2.2. Wholesale Broadband Access Market II.2.2.1. Wholesale Market Definition On the basis of the analysis of the retail markets, the analysis of the wholesale market starts from the assumption that wholesale regulation would only be needed on the wholesale broadband access market for the subsequent use of business customers. All external and self provided DSL-bitstream connections for the subsequent use of business customers are included in the relevant market. Furthermore, RTR considers that, as regards external or self provided connections through alternative infrastructures, such as CATV or mobile connections, no sufficient indirect constraint exists at the retail level, due to the fact that the business customers retail broadband access market only includes xdsl broadband connections, and concludes therefore that connections provided to business customers through alternative infrastructures are not to be included in the relevant wholesale market. Similarly, self provided DSL-bitstream connections for the subsequent use of residential customers are not to be considered as adequate substitutes, as no sufficient indirect constraint at the retail level would exist. According to RTR, such connections do, as a consequence, not form part of the relevant market. On the contrary, as regards external DSL bitstream connections for the subsequent use of residential customers, RTR argues that, from a technical viewpoint, such connections do not differ from the external DSL-bitstream connections for the subsequent use of business customers. The technical input is in fact identical at the wholesale level, and most ISPs do not differentiate at all between residential or business customers 19. Therefore RTR proposes that, due to supply-side substitutability, these connections form part of the relevant market. Moreover, as regards Fiber to the Home (FTTH), of which only 3,500 lines have been rolled out by alternative operators at this stage (Telekom Austria will only start trials during the course of 2010), RTR informs that the products provided via FTTH have so far no sufficiently disciplining impact on the products included in the relevant market. FTTH is consequently excluded from the relevant market. On the contrary, RTR further clarifies that Fiber to the Curb (FTTC), Fiber to the Building (FTTB) as well as VDSL2 products form part of the relevant market. 20 The relevant geographic market is defined as national. II.2.2.2. Three criteria test RTR carries out the three criteria test for the wholesale broadband access market for the 19 20 In its reply to the RFI, RTR confirmed its view that wholesale bitstream products are technically so similar that there is no need for differentiation on the basis of product characteristics. RTR notes, however, that TA differentiates between residential and business wholesale product profiles by overbooking ratio (1:5 and 1:30 ratio respectively). RTR does not provide prices for wholesale products. As specified by RTR in its reply to the RFI, currently FTTH is offered only by small alternative operators, reaching altogether around 3500 lines. As of mid-2010 TA plans to launch fibre pilot projects, mainly FTTC and FTTB 20. RTR expects a larger FTTH roll-out by TA only as of 2011 when RTR would be obliged by law to review the market. 5
subsequent use of business customers, as delineated. First, RTR notes that high, non-transitory barriers to entry of structural, legal or regulatory nature exist, due to the presence of economies of scale and high sunk costs. RTR further adds that the number of unbundled lines decreased in Q1 2009 and no expansion is to be expected within the next 2 years. The first criterion is consequently fulfilled. Secondly, RTR does not identify a trend towards effective competition. TA holds a market share of 74%, decreased by only 4% since the previous round notification. Even taking CATV connections into consideration, TA's market share would remain stable amounting to approximately 66%. The second criterion is thus fulfilled. Thirdly, RTR considers that access regulation at the wholesale level is necessary and that general competition law would not be sufficient to address the competition problems that could arise on the market. The third criterion is thus also fulfilled. III. ASSESSMENT The Commission has examined the notification and the additional information provided by RTR. RTR's draft measure concerning the market for wholesale broadband access in Austria falls within Article 7(4)(a) of the Framework Directive and would affect trade between Member States, because the conditions for wholesale access determine the costs and the ability of other operators to enter the corresponding wholesale and retail markets to a significant extent. Pursuant to Article 8(2)(a) to (c) of the Framework Directive, NRAs shall promote competition in the provision of electronic communications services by ensuring that there is no distortion or restriction of competition in the electronic communications sector and by encouraging efficient investment in infrastructure and promoting innovation. In accordance with Articles 15(3) and 16(1) of the Framework Directive, NRAs shall, taking utmost account of the Recommendation and the Commission's Guidelines on Market Analysis 21, define and analyse relevant markets in accordance with the principles of competition law. At the current stage of the procedure and on the basis of the information available at this stage, the Commission is concerned that the product market definition presented by RTR would not be in line with the principles of competition law. The Commission expresses serious doubts for the following reasons: III.1. Retail market definition RTR defines two separate markets at the retail level, a retail broadband access market for residential customers, and a retail broadband access market for business customers. In RTR's view, whereas the retail market for business customers would only include DSL products, the retail market for residential customers would instead include DSL products as well as mobile broadband and CATV connections. Based on the results of a SSNIP test, which was carried out via a survey of between 372 and 1897 customers in January 2009, RTR argues that mobile 21 Commission Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications and services (OJ C 165, 11.07.2002). 6
