Open competition in the post-1998 European telecoms market
H. Ungerer
Swedish Telecoms Summit '97
3/12/1997
Stockholm
The opening of the European telecom market by 1st January will be a first in the world's telecommunications market. For the first time, for an area as large as 380 million people competition in telecommunications will be the rule - in the local market, in long distance and in international.
This is the culmination of a ten year process in Europe which was opened by the 1987 EU Green Paper on telecommunications. The Green Paper was based on the conviction that the dynamics of innovation of telecoms required new structures . During the rapid development of the sector since then, it became clear that the future of the sector will be determined by globalisation and innovation, not by isolation and maintaining past positions and structures.
By 1993, during the EU Telecom Review consensus was reached that liberalisation could not be limited to the new value-added areas. The decisions to liberalise the sector fully - services and infrastructure - local, long distance, and international - was taken on a broad political basis by the European Parliament and Council.
It was implemented through a series of Liberalisation Directives and Decisions adopted under the European competition powers and through harmonisation Directives based on the EU's ONP framework, as agreed by the European Parliament and Council.
The total package of new regulation at Community level consists of some 15 Directives and Decisions adopted over the last two years. The finale of the EU 1998 programme is the Full Competition Directive (Commission Directive 96/19/EC) : the date for lifting of all remaining restrictions on provisions of public networks and voice telephony is, of course, 1st January 1998, in line with our WTO commitments.
This a great step forward indeed, but meaningless without the concomitant regulatory preparation. The Commission's Directives have to be implemented by the Member States. This means the setting up of licensing procedures, interconnection regimes and fair rules on universal service obligations. The central Directives in this area are the "Licensing Directive" (EP and Council Directive 97/13/EC) and the "ONP Interconnection Directive" (EP and Council Directive 97/33/EC).
The fifteen EU-Member States have notified - or are currently doing so to the European Commission these new regulatory frameworks so that they can be screened under EU-Law.
The Scandinavian countries - and in particular this country - have been leaders of the process both on regulation, as well in technology introduction, such as on mobile and the Internet. It is therefore a pleasure for me to have the opportunity to address the audience here on these issues.
THE IMPLEMENTATION RECORD
Progress is well advanced in the EU Member States which are due to liberalise on 1st January 1998. All have adopted the necessary measures to abolish special and exclusive rights, or have these measures in the final stage of the legislative process, except for Member States granted longer implementation periods. Substantial progress has been made on the other critical points : licensing regimes, universal service definition, numbering - and, as a key area, access and interconnection.
The process is being closely monitored. The European Commission has strengthened its internal structure in this respect and has created a Joint Team between DG IV, the Competition Directorate General responsible for the liberalisation deadlines, and DG XIII, the Telecommunications Directorate General responsible for the harmonisation framework.
The latest status report on implementation was issued in November ("Communication to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions on the implementation of the telecommunications regulatory package " COM(97)504, 8th October 1997).
Overall, we note substantial progress : implementation of the framework by more than 90% by six of the ten Member States which had not been granted any deferments. Eight of these ten Member States have implemented more than 80% ; this means that more than three quarters of the Member States which have not been granted derogations can be said to have transposed most of the legislative framework. We are optimistic on full implementation. And Competition Commissioner Van Miert has announced the rapid launching of infringement procedures where these are required to underline the determination of the Commission. Indeed, eight procedures were launched two weeks ago.
Independent sector-specific regulators are now in place in nearly all Member States and the remaining Member States are progressing to rapidly do so.
We have simultaneously closed the loop holes which had been left for some Member States. Derogation periods for Ireland and Portugal have been shortened to 1st January 2000, for Luxembourg to 1st July and for Spain to 1st December of next year, and Greece to 31st December 2000. This means that the EU's telecommunications market will now be fully liberalised in all Member States by the year 2000, including those countries for which transition periods beyond 1st January 1998 had been originally foreseen.
We will maintain the pressure in Member States to fully adjust the regulatory framework to their commitments.
