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Telecommunications Competition & Strategic Partnerships
Let me join into this morning's discussion with this statement : There is no fair competition on the playing field, however wide the gates are open, without rules of fair play and reliable umpires. Setting out the right rules involves a delicate and dynamic balance between sector specific regulation and use of competition policy.
Before I go on to explore some of the specific challenges we face I want to say a word or two about the increasingly close and important relationship between telecoms regulation and competition policy. What do we really mean by this distinction. Generally it has been noted that, for each stage in the evolution towards a fully competitive environment, the right balance needs to be struck between ex ante rules and ex post decisions. But one should note that even this does not really represent such a clear-cut division between competition policy and sector specific regulations. The EU Directives issued on the basis of the EU competition law's article 90 form now the core set of Directives for the deregulation schedule up to 1998. Moreover, to a certain extent, competition guidelines and precedent setting case decisions can themselves effectively function as ex-ante safeguards on anticompetitive behaviour.
Liberalisation: the run up to 1998
Before we get on to the latter aspect, let me give you our view on the state of the de-regulation side -- the "gate-opening" process - and I will refer here of course to Nicholas Argyris speech As I have just said, the EU competition law article 90 has played a central role in establishing liberalisation of all telecom markets across the EU by 1998.
The concept we have implemented here is one of progressive evolution of competitive infrastructure. In particular breaking the local bottleneck with increasing introduction of alternative facilities with a direct link to the customer.
First we went for satellite communications with a directive adopted in Autumn of 1994. This means full effective liberalisation of satellite systems across all of the EU. It breaks the grip of the incumbents on access to the space resource, particularly as concerns their privileged position as signatories of the International Satellite Organisations. Deep reform of the ISOs is in fact part and parcel of the logic of this directive. In this context we are encouraging, but also tracking closely the reforms of Intelsat, Inmarsat and Eutelsat. We are currently witnessing some major moves towards progress, but the competitive implications of the restructuring and separation of commercial and non commercial operations must be watched very carefully. Likewise the formation of private international satellite consortia are also screened by our competition rules. Systems such as Iridium have already been notified and investigated by DG IV, and we are keeping an eye on new developments such as Teledesic.
As far as EU signatories, and operations in the EU area are concerned, EU competition rules apply fully to these organisations. The directive makes clear that we will use this instrument wherever necessary, not only as concerns access to space capacity but also as concerns downstream distribution arrangements and agreements.
The deadline for notification of measures to implement the satellite directive was August 1995. We are still having problems with some member states: Greece, Portugal, Spain, Ireland, Luxembourg and Italy. We cannot tolerate delays at this point and thus we have initiated legal procedures which I am confident will result in a satisfactory response.
The next link we tackled in the liberalisation process was the mobile connection to the customer, to build mobile networks into a full scale competitive infrastructure. Adopted in January this year, the mobile directive enters fully into force on November 15. It abolishes all remaining exclusive and special rights in the mobile communications market, for both service provision and use of own and third party infrastructure. Competition law is applied not only to licensing of new GSM operators, but also, from 1998 to DCS1800 licenses. Clearly, the most economic and flexible provision of mobile services, achieving reliable EU wide roaming capability, will entail the combination of GSM, DCS1800 and DECT technologies. This entails dual mode equipment and roaming agreements which in principle we fully encourage. On the other hand, it is important that the new DCS1800 markets are not foreclosed by incumbent mobile operations simply extending their dominant positions and keeping others out. The directive thus allows for the combination of mobile digital technologies where this supports a pro-competitive evolution.
The third attack on the customer access bottleneck was the Cable Directive. This was adopted at the end of last year and enters into force from the first of October (next month). This means unlimited use of all cable network licences for liberalised telecoms services, freedom to arrange interconnection of cable TV networks and clear accounting separation in the case of joint provision by dominant operators of cable and telecoms services.
On the one hand the directive is clearly about establishing an alternative platform for fixed link local access. The UK model was the prototype for this, where we are now witnessing the growing success of the cable operators to gain telecom customers from the incumbent.
On the other hand the directive is about encouraging multimedia applications and services : the convergence of audiovisual broadband service and customer interactivity. To the extent that this entails the joint provision of telecoms and TV service we have a dual challenge for competition policy here. How do we deal with the entry, or prior existence, of the incumbent telecoms operator in the cable market? The synergies involved may appear beneficial to customers, but how can this be weighed against the risk of foreclosing not one, but two major markets with the potential creation of a double strength cable/telecom bottleneck? As I mentioned, for the moment the directive set down accounting separation requirements and does not address the question of restrictions on TOs from providing broadcasting services. However, these key questions are the subject of a major 1998 review which I will come back to later on.