connections are adequate substitutes of DSL bitstream and CATV products for residential customers. Looking at the recent uptake of mobile broadband subscriptions in Austria, RTR comes to the conclusion that sufficient infrastructure-based competition exists on the retail market for residential customers, and, at the wholesale level, regulation of bitstream access would no longer be necessary. The Commission notes that, in accordance with the Commission's Guidelines on Market Analysis, in order to correctly define the substitutability of two different products a proper assessment of the functionality and end use of the relevant products is necessary. In particular as regards fixed-to-mobile substitutability, a thorough analysis of the product substitution should consequently take due account of the different product functionalities used by the end customers, as well as other factors such as speed, price information or cross-price elasticity. It is true that RTR carried out a customer survey to inform itself of the elasticity of substitution between fixed and mobile services. However, for the question of whether all such services belong to the same product market, other factors than covered by the survey need to be assessed as well. RTR should have analysed for instance whether all three types of broadband connections can be used for applications such as the download of music or films and whether they provide sufficiently secure connections allowing customers to use any of the connections for internet banking and other applications requiring a protected connection, as many residential broadband users use such functionalities of their broadband connection. Also, RTR does not make reference to the role that double, triple or quadruple play offers already have in the retail market for residential customers. Such offers are usually considered a key source of non-substitutability between fixed and mobile broadband services in other European markets. Moreover, RTR does not provide information on whether particular contractual conditions such as minimum contract duration or the ability to transfer lines to another address was a feature of both fixed line and mobile line broadband connections. The Commission notes that in case mobile broadband connections could not be considered to be substitutes for CATV and xdsl connections in the residential market, this may in turn affect the wholesale market definition, and in particular could make it necessary for RTR to also analyse whether the wholesale broadband access market for the subsequent use of residential customers warrants ex ante regulation (especially if it would arrive at the conclusion that the relevant residential retail broadband market is only competitive due to appropriate wholesale regulation). In such a scenario RTR would have to carry out the three criteria test also in respect of this wholesale market and to include self-supplied bitstream access lines for the subsequent use of residential customers into the market definition. In view of these doubts concerning the interpretation of the evidence before the Commission, the Commission has - at this stage of the procedure - serious doubts about the definition of the relevant retail broadband access market for residential customers. III.2. Market definition at the wholesale level The Commission would like to recall that, although a thorough analysis of the retail markets is necessary in order to properly define the corresponding wholesale markets, the definition of the wholesale broadband access market should also include a substitutability test carried out at wholesale level. 7
However, RTR has not carried out a detailed substitutability analysis of the wholesale products available. Rather, it defines the relevant wholesale product market on the sole basis of the products offered at the retail level. In particular, the inclusion of wholesale external bitstream access products for the subsequent use of residential users in the relevant wholesale market is not based on a detailed substitutability analysis. Such analysis would need to be supported by factual evidence 22, which is lacking in this case. Instead, RTR bases the inclusion of the wholesale external bitstream access products merely on the assertion that bitstream can be used to supply retail broadband access to both residential and business customers. However, at least as regards TA it is rather likely that the final destination of the wholesale bitstream product is known. Excluding selfsupplied bitstream connections for the subsequent use of residential customers from the relevant market could lead to a too narrow market definition, carrying the risk of under-regulation (see (a) below). On the other hand, including externally supplied bitstream connections into the relevant product market could lead to a too wide market definition and at the later stage to an incorrect market share calculation and SMP assessment, carrying the risk of over-regulation (see (b) below). Therefore, at this stage of the procedure the Commission has serious doubts as to whether the market delineation by RTR at the wholesale level is based on a sufficiently detailed and robust forward looking analysis as regards the products which are to be included in the relevant market. a) Exclusion of self-supplied bitstream for the subsequent use of residential customers from the relevant wholesale market According to RTR, self provided DSL bitstream connections for the subsequent use of residential customers are not to be included in the relevant wholesale market. RTR argues that, in case of a wholesale price increase of 5-10%, the retail price increase would only amount to 2-5.5%, as the share of the wholesale input costs in the retail price is 40-55%. In case of such a limited increase of the retail price for business broadband products, business customers would not shift their demand to the residential retail market, if retail prices were not to be increased. Therefore, there would be no competitive constraint from the internal supply of bitstream for the subsequent use of residential customers, neither on the internal nor on the external supply of bitstream for the subsequent use of business customers. However, according to the Commission's practice 23, self-supply forms part of the relevant market where the network operator in question would, in the short term, be willing and consider it economically viable to supply systematically the services to third parties. This is indeed usually the case for the product selfsupplied by the regulated operator, due to the fact that TA offers itself the same product as the one which it already provides by way of its external bitstream offer to third parties (for the subsequent use of residential customers). The exclusion of the internal supply from the market would require a detailed analysis of the lack of supply side substitution between the externally and internally provided bitstream for the subsequent use of residential customers. Such exclusion should 22 23 See further the Commission Guidelines on Market Analysis, paragraph 44. See further the Explanatory note on the Commission Recommendation on relevant markets, Section 3.1 and the Commission Guidelines on Market Analysis, paragraph 52. 8