Let me add here a few remarks on the status in this country. Overall, with the adoption of the amendments to the 1993 Telecommunications Act in June 1997, we feel that the situation is overall satisfactory and leading in Europe, even if some questions remain open, concerning issues such as details of the licensing systems. In the framework of the current screening process of national regulation under the Community Directives, a letter was sent to the Swedish Government to clarify these remaining outstanding issues.
As the regulatory frameworks now fall into place, the main focus will shift to the marketplace: changing market structures, to make competition a market reality and to create the level playing field that we need.
I believe that we will see during the coming months, as we pass the historic date of 1st January 1998, focus on four issues : access and interconnection ; the growing importance of mobile in the local loop ; the future of the cable TV networks and of convergence ; and , further driven by the global re-arrangements in the sector, growing competition for the control of the Internet, and of privatisation in most of Europe, the general question about the future structure of the industry.
ACCESS AND INTERCONNECTION
Network access was already central in the EU Green Paper on telecommunications of 1987, which set the guidelines for Europe's ten-year liberalisation process .
The basic European framework for network access and interconnection is defined by the EU Open Network Provision (ONP) directives, which have been reviewed and amended during the last two years in preparation of the full liberalisation of the sector by 1 January 1998. This framework is the EU's main device to fully implement the conditions required for fair interconnection, such as non-discrimination, cost-orientation, structuring of interconnection points, transparency and accountability of the process, as well as dispute settlement by an independent regulator.
The EU ONP Interconnection Directive (Directive 97/33/EC) as finally adopted in July provides now throughout the EU the framework for access to public telecom networks. The Directive is the basis of the national interconnection regimes now being established.
The cornerstones of the EU concept can be briefly described as follows :
The framework of open network access (ONP), which had been originally developed for ensuring access for value-added services to the network of the monopoly, is now being adapted to a multi-operator environment through the Interconnection Directive. ONP thereby becomes the natural framework for the definition of basic principles for access to public networks in the EU.
In parallel, with the starting of competition in both networks and public voice service, the application of EU competition rules comes to the forefront. This is also prompted by the requirement to ensure necessary competitive safeguards.
At the same time, there is a growing practice and experience in the EU regarding interconnection and access issues. This concerns access and interconnection of networks in the markets already liberalised - with countries like the Scandinavian countries and the UK obviously having substantial experience in this area. A Europe-wide experience and practice with regard to access questions has also been developed in interconnection of mobile and fixed networks.
Let me add some remarks on the amendment of the ONP framework, and in particular on the approach taken in Directive 97/33/EC, the ONP Interconnection Directive.
In the new concept the role of the monopoly network operator is replaced by the concept of public network operators acting in competition, with a number of rights and duties. The rights concern the right to interconnection with networks of competitors of the same category. The duties concern the obligation to offer network access to others but also the guarantee of universal service.
A general duty to supply exists in particular for public network operators with "significant market power" - this corresponds to the "major supplier" concept in the WTO Reference Paper. In the Directive, operators with a significant market power are defined indicatively as those with a market share of more than 25%.
Regarding the establishment of the details of interconnect, priority must be given to commercial negotiations between market actors. However a strong role is given to the national sector-specific regulator concerning the control of the process and in particular where commercial negotiations fail. The Directive also provides for a conciliation procedure for transnational problems at the EU level.
Combined with the EU's Full Competition Directive, the framework provides for :
the announcement of standard interconnection offerings ;
requires a sound balance between whole-sale activities and retail activities of the incumbents. Wholesale activities concern the provision of access services by the incumbents, retail their activities in the delivery of services to the final customers ;
aims at best practice interconnection rates across the EU. To this end, the European Commission has published two months ago, an EC-Recommendation on Interconnection Pricing and Accounting Separation, recommending ranges of best practice interconnect prices.
The best practice approach is a decisive breakthrough to break the deadlock in Europe on access and interconnect. First developed earlier this year in the context of the competition proceeding against Deutsche Telekom, the Recommendation generalises the approach for all Member States. The benchmark is based on the three Member States with the lowest applied or announced interconnection rates at the time of publishing the Recommendation (UK, France, Denmark). It sets the range for local access at 0.6 to 1.0 ECU / 100, i.e. 0.7 to 1.2 US cents. This will make Europe the market with one of the lowest interconnection rates in the world and should rapidly bring new services to the customer.
