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Comments on "The Coherence of EU Policies on Trade, Competition and Industry Case Study : High Technologies"

by David DEACON (1) on the paper by Dominique FORAY, Pauline RUTSAERT and Luc SOETE

I. Introduction

  1. The authors have presented a useful historical summary and factual overview of Community policy in the field of telecommunications and the interaction between trade, competition and industry policies. At the risk of oversimplifying they state that originally industry policy dominated with R and D programmes and harmonisation. Competition policy now seems to predominate with the current liberalisation programme but trade policy will play a bigger role in future in the framework of GATS and globalising markets.
  2. I will comment on this paper from my point of view as a competition practioneer - trying to applying the Community competition rules in a reasonable manner to a sector that is in the throes of rapid and far reaching technological and regulatory upheavals inside the Community and where globalisation and internationally dimensioned strategic alliances are of growing importance (2). As the paper shows the analysis of the sector is complex and the interaction of the three Community policies in question - industry, trade and competition - have to be taken into account in order for any individual policy to be applied coherently, thereby avoiding possible contradictions. The recent G7 conference underlines the importance of the sector and coming together of the three policy areas.
  3. By final word of introduction I must admit that I am optimist about the coherent application of the three Community policies. I see them as necessary complements. Much has been written on the conflict of industry and competition policies. However the Treaty is quite clear. In Article 3g it states that in order to achieve the basic goals of the Community there shall be " a system ensuring that competition in the internal markets" is not distorted.
    • Furthermore Article 130 states that industry policy shall be applied "in accordance with a system of open and competitive markets"
    • The Commission put the flesh on these legal structures in two important documents - the White Paper on Growth, Competitiveness and Employment (3) and its Communication on Industry Policy (4). Both these documents see the maintainence of effective competition through vigorous competition policy as an essential element to wider Community competitiveness. This theme is also found in Commissioner VAN MIERT's declaration to Parliament (5) and in a recent Competition Reports (6). The Bangemann Report underlines the specific role of competition for telecoms. In fact the industry policy programmes for telecommunications described by the authors are not only not contradictory to competition policy, but are in fact prerequisites for competition. Take for example the programmes to define open standards and interoperability, without which the Union would remain 12, now 15, different but separate telecommunication networks (7).
  4. As regards competition and trade policies, again I see them as complementary. Trade policies have a twofold effect. Firstly they aim to open up the Community and third markets by reducing tariff and other barriers - they therefore widen competition. Secondly they protect Community industry from destructive or unfair competition, which can normally only occur because of a failure of competition policy in a third country. On the one hand countervailing duties are imposed on imports that have received what would be illegal subsidies in the Union and are recognised as such under the GATT. On the other hand anti-dumping duties protect EU industry from practices that would normally be made impossible by the application of competition rules from companies operating in a market economy (8). Thus the "protectionist" side of trade policy is mainly to compensate EU firms from companies in third countries not subject to effective competition rules. In the long run it therefore promotes competition.

II. liberalisation a necessary but not sufficient condition for competition

  1. In telecommunications, it is clear that liberalisation (ie the abolition of exclusive rights which gives rise to legal monopolies) must be applied before any competition can take place. An ambitious programme going up to 1998 with the liberalisation of voice telephony is described in the paper (9). However the introduction of real competition implies much more than a mere programme of the translation into national law of Community Directives abolishing legal monopolies in the different Member States. To arrive at a situation where the benefits of competition can be really felt, takes both time and the vigorous enforcement of the rules of competition. Without this latter we risk the incumbent monopolist using both his market power and control over conditions of access to his network to prevent the emergence of potential competitors. Where previously the monopoly telephone operator could hide behind a legal monopoly, after liberalisation he could abuse his dominant position to prevent entry. Competition in this sector is all the more difficult to get started up because, unlike most industries, new entrants depend on the incumbent's network to which the price of access is absolutely vital. Unfortunately the paper does not go into this aspect, where the experience of Mercury in the UK shows how difficult it is to get competition beyond the legal possibility to become fully effective. Neither does the paper explore methods employed in third countries - such as the more radical solution employed in the USA by splitting up of AT & T into regional Baby Bells.
  2. In fact many issues need to be resolved to make competition effective beyond the classic application of the rules of competition. For example
    • whether in addition to competition rules there needs to be an EU telecoms regulator to determine the price of network access or whether the same result can be achieved via the coordination of existing regulators. In fact the complementarity of regulation and competition could be usefully explored by the paper.
    • decisions have to be made on contributions for the funding of the universal service obligation, which is rapidly becoming an effective way for incumbents to defend their entrenched position. However certain commentators now imply that the financial burden of this universal service obligation is not as heavy as has been implied (10) and could be used by incumbents to block entry.
    • a decision needs to be made in the EU on the liberalisation of the infrastructure along with that of their associated liberalised services. Competing infrastructures are the best way to facilitate entry and bring about the industry policy advantages of extra investment and capacity forecast in the Bangermann Report (11). In fact US experience in "long" lines would suggest that parallel networks are the best way to create both really effective competition and new value added services.