July 1st this year was the deadline for liberalisation of alternative infrastructure. Under the provisions of the Full Competition Directive adopted in March, the Member States had to notify by this date the implementing measures lifting restrictions on use of all existing alternative telecoms networks for liberalised services. The response has been fairly impressive. Apart from four of the five eligible countries applying for derogations, all the Member States are pretty much on track and many are already in advance of our timetable to lift restrictions on all services and infrastructure.
I think it is important to note that a key factor in our success here has been the tying of liberalisation conditions to the important competition cases in the telecoms sector recently brought before the Commission.
Liberalisation and Competition Cases
Notifications such as GlobalOne and Unisource are a very effective lever to put pressure on the national governments concerned to make solid commitments to opening the relevant markets. From as far back as the BT MCI decision in 1994 we have made it quite clear that alliances can only go forward in a liberal market environment, they cannot be used in any way as a means to link up monopolies. The clearance of the Atlas and GlobalOne joint ventures, for example, is wholly conditional upon the introduction of effective competition in the markets concerned, especially alternative infrastructure : this means not only the legal lifting of restrictions , but also the granting of new licences and ensuring effective competitive conditions for new entrants.
Another illustration of this link between competition cases and securing implementation of the liberalisation timetable was the recent GSM case in Italy. As part of the compensation package which was worked out to "balance" the unfair fee charged to the second operator, we demanded that the Italian government make firm and specific commitments to an early opening of their alternative infrastructure market. We will be insisting on this commitment in our current contacts with the new Italian Government
The final landmark in this list of liberalisation achievements is of course the "big bang": 1998 lifting of restrictions on provision of public networks and voice telephony.
A great step forward indeed, but meaningless without the concomitant regulatory preparation in terms of licensing procedures, interconnection regime and fair rules on universal service obligations. So, before we get to 1998, in 1997 Member States must notify these new regulatory frameworks to us so that they can be screened by competition rules. After which they are obliged to publish the procedures and rules for the benefit of potential new entrants and investors. We know that potential entrants have to be in a position to make reasonable choices about when, where and how to invest, so it is vital that the major issues concerning economics, risks and opportunities for entering the core telecom markets are made clear and transparent before 1st January 1998.
Next year is not going to be easy. There is still a lot of work to be done, but I am increasingly confident that we can get most, if not all, of the Member States, pretty much "up to scratch" by the big deadline. However, I also want to stress that the Commission will not hesitate to use its competition powers to be tough on tardy or incomplete implementation. In fact we are going to be aided with increased resources and streamlined procedures dedicated to monitoring and correcting national interpretation of Article 90 directives.
In any case, once all these restrictions have finally been lifted and the initial enabling regulatory mechanisms put in place, we have firmly established the platform for a competitive environment. But, as I noted before, this is hardly the end of the story. In fact it is just the "launching pad", the beginning of the most difficult challenges for regulators and competition authorities alike. The focus of competition policy shifts at this point from governments and legislation to market players and commercial conduct, in particular to the dominant market players and their relations with their competitors and counterparts.
The Challenges Ahead
Anyway, let me turn now from these general points, to more specific issues, to address the main challenges which lie ahead for the post 1998 environment. In my mind these are:
i Access and interconnection
iii Restructuring and Convergence
i Access and Interconnection
As promised last year, we will be publishing this Autumn a draft Notice on the application of the EU competition rules to access and interconnection in telecoms and related areas. This should create greater market certainty and more stable conditions for investment and commercial initiative in the liberalised sector. It also expands on how competition rules will be applied in a consistent way across the converging sectors involved in the provision of new multimedia services : in particular addressing gateways and bottlenecks in this context.
However, before launching straight into discussion of the competition articles per se, the Notice first sets competition policy within the context of the broader overall EU framework in the area of interconnection; that is, it defines and clarifies the relationship between competition law and sector specific legislation under the Article 100A framework which, in this case, is set out in the draft ONP interconnection directive. I believe this relationship is an extremely important concept to get clear. In fact interconnection represents the most important manifestation of the call for a finely tuned and flexible balance between telecoms regulation and competition rules, which I mentioned before. So let me dwell on this point for a moment:
The competition rules cover areas, such as access agreements between private networks and service providers, which are not addressed by the ONP directive. But the competition rules also have a significant and coordinated role with areas which are covered by ONP. First let me say that, being more detailed and focused to the task at hand, the ONP framework and its implementation by national regulators, should naturally be the "first port of call" concerning agreements to which the framework applies. However, the competition rules do also allow parties to any interconnection agreement to call upon their inalienable competition rights whenever, or wherever they find the ONP process to be inadequately implemented or unsatisfactory.