The mandate for the application of general EU competition rules to access agreements results from the fact that these agreements determine fundamentally the future competition structures of the sector and have therefore an enormous impact on future overall competitive structures in the EU. Apart from the fact that EU Competition Law is used according to its nature across sectors, and therefore also includes areas such as cable-TV networks, the Internet, and multi-media, the issue is to develop a methodology for evaluation of interconnection and access issues under anti-trust law.
This is also necessary, in order to establish necessary safeguards against anti-competitive practices.
We have issued, earlier this year, a Communication on the application of EU Competition Rules to access agreements. A final version is to be adopted during the first days of January. The Communication defines to what extent Article 86 of EU general competition law, regarding the abuse of dominant positions, is applicable to the control of bottlenecks - like the bottleneck in the local loop. Another major goal is to define the co-operation between national sector-specific regulators and action under general anti-trust law.
Finally, the impact of interconnection and access agreements on third parties must be evaluated under competition law aspects. We must prevent that access and interconnection agreements are used to foreclose the markets to others.
The future relationship between sector-specific telecom regulation and general antitrust legislation is fundamental to the efficiency of the process. We observe with interest the experience in this respect in the Asia Pacific area, such as in Australia, New Zealand , as well as of course in the US.
Given the basic competitive aspect of access and interconnection agreements, the role of competition law for the sector is bound to grow rapidly, as shows also experience in this country.
MOBILE
The Internet and the introduction of digital television together with the development of new multi-media services will be one major line of development. The future development of personal communications is likely to be the other. This means that the future of competition in Europe in this core sector lies with the development of the new technologies : wireless, cable, satellites.
The smooth transition from use of current mobile technologies to the future third generation systems is therefore central. The development of the mobile and wireless communications environment becomes key for the future competitive market structures.
With this, wireless-based communications have become a vital element in the telecommunications infrastructure, where globalisation is most present in a very immediate form, with the adoption of world-wide mobile systems.
Since its commercial launch in 1992, GSM has emerged as a World standard for mobile communications. GSM and its related technologies, DCS-1800 and PCS-1900, provided already by the start of this year coverage through 187 networks in 103 countries and have a subscriber base of far more than 30 million users. Of course, the Scandinavian countries have made a major contribution to this process, both via its leading industrial companies in the field, as well as with the leading position on mobile penetration of 30% and above, one of the highest mobile penetrations in the world.
1st January 1998 will mean a new environment for mobile communications services. Indeed, the mobile sector will face a range of new issues in a fully liberalised telecommunications market. The merging of fixed and mobile telephony concepts will become one of the most immediate regulatory, competition and market issues.
Prices in the local field will inevitably move towards fixed telephony, to tap the mass market which PCS requires.
Within the next year, i.e. by 1998, all mobile operators will have to question whether they want to remain "pure" mobile (niche) operators or whether they also want to expand into fixed operations.
Given the basic nature of modern cellular systems as card-based services, which can find a market beyond mobile and which will have to compete at least partially with card based services derived from the fixed network, the question as to whether the concept of "pure" mobile operators has a future, arises.
Its new broader role makes mobile, besides alternative fixed networks and cable, the third major technology to break the local bottleneck of the phone companies. Such is the major task of any effective competition policy in the sector, aiming at enlarging consumer choice.
We must allow economic players fully economical operations. This means lifting the current restrictions between the different mobile technologies, between fixed and mobile, and between the different services; all foreseen in the EU Mobile Directive of 1996, an important component of the regulatory package, and proposed in the 1994 Mobile Green Paper.
It means openness towards other technologies, such as CDMA in the context of the future UMTS system. It must also entail integrating global LEO systems in a transparent manner into the competitive market environment.
As is well known, we are currently reviewing the major LEO consortia under EC competition rules in order to ensure such integration. We have cleared Iridium ; however, we have also made known on the occasion that we will keep the impact of its distribution agreements on the market structure in the EU under review. These issues will become particularly important with the current flurry of new global LEO projects, as seen at the World Radiocommunications Conference in Geneva.