Major political decisions need to be made because competition requires tariff rebalancing ie tariffs should reflect costs which is not the case at the moment. This is politically sensitive as in most Member States business is de facto subsidising private households.

In fact the issue of the introduction of effective competition as opposed to its mere legal possibility, on which the paper focuses, is directly linked to industry and trade policy. Without effective competitive pressure on the monopolist we are unlikely to see the reduction in prices or the extra capacity generated for new innovative value added services, that industry needs. Furthermore unless entry becomes a de facto as well as de jure possibility, third countries will continue to perceive our markets as foreclosed and be understandably reluctant to open up their markets to EU companies. In fact this consideration appears to have been a factor in US in favour of permitting the cooperation between BT and MCI because the UK market was regarded as an open one (12).

III. Need for market analysis to assess alliances

  1. The paper discusses the growing importance of strategic alliances and other forms of cooperation in this sector, where companies are positioning themselves for global markets. In fact there are some extremely important cases either recently decided -BT and MCI - or currently under consideration - Atlas, a cooperation between French and German Telecom and Sprint. The paper states "Therefore to assess in advance (emphasis added) the pro- and anti-competitive effects of these alliances is extremely complex", and that "the concentration of market power induced by these strategic alliances constitutes a severe threat to future competition". Finally the paper adds that the arguments will be advanced by the parties and some governments that alliances having anti-competitive effects may be defended as necessary to enter new markets or to compete on a global scale. According to the paper there appears to be a conflict between competition and industry policy in the global market context. Unfortunately the paper does not develop any analytical framework which will allow the Commission, or any other anti-trust enforcement agency, to make an assessment of these alliances before they are consummated or to avoid possible contradictions between trade, competition and industry policies. Because of their structural nature the Commission is obliged to work on the basis of forecast economies/synergies and forecast effects on the market. Although mistakes can be made, especially on such dynamic markets, the Commission has to assess their impact on the relevant market and balance the gains and losses.
  2. This can be done as the BT-MCI decision of the Commission shows (13). Its an example of how the Commission brought potential conflicts into a coherent policy. In fact it is likely that the Commission will not react favourably to alliances where domestic markets are closed, as this may only serve to aggravate the difficulty of eventually introducing competition (14). Because Commission decision are subject to judicial review by the Court of First Instance and subsequently the Court of Justice it is unlikely to be able to approve agreements that seriously prejudice effective competition inside the Community. Furthermore the creation of a European champion at the price of eliminating effective competition on the EU market goes against the spirit of the new EU industry policy. Rather effective competition is seen as a way to train Community firms to fight on wider markets (15). Where however the market is truly global all EU firm can be allowed to cooperate because competition the Community is not prejudiced (16).
  3. There are two other factors aspects also needed to be taken into account when discussing alliances. Firstly, alliances may be only the only way for EU service providers to break out of their role as essentially domestic monopoly service providers and enter the new fast moving globalising services market. Secondly we are starting to see alliances between on the one hand non-telecoms companies who have or can easily build physical networks (railway, electricity, energy companies) but have no experience of telecoms services and on the other hand telecoms service providers who have the know-how to exploit these new alternative infrastructures. Such alliances can be procompetitive and show the complementarity rather than conflict of industry, trade and competition policies.

IV. POTS become PANS - a look to the not too distant future

  1. Similar forward looking analysis is required by the Commission when it has to examine the emerging but increasingly important interface between telecommunications, media and computing. If the forecases are to be believed,the form of delivery, type and quantity of media in the homes will be revolutionised and domestic telecommunications will change from the current POTS (plain old telecommunications services) to PANS (pretty amazing new services). Whether ownership of the wires or cables that deliver these services will become relatively less important compared to the services offered over them, remains to be seen ie will telecoms wires be like motorways, where any traffic that pays the toll can pass. This convergance of sectors is already confronting Community competition policy with its sensitive interaction with industry policy and particularly for media with trade policy. In fact the Commission's second negative merger decision concerned Deutsch Telecom and the two leading German pay TV/media companies - Bertelsmann and Kirch - that would have foreclosed the market (17). It concerned directly industry policy because of the link to digital HDTV (18). Some discussion of these aspects would have rendered the paper more useful for practioners who have to analyse such cases, as would the Community policy towards telecoms in the PECOS (former East European state economy countries), with its links to trade policy.