More generally, competition rules may be applied to check the effectiveness of ONP principles as they are interpreted by national regulators, to ensure full conformity with competition policy goals.
Having defined its place within, or beside, telecoms regulation let us return to the basic concepts of competition law which apply to this area and which are explained in the upcoming Notice. In general these concepts will be applied to problems of pricing, tying and discrimination (which at the extreme may represent a refusal to supply):
First, is the question of the identification and definition the relevant reference market concerned - that is, on the one hand, a final customer market defined by competing retail service products, and / or on the other, the "wholesale" market for the access services in question.
Second, the Notice sets the way in which Article 86 applies to the behaviour of dominant players in their relations with weaker ones, and in particular the control of bottlenecks and essential facilities.
Finally, under the principles for application of Article 85, the potentially harmful impact of exclusive or collusive access agreements on third parties is addressed.
The Notice represents the clearest possible indication to market players as to the way complaints, regarding abuse of dominant position, discrimination and/or collusive behaviour, between operators, will be decided. In this way, and with a few precedent setting decisions, we hope to discourage anticompetitive practices from the outset. Thus neither market players nor the Commission services need face the untenable situation of having each and every interconnection or access agreement scrutinised on a case by case basis.
Alongside interconnection and access, pricing will of course be the major issue once the markets are opened. The questions of the degree and type of both retail and wholesale pricing rules in a market with the structure and history of national telecoms networks are extremely complex, especially in relation to the allocation of fixed and common costs. You can rest assured I am not now going to launch into a detailed discussion of the economics and accounting principles involved. What I will do, however, is to try to pin point what I see as the key challenges or questions in this area:
* Investment incentives
The ability of operators to compete effectively, and the sensible and efficient development of networks across the EU, will depend critically upon the price that entrants have to pay for use of or interconnection with the infrastructure of the main operators. Prices set too low encourage inefficient proliferation of resellers and service providers and under investment in new and alternative networks. Prices set too high will obviously do the opposite. Either way the consumer loses out.
The critical factor is creating the optimal incentives for investing by sending out the right signals to the market. Upstream, an ideal pricing policy would be one which resulted in a clear recognition of the natural bottlenecks and an economically viable bypass of others. There also needs to be a broader recognition that the retail pricing policy applied to the incumbents sets the major condition for decisions on market entry for others. Obviously competitors must be allowed to earn a sufficient return. At the end of the day we all know that a competitive structure is not guaranteed in the long term by any regulator (however energetic and well intentioned) but by investors ready to take significant risks and commit their own resources. As long as planned investment from competitors is still in the range of 10-20% across the EC of that by the incumbents, a future competitive structure is just not assured.
Changes in ownership of the national network operators is also a key complicating factor here. Via assessment of the appropriate rate of return to the asset base, the value at privatisation should feed into the future tariffs that the company can charge. It is important that we recognise the tension in this context between political incentives to artificially inflate share values and the interests of an effective liberalisation agenda.
* Pricing flexibility, consumers and competitors
Another challenge is this: How should we understand, or explain, the relationship between pure competition principles and consumer interests as far as pricing is concerned? We know that competition rules can impose non-discrimination conditions at an upstream bottleneck but this alone may not necessarily translate into lower prices for the end consumer if this wholesale price is excessive. On the other hand, in a situation where competition rules are applied to prevent predatory pricing, such as the type of targeted discounts which characterised our recent case against DT's new tariff proposals, then it may appear that certain customer interests are being "sacrificed" for the goal of competition.
The solution to both these apparent dilemmas can ultimately be found in the pursuit of the goal of encouraging truly competitive pricing. What does this mean? It means efficient pricing (which must ultimately be cost oriented) and pricing which is sustainable in a really competitive environment (which means costs must be covered and cross-subsidisation is "out").
As regards access to the major public networks, the EU ONP framework leaves detailed pricing regulation to the discretion of the national regulators but sets out some basic principles: Wholesale prices should be unbundled and generally based on incremental costs plus a uniform mark up for fixed and common costs. Standard offers should be transparent and published. As concerns the retail end, ONP principles dictate progressive rebalancing. This, however, can and should be achieved in a way which does not translate into real price rises for domestic customers.