A major concern will be to ensure a smooth transition to future global mobile systems, i.e. the UMTS.
From a Competition point of view, a main aim in the current critical phase of choosing the right technology will be to avoid technology cartels. We believe that Europe needs Europe-wide technology but also the world's best technology. Excluding prematurely technologies from the European market by imposing arrangements on others through market power could work counter to this objective. The Commission has published its conclusions on the extensive consultation process of this year in October in the form of a Communication which sets out the basics of our future approach (Communication : Strategy and Policy Orientations with regard to the further Development of Mobile and Wireless Communications (UMTS), 15 October 1997).
CABLE AND CONVERGENCE
Multi-media will be key in the future, both in its own right and as the future base for both the entertainment and professional industries and services.
With the introduction of interactive digital television and interactive services, the further advance of the Internet and of electronic commerce, the sector goes through a critical stage of formation, which will set the condition of competition for the years to come. As is well known, the Commission is currently scrutinising major new ventures in the area, such as Kirch / Bertelsmann in Germany and BiB (BT/BSkyB) in the United Kingdom.
Apart from following carefully current market restructuring, two major initiatives are underway at the EU level. Firstly, the EU-Full Competition Directive and the EU-Cable Directive mandate a Review of the cross-ownership between telecommunications and TV-cable networks by 1st January 1998. Underlying this issue is the whole issue of the future competitive situation in the local loop - the determining question of the future competitive structure of communications and media markets in Europe.
The "Cable Review" is now nearing its completion. Commissioner Van Miert has announced that we will publish results and our conclusions soon. Mr Van Miert has also announced that major structural changes will be needed.
In response to the on-going scrutiny major measures are already being taken. Out of the four largest cable operations in the European Union (Germany, The Netherlands, Belgium, Sweden), Deutsche Telekom has announced one week ago that it will separate its cable operations into a separate legal entity and that it will consider further measures. In The Netherlands, KPN has indicated plans for measures beyond legal separation. The Belgian cable operators are traditionally separated from the incumbent.
While the cable issue will decide on the question if the access to local homes can be in a single hand and which measures should be taken in such cases, the Convergence Green Paper, which the Commission has announced, will set the wider context. It addresses the general issues of convergence of telecommunications, the media sectors, and the Internet.
The basic issue is that as we move into converging markets we must avoid creating new super monopolies both in upstream and downstream markets. We must maintain the creative dynamics of growth.
SOME GENERAL REMARKS ON APPLICATION OF COMPETITION RULES TO THE SECTOR
Let me here recall the basics of the application of EU Competition Rules to the sector : EU Treaty Articles 85/86 and 90. European Competition Rules mandate three basic positions :
prohibition of anti-competitive agreements or concerted practices ;
prohibition of abuse of sole or joint dominant positions ;
abolition of special and exclusive rights, where they induce the abuse of dominant positions.
The main issues which we will have to address in the transformation of the sector are :
risks of restriction of competition : this concerns issues such as market partitioning, price fixing, foreclosure, anti-competitive coordination of negotiations ;
issues of single or joint dominance. Here we will have to approach novel problems of assessment of the impact of dominance in areas such as access to essential facilities and refusal of interconnection.
and finally,
expansion of dominant positions, to the disadvantage of the consumer and the competitive market place.
Let me explain this with regard to our position on alliances, both as regards global alliances and multi-media link ups.
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. Under this reasoning, we have approved the main global alliances : BT/MCI, GlobalOne, and four weeks ago Unisource/Uniworld/AT&T - with the participation of Telia, of major interest to this country.
If, on the other hand, it looks more like a defensive strategy to sew up markets and shut out competitors, then EU competition rules will be used without hesitation to block the agreement.
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 extensions of existing dominant positions.
This is just an example of our major objective : opening markets, avoiding market bottlenecks, opening the door to new development and technologies - and this means to more investment and jobs. We need the necessary incentives in the markets to fully exploit the new technological possibilities of telecoms networks on the one hand, cable networks and the new interactive television markets on the other. This is what creates new markets and maximum market potential.
Let me make here a more general remark on the future relationship between application of general Competition Law and sector specific regulation, be it at national, or European levels. The Commission's position on this relationship has been set out very clearly in the Competition Access Notice mentioned earlier.