be based on evidence for obstacles to substitution such as for example capacity constraints, and cannot be justified on the sole basis of the market delineation at retail level. RTR, however, has not analysed the lack of economic viability for TA to exploit its capacities currently used for self-supplied internal bitstream services for the subsequent use of residential customers also for business customers. Therefore, at this stage of the procedure, the Commission has serious doubts as to whether, in case two separate relevant wholesale markets where found to exist, the reasons brought forward by RTR to exclude self-supplied bitstream for residential users from the defined wholesale broadband access market is justified. b) Inclusion of externally provided bitstream for the subsequent use of residential customers in the relevant wholesale market Even in case RTR provided sufficient evidence with regard to the definition of two different retail markets for business and residential customers, on which the definition of two separate wholesale markets would be based, the question arises why the external supply for the subsequent use of residential customers is included into the relevant market while self-supply of bitstream for the subsequent use of residential customers is excluded. RTR simply states that selfsupplied bitstream products for the subsequent use of residential customers have to be excluded from the market because they are not used for products which constrain competition on the retail market for business customers. However, RTR also states that wholesale bitstream products can be used for both the provision of broadband access to residential and to business customers and that neither Telekom Austria nor the alternative suppliers, namely the local loop unbundlers, are aware of the final use that is made of the bitstream product. Against this background, the Commission has serious doubts as regards the inclusion of externally supplied bitstream for the subsequent use of residential customers into the relevant wholesale market. For these reasons, and in view of the issues considered in past Commission practice 24 the Commission expresses at this stage of the procedure serious doubts as to whether the market definition proposed by RTR meets the requirements laid down in Article 15(3) of the Framework Directive and accordingly whether RTR is acting in conformity with Article 8(2)(b) and (c) of the Framework Directive read in conjunction with Articles 10 and 82 of the EC Treaty. These serious doubts stem from the lack of sufficient evidence to substantiate the market definition. The above assessment reflects the Commission s preliminary position on this particular notification, and is without prejudice to any position it may take vis-à-vis other notified draft measures. The Commission points out that, in accordance with Article 7(4) of the Framework Directive, the draft measures shall not be adopted for a further two months. Pursuant to Point 17 of Recommendation 2008/850/EC 25, the Commission will publish this document on its website, together with a notice inviting third parties to submit observations on this serious doubts letter within five working days. The Commission 24 25 See also the Commission's comments in cases UK/2007/733, AT/2008/757 and FR/2008/781. 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, OJ L 301, 12.11.2008, p. 23. 9
does not consider the information contained herein to be confidential. You are invited to inform the Commission 26 within three working days following receipt whether you consider that, in accordance with Community and national rules on business confidentiality, this document contains confidential information which you wish to have deleted prior to such publication 27. You should give reasons for such request. Yours faithfully, For the Commission Neelie Kroes Member of the Commission 26 27 Your request should be sent either by email: INFSO-COMP-ARTICLE7@ec.europa.eu or by fax: +32.2.298.87.82. The Commission may inform the public of the result of its assessment before the end of this three-day period. 10
EUROPEAN COMMISSION Brussels, 15/10/2009 C(2009)8003 SG-Greffe (2009) D/6875 Rundfunk und Telekom Regulierungs-GmbH (RTR) Mariahilferstraße 77-79 A-1060 Wien Austria For the attention of: Mr Georg Serentschy and Mr Wolfgang Beran Fax: +43 1 58 058 9191 Dear Sirs, Subject: Corrigendum of Decision SG (2009) D/6009 of 5/10/2009 Case AT/2009/0970: Wholesale broadband access in Austria Opening of Phase II investigation pursuant to Article 7(4) of Directive 2002/21/EC 28 Please note that the Decision SG (2009) D/6009 of 5/10/2009 has to be amended as follows: 1. On page 4 the second paragraph should read as follows: "RTR notes that with regard to the use of different types of broadband access by business customers xdsl connections amount to 75.4%, while the use of cable connections amounts to 14.5%, the use of mobile radio connections to 15.5% and the use of other access types to 9.7% 14." 14 Results based on the Customers Survey, January 2009, multiple answers allowed. RTR further adds that, unlike the residential customers market, three quarters of mobile connections are to be considered complementary to fixed broadband connections, whereas only one quarter is used as substitute. 28 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, 24.4.2002, p. 33. 11
2. On page 4 in the first sentence of footnote 18 the words "with regard to mobile broadband connections" have to be inserted in front of the words "only when a volume". 3. On page 6 in the second sentence of the eighth paragraph the reference "between 372 and 1897" has to be deleted. Yours faithfully, For the Commission Neelie Kroes Member of the Commission 12