What does competition policy per se have to say about such pricing issues? Ideally, as the relevant markets become more competitive, standard tariffs and uniform pricing rules may be relaxed in favour of increasing pricing flexibility for competing operators. Unfair discrimination by dominant operators will always be an offence but a degree of discrimination based on real differences in demand and objective costs should ultimately be allowed for. This will open the way for more innovative "tailor made" pricing packages for different consumer needs and demands, as well as, ultimately, more efficient use of network resources as far as upstream agreements are concerned.
On the other hand, such potential advantages of relaxing more strict or uniform pricing rules must always be balanced against an assessment of the risks for competitors and consumers alike.
As concerns competitors and the wholesale market, more pricing flexibility could also spell less ex-ante safeguards and greater discretion for anti-competitive practices regarding access and leased capacity charging (such as price squeezing, predation and unfair discrimination). One implication of this is that, at least for the foreseeable future, standard tariffs for standard unbundled components should always be available "off the shelf", for those who do not wish (or need) to negotiate special "bells and whistles". The other important implication is that, as sector specific pricing regulation retreats, scrutiny and monitoring by competition rules must advance in its place.
As concerns consumers, relaxation on strict pricing rules may be seen to pose the risk of harm to the less lucrative users of the network. If this is explicitly recognised and addressed however, the potential problem is not so difficult to overcome. For example, in the DT discounts case, the Commission and the German Authorities have now simply ruled that if benefits are to be offered to big corporate customers, this must be balanced by benefits offered to domestic customers. In the UK case, the quid pro quo for relaxing the RPI + 2 constraint on line rentals is that no single customer should have to lose out vis a vis their new choice of packages for fixed and measured charges.
* new services and multi-media
The question of sensible and efficient pricing becomes even more poignant with increasing divergence of the range of services and patterns of usage over the telecoms networks. Current pricing policies for use of customer access lines were of course developed for traditional switched voice telephony usage. Increasingly however they will also be used for packet switched data services (particular the Internet) and other online multimedia services. What are the pricing issues here? On the one hand, where there is free or flat rate local charging such as in the US, the incumbent network operators are starting to complain of unfair overuse of the local loop, and congestion problems as customers stay on-line for hours. On the other hand, where local charges are still measured and relatively high (which becomes especially significant when one considers an average use of around 20 hours/month), then use and growth of new services such as the Internet may be discouraged and retarded by comparison.
Does this imply that incumbents TOs should be allowed to charge differently for different types of services and transmissions? Again the risks have to be balanced against the benefits. At the upstream level (ie between network operators and internet access providers) this could currently pose serious risks of anti-competitive practices. However, where flexibility should perhaps be increased over time is at the end-customer retail level. I hope that we will be seeing more and more choices for end users as to how they wish to be charged for different types of use: options could range from, for example, a flat rate, capacity based "all you can eat" monthly charge, right down to special discounted measured rates for very low users.
Let me turn now to the third challenge for the future: the question of restructuring and convergence. On the whole we assume a positive attitude towards new vertical and horizontal partnerships and ventures, as long we can be convinced of the real synergies and benefits which should form the underlying logic for the moves. If, on the other hand, it looks more like a defensive strategy to sew up markets and shut out competition the competition rules must be used to block the agreement (Clearly there's only one thing worse than a national telecoms monopoly and that's a trans-national multi-media monopoly!). In particular we are watching out very closely for bottlenecks - preventing the creation of new ones and ensuring fair conditions of access where we have a "fait accompli " - and for any extension of existing dominant positions.
I mentioned before the logic of tapping the potential of the parallel application of pro-competitive ex-ante policy (under Article 90) and some key case decisions and investigations. This is also relevant in this context. In particular concerning entry of dominant network operators into the converged markets.
The original versions of the Media Services Group (MSG) in Germany, and Nordic Satellite Distribution (NSD) agreement in the Nordic market had to be blocked because they involved, amongst other things, network operators, enjoying essentially gatekeeper functions extending dominance into related broadcasting and content markets. With the same basic concerns in mind we have launched initial investigations into the plans of national telecom operators in countries like Spain and Italy to venture into the cable TV market.
In parallel with such cases, the whole question of joint provision of telecoms and cable TV networks by dominant operators is being addressed from the policy perspective by the twin reviews announced in our Cable Directive and the Full Competition Directive for 1st January 1998 at the latest.
