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The Current Competitive Issues
Let me start off this morning by running first over the achievements of EU competition policy in telecoms. I will then go on to discuss some of the major challenges ahead of us.
At this point, the firm achievement is the liberalisation stage: lifting regulatory restrictions, abolishing legal monopolies. We have opened the gates for new entrants to enter the playing field. Ensuring a competitive environment in a networked market like telecommunications is however not just about deregulation. Prevention and cure of anticompetitive behaviour by dominant players, avoiding market foreclosure and encouraging the right investment incentives for new players is the really difficult tasks which lie ahead. There is no fair competition on the playing field, however wide the gates are open, without rules of fair play and reliable arbiters. Setting out the right rules involves a delicate and dynamic balance between sector specific regulation and use of competition policy.
Liberalisation: the run up to 1998
Before we get on to this, let me give you a run down on the de-regulation side -- the "gate-opening" process. As you know Article 90 EU competition law has been successfully applied to liberalise all telecom markets across the EU by 1st January 1998, a date which via the WTO negotiations in Geneva now gains world-wide importance.
The concept we have implemented here is one of progressive evolution of competitive infrastructure. The central target is breaking the local bottleneck, with increasing introduction of alternative facilities with a direct link to the customer.
Thus we first went for satellite communications with a EU Art. 90 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 and developments in Intelsat come to a critical stage. 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 us. Systems such as Iridium have already been notified and we have published our findings recently in the Official Journal according to the procedures of regulation 17; 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.
As regards the full implementation of the satellite directive, we are still having problems with six member states: Greece, Portugal, Spain, Ireland, Luxembourg and Italy. While progress has also been made with these countries, we cannot tolerate delays at this point and thus we have initiated procedures which I am confident will result in a satisfactory response. I may add here that we now expect rapid progress in the majority of these countries up to the end of the year.
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. The importance of mobile for the overall development of the telecom sector can hardly be overestimated. Adopted in January this year, the mobile directive must be fully implemented by Member States by 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 now on, 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, and we will also have to be more open to CDMA developments. This entails dual and multi-mode equipment and roaming agreements which in principle we fully encourage. On the other hand, it is important that the new markets are not foreclosed by incumbent mobile operations simply extending their dominant positions and keeping others out. We have made this clear in the recent SIM-lock case. The directive thus allows for the combination of mobile digital technologies where this supports a pro-competitive evolution.
The third attack on the local loop bottleneck was the Cable Directive. This was adopted at the end of last year and must be fully implemented by the first of October (next month). This means unlimited use of all cable network licences for liberalised telecoms services, including from 1.January 1998 onwards public telephone service; 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.
Let me clearly say : we want to develop cable across Europe, besides wireless, into 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? For the moment the directive sets 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.
The core of the EU 1998 programme is now the Full Competition Directive also issued under Art. 90. 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 positive. 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.
As regards the derogation countries (Ireland, Spain, Portugal, Greece, and Luxembourg), Spain has not up to now asked for a derogation. The other four countries have requested various derogations through the review process foreseen by the directive, which includes publication of the request in the Official Journal . While this is a process still underway and it is therefore too early to go into detail, it is already apparent from the requests that in many cases derogation periods will have to be renounced or substantially shortened. We expect to complete the review and approval process during October/ November.
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.
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 Phoenix 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.
The final test will of course be 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, on 1st January 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. 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.
Regulatory Balance - the relationship between competition policy and telecoms regulation
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 sector-specific telecoms regulation and competition policy. 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. To a certain extent, competition guidelines and precedent setting case decisions can themselves effectively function as ex-ante safeguards on anticompetitive behaviour.
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 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.
Currently, the system in Europe is generally evolving towards a strong role for the national regulators in the context of the EU's sector-specific ONP interconnection and licensing directives (of which we will hear much more during this conference) 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. Solid and practical steps towards this could include, for example, secondments, specific allocation of liaison tasks to certain personnel and greater and more organised use of electronic communications means.
The Challenges Ahead
Let me address now 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 and Competition Rules
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 will first set competition policy within the context of the broader overall EU framework in the area of interconnection; that is, it will define and clarify 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 Open Network Provision framework is clearly sector specific, it applies only to telecoms networks. It is, furthermore, focused particularly on a certain type of telecoms network, that is public networks. Competition rules on the other hand are fundamentally applied to any competition problem which exists between two sets of market participants, be they public or private, telecoms or multimedia. So the first point I want to make is that competition rules obviously also cover areas of agreements not covered by the sector specific harmonisation approach.
The ONP interconnect framework (which will be discussed extensively during this conference) basically addresses four main situations:
One: equivalent interconnect rights and obligations applying to network operators in the same regulatory "category"
Two:the establishment of safeguards to balance asymmetries in bargaining power between two interconnecting operators
Three: ensuring recourse to an independent National Regulatory Authority to resolve disputes and to actually define and impose interconnect conditions where necessary in certain circumstances
And lastly: we come to what is perhaps best understood as a "common carrier" principle; that is, a special "backbone" role involving more traditional open access principles, for those carrier enjoying "significant market power"
As I said before, the competition rules cover also 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 in national interconnection regimes, 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 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 will be 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 which we hope to publish in October after the completion of the intensive internal consultation which a subject of this complex nature requires, 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.
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. Without going into too much detail, let me 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 under-investment in new and alternative networks. Prices set too high will obviously prevent market development. 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. There 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; and this has become more generally noticed on recent occasions such as the BT price cap review in the UK. 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 own resources. As long as planned investment from competitors is still in the range of 10-20% across the EU of that by the incumbents, a future competitive structure is just not assured.
* 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 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.
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 differentiation 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 features. 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.
* 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. However they are also used now for access to 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 can 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 monthly charge, right down to special discounted measured rates for very low users. Again, the new price formulas developed across in the mobile/PCS sector show the way where the development could go.
The introduction of telephony via the Internet and the emergence of the first international dial-in/dial-out Internet telephone access providers offering such services (which I believe can be expected for the next few months) will without doubt further accelerate clarification of price setting behaviour in the wholesale and retail telecom market. We are currently formulating our position on the regulatory treatment of Internet telephony.
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. 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 counties 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 : cross ownership and future relationship of telephone networks and cable.
We have recently announced a major 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 the new US Telecoms Bill, adoption of the EU Full Competition Directive, a major review of telecoms in Japan with the decision on the future structure on NTT due before the end of the year, and continuing work 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 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.
Let me make a last overall comment. We seem now to have in the European Union a broad common understanding that a fully competitive environment can be, and will be, the basis for a growing telecom market which serves best the European customer and the information society as a whole. There is a growing conviction throughout the discussions that in the new complex environment of telecoms, cable, mobile, satellite and Internet, competition is ultimately the best guarantee for universal service . The amended ONP Voice Telephony Directive as adopted by the Commission last week gives further re-assurances about universal service.
But from a competition point of view we have strongly resisted
any attempt at over-regulation, such as extending the reach of
voice telephony regulation at this point into the mobile sector.
It is by giving room to the new competitive providers, and not
by restricting them, that universal service is best provided to
the European citizen. It is by lifting barriers to investment,
and avoiding unduly heavy regulation, that the telecom sector
can fulfil its promise as a motor of innovation and economic and
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