The Notice clearly sees complementary application of sector specific regulation (harmonised under ONP rules) and general competition law which, by nature, applies across sectors.
None of the two legal approaches isolated can ensure a development to a genuine competition structure in the network markets. Sectoral regulation will be generally able to go further, as regards the guarantee of access and universal service than general Competition Law would allow. Sectoral regulation can, in particular, impose detailed obligations with regard to price structures, accounting obligations, and also price levels. Many years of experience in the UK and in the Scandinavian countries can service here as examples. As mentioned, the Commission itself has chosen this route with its recommendation on best practice interconnect rates as has been published.
General competition law and an essential facilities doctrine derived from it must limit itself to the situations of abuse of a dominant position on the market and the measures necessary to terminate such abuse. While thereby sectoral regulation represents a necessary means - in particular in the transitional phase - to generate competition and certainly permits a substantial stronger intervention for ensuring interconnection, one must however also recognise that it is by nature a much deeper intervention in the working of the market and therefore investment and innovation by network providers. On the other hand, the essential facilities doctrine under general competition law limits itself in principle to situations of market dominance. The intensity of intervention therefore will be automatically reduced with the development of true competition. Access regulation based on general Competition Law therefore automatically includes a "sun set " element, i.e. the withdrawal of state intervention, as soon as truly competitive access markets develop.
In the future reviews of regulation the right balance will have to be found. A close coordination between sector-specific regulation and general competition law is required, both at the European and the national levels. The institutional framework for these two approaches will depend on the national frameworks in these areas. Generally, sector-specific regulation should be limited to the necessary area. The insurance of general competitive conditions should be left to general competition law which offers in areas such as market definition and market dominance the better instruments. With the further development of effective competition, the weighting should be shifted to the application of general competition law.
Summarising, the European Commission's approach sees the sector-specific regulator in the "front role" for securing a secure transition of the sector to a competitive market structure. However, general Competition Law should guarantee the general integration of this approach into general market mechanisms.
LET ME CONCLUDE
With the introduction of a regulatory framework and full liberalisation by 1st January across the European Union of the core telecommunications markets, attention must now shift to achieving structural change to real competition. The future market structure will move to the centre of interest. Main movers of the development will be wireless, cable, and satellites. Apart from the introduction of competition, the main influences will be the entry of private capital into the sector and its consequences, the rapid progress of globalisation and the development of new market structures, with the latter mainly pushed by the new technologies available in the wireless / cable / satellite fields, and the Internet.
All of these will be decisive in reaching true competitive structures in the period which will now follow. This will be a difficult transitional period which may well take up to five years. Our immediate action will concentrate on those areas of most influence to develop the dynamics of this transition.
With the advent of globalisation we have to address the bottlenecks to development also in the international field. We have to assess current agreements in the new context of competitive markets. This explains the major action on screening international accounting rate agreements under EU competition rules which Mr Van Miert has recently announced..
At the same time, cable and satellites take on a role of a new dimension in the new context. Cable will play a decisive role in deciding the crucial question if we achieve real competition in the local loop. This explains the importance of the Cable Review. The new satellite systems which will start to enter the market from 1998 onwards will make the global dimension a very real component in the telecom market of the future. This also means that the current reform of the International Satellite Organisations will continue to be in the centre of our interest.
The consumer will see the real benefit of the new developments when we manage to make the different ends meet in a competitive market : the Internet, the new digital services, wireless , cable and satellite. Of these, the Internet will play the most important role in this process. Keeping the Internet open and out of control of the major conglomerates which are now shaping with the advent of electronic commerce will be an indispensable condition for an open transition. The Notice on Internet Telephony which is due for publication in January is a contribution to this goal.
1st January is just opening the door to the new developments. We may need five years to achieve the structural change in the markets which will now become the major goal , after the lifting of the regulatory barriers. But we believe that we are on the right way towards growing markets, more consumer satisfaction and more jobs. Only competitive markets will be able to ensure a world position for Europe's communications industries and a successful shift to the new economic structure which the European Union needs.