The review will play a major role in the next stage which we have to face, once a pro-competitive market structure is put in place in all Member States : creating truly pro-competitive market structures. The major task will be to break the local bottleneck. Cable - together with wireless - are called upon to play the major role in pursuing this central objective.
We have recently announced a study which will form the research and analysis base for this review. The study will assess different policy options based on results of an intensive analysis of the market itself and of actual and potential policy impact on the developing multi-media market structure. In particular we are going to be focusing on the following policy options:
* maintenance of the status quo
* lifting of existing constraints on telecom operators to provide cable TV capacity to their customers
* divestiture of cable operations of dominant telecom operators.
The main underlying issue in all this is the need to leave open the potential for development of a viable infrastructure platform for real competition at the customer access level. On the other hand we must not stand blindly in the way of the realisation of real competitive synergies from the perspective of either of the converging sectors.
The results of this policy review will be issued for consultation in 1997.
iv International Aspects
Ultimately the market in telecoms services, the dominance and impact of its major players, and the demands of its customers, cannot be anchored and pinned down to a particular geographic area. The same logic which applied to lifting regulatory barriers between EU Member States and the application of competition policy to dominance from an EU wide perspective, will inevitably be applied with increasing intensity to the global market.
It is no coincidence that we see in the same year: adoption of a major US Telecoms Bill, adoption of the EU Full Competition Directive and agreement in the WTO Negotiating Group on Basic Telecoms group on regulatory principles to guarantee market access at a multilateral level. It is also no coincidence that this year also sees the major policy forum of the ITU addressing the key problem of the global coordination of frequency and orbital slot allocation for both geo-stationary and LEO satellite systems. The logic here is not so much that of simple de-regulation (as I mentioned before, this is the "easy" bit) but that of regulatory convergence. Or, rather, a new convergence of trade issues, domestic regulatory issues and competition issues.
Markets such as international services and mobile satellite services are inherently non-territorial. They are about flows, not places. The players, through foreign direct investment and alliances are likewise, global. Most States are reacting to this by joining the liberalisation bandwagon. Some, however, still appear to be stuck in the anachronistic national market, national champion paradigm. In this context two points become clear:
* asymmetries in regulation between different regions imply increasingly significant distortions of competition
* Investigation, under competition rules, of dominance and competitive impact of commercial behaviour must have an increasingly global perspective
In 1998 the cross border agreements within the EU, for the handing over of telephony traffic from Member State to another, should become straight interconnect agreements, indistinguishable, in theory, from domestic arrangements. 1998 is also the date on the table for the WTO negotiations on basic telecoms. One does not have to have too vivid an imagination to conceive the potential instabilities and complications if we cannot balance our internal liberalisation with our external opening to third countries.
Time is very short. We need to be quite practical on these questions - pick up and use the most effective tool to hand.
Firstly, what is important is not so much which goal is pursued via which legal instrument but that the two frameworks, telecoms regulation and competition policy, are coordinated, mutually reinforcing and coherent.
Secondly, from a purely institutional point of view it is really up to the Member States where they want to draw the line between the responsibilities of their competition authorities in the telecoms area and that of the telecoms regulators. What counts for the market (and for us) is consistency, effectiveness and independence from the incumbent telecom operator. The Australian scenario, whereby the competition commission is taking over the economic aspects of the telecoms regulator under the new access regime rules is one fairly extreme solution on the competition policy side. The opposite is happening in the UK, where Oftel is now taking on responsibility for more general fair trading conditions and application of EU competition Articles 85 and 86. We see a third scenario in Italy whereby the new telecoms bill is transferring the competition powers in the telecoms sector, previously held by the National Competition Authority (the Autorita Guaranta) over to the National Regulatory Authority.
Currently, the system in Europe is generally evolving towards a strong role for the national regulators in the context of the ONP interconnection and licensing directives and a parallel strong role for competition policy at EU level for guaranteeing liberalisation and preventing anticompetitive behaviour.
Looking into the future, the regulatory balance must continually adjust to the balance of risks and advantages of policy oriented telecoms rules versus competition law: of stricter targeted regulations, standard rules and uniform tariffs on the one hand, compared with more flexible, general competition rules, ultimately allowing greater discretion in terms of pricing and differentiation of terms and conditions for both wholesale and retail customers. This is not a question of "either /or" it is a question of careful balance and timing.
A recent study conducted for us on institutional issues in the area of telecoms and competition policy concluded that a major priority for the future should be greater communication, cooperation and coordination between regulators and competition authorities at all levels: that is within member states, between member states and between member states and the Commission. It is with this vision that I would like to conclude.
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