V. Conclusions

  1. The paper is a useful summary of the state of play in telecommunications and the interaction between competition, trade and industry policy. There are some omissions - notably no mention is made of the Commission Communication on Telecommunications Equipment (19) which highlighted the close industry, competition and trade policy links between telecommunications equipment and services. This is a particularly important high technology industry where the Community has several world class players - Alcatel, Siemens, Nokia, Ericsson - and where the Community in faced with restructuring - see Siemens/Italtel, Teletrra and GEC/Plessey/Siemens. In these cases structural links between national champion telecoms equipment producers and monopoly service providers have to be examined, in the context of liberalising but still essentially monopoly service markets and the opening up of public procurement for telecoms equipment (20).
  2. In fact many of the problems identified in the paper are already or have already been involved in cases and policies before the Commission. The paper's usefulness would have been enhanced if it had ventured to look forward and via a more quantitative and analytical, rather than descriptive, framework made policy suggestions. Many apparent contradictions between trade, competition and industry policy in fact disappear or become clear when the real market situation is analysed in the individual case. Finally liberalisation should not be equated with competition, it is in fact only the first of many steps.

  • (1) Official of the Commission of the European Communities- Directorate General for Competition (DG IV). The views expressed are those of the author and not necessarily those of the Commission
  • (2) The author's duties inside the Commission involve coordination of individual cases of the rules of competition to all sectors. As such he has no specific knowledge of the telecommunications sector; The author is therefore grateful for the comments of Miguel PENA of the telecommunications unit in DG IV. All errors and omissions are the author's.
  • (3) Bulletin of the EC Supplement 6/93
  • (4) An industrial competitiveness policy for the European Union. Bulletin of the European Union Supplement 3/94 - COM(94) 3/9 final
  • (5) Hearing of Euopean Parliament 16 January 1995
  • (6) XXIII Report on Competition Policy 1993 European Commission pt 17-26 and 150-161
  • (7) This is not to deny that all standardisaton is procompetitive - some can be detrimental and have a foreclosure effect. This debate is beyond the scope of my remarks.
  • (8) This is not to deny that all standardisaton is procompetitive - some can be detrimental and have a foreclosure effect. This debate is beyond the scope of my remarks.
  • (9) The liberalisation of voice telephony is of absolutely crucial importance to the sector and should not be underestimated.
  • (10) see for example John Kay of London Economics Daily Telegraph 16 February 1995, 13 February 1995 page 7 (European edition)
  • (11) These issues are treated in the two Green Papers on infrastructure (COM 94/440 and COM 94/682) which also treat financing of the universal service and interconnection problems. These Green Papers are based on publicity available studies.
  • (12) See also Financial Times Monday 27 February 1995 pg 16 (European edition) where US proposes to open its telecoms market but only to investors from already liberalised countries. Al Gore at G7 conference.
  • (13) OJ L 233 of 27.08.1994
  • (14) See for example declaration of Mr VAN MIERT to G7 on Information Society. Financial Times 28 February 1995 page 16 (European edition)
  • (15) See also Michael Porter, Competitive advantage of nations, New York : Free Press 1990.
  • (16) See Philips/Thomson/Sagem (Press Release IP/93/32 of Commission and XXIII Competition Report point 215) where all Community firms having interests in liquid Crystal Displays were allowed to put together their efforts because of the intense competition not only on world markets but also on Community markets from several powerful Japanese producers.
  • (17) Case IV M 469 MSG 9.11.94 published O.J. L 364, 31.12.1994. Interestingly enough the only other negative merger decision to date has also been in high technology - construction of aircraft. IV M 053 DE HAVILLAND/Aerospatiale-Alenia of 2 October 1991; published L 334, 5.12.91 page 42
  • (18) The issue of cable TV and its infrastructure is a crucial issue for the future of telecoms. Penetration of the domestic market in Europe by cable TV although not as advanced as the US, is growing rapidly. An alternative infrastructure network is thus in the making.
  • (19) SEC (92) 1049 Brussels 15 July 1992. The European Telecommunications Equipment Industry. Communication from the Commission.
  • (20) In fact the paper appears to confuse the opening up of public procurement for telecoms equipment (switching gear, etc) with the abolition of exclusive rights of telephone service operators for terminal equipment (handsets etc). Furthermore if effective competition is introduced for services, there will be less need for public procurement rules as all service providers will be obliged by pressure of competition to buy the most cost effective equipment rather than simply rely on a national champion equipment producer.
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