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Special Sectors:How much is too much? Telecoms & Postal Services

H. Ungerer

Market Power
EU Committee 15th Competition Conference


Brussels , Conrad Hotel Brussels

"How much is too much ?"

Let me make a few comments on the question of this panel. Dealing with this question in the telecom and postal field, the question must inevitably be posed against the background of the real market situation :

In the telecoms sector, 1st January 1998 with its full liberalisation, has brought Europe the lifting of all remaining legal monopolies  - with the exception of a few Member States which have been granted short additional transition periods.

This focuses the attention now on the behaviour of the dominant market incumbents, which characterise the sector, and their use of their market power. Given the extreme market power which has been accumulated by them during the long times of legal monopoly, the sector is likely to become a source of lead competition cases for dealing with the problem of market power as such  - and we see clear indications of this during these very months, with current spectacular cases. An ending of legal monopolies does not mean an end to dominant positions and market power.

In the postal sector, we are faced with a more subtle situation.

After the compromise achieved on postal liberalisation at the end of last year, with the adoption of the postal policy package  - the Postal Directive and the Postal Notice  - the sector will continue to live under a legal monopoly regime in its core market segments for a number of years to come. However the situation is not as stable as it may seem. The incumbents have started to expand further into competitive sectors and we will be increasingly faced with the complex problems resulting from the combination legal monopolies and the use of market power  - as they are legally circumscribed in the interplay of Articles 90, 86, 85, and more and more the Merger Regulation.

Let me first make a few short comments on the telecoms sector which, I believe, will be dealt with more extensively by others in this panel. I will then concentrate on the postal sector.

We are seeing dramatic change through the liberalisation of the EU telecom market. It may be best to recall some facts. According to the most recent implementation report ("Third Report on the implementation of the telecommunications regulatory package", COM(98)80 final of 18th February 1998) published by the European Commission, in all of the ten Member States of the EU who had to liberalise their market by 1st January 1998, new licences for network and full voice telephony operations have now been allocated.

In total, more than 500 local loop licences had been allocated by end February in the European Union, the time of publication of the Implementation Report  - and this is, of course, a moving target.

With the effective elimination of the legal monopolies and the apparent working of the licensing regimes now put into place, the future use of market power by the incumbents becomes the central topic of future market development  - and this expectation is born out by the growing number of cases which we are now seeing emerging. The cases tend to concentrate on the areas where the incumbents meet the new competitors and where they must learn to measure their use of their market power  - which must not turn into abuse.

The main areas of current attention are :

Access and interconnection where the basis of future competition and investment, is determined both in the telecom and in the media field, be it access to telecoms networks or to cable, or to set top boxes.

Alliances, both horizontal and vertical, where telecoms and media interests forge new positions on new segments.

More generally, what has now come to be called convergence : telecoms / media, where the major cases are of course on all of our minds during these weeks and where a general debate has been launched by the Commission with the Convergence Green Paper. But also mobile / fixed and their combined offerings  - which may become the hottest topic in European telecoms later this year  - and, of course, the Internet which has the potential to "net" all these actors.

The Access Notice ("Notice on the Application of Competition Rules to Access Agreements in the Telecommunications Sector  - Framework, Relevant Markets, and Principles") which has been finally adopted by the Commission on 31st March 1998, and which will be published after its final linguistic review within the next four weeks in the Official Journal is addressing many of these issues in substantial detail and gives a detailed list of potential areas where incumbents may succumb to the temptation of abusing their market power.

It lists as main issues of potential abuse under Article 86 :

Refusal to grant access. The essential facilities aspect linked in many situations to the dominant position of the incumbent ;

Bundling. The bundling of two or more products or services in such a way that competition is distorted or technical progress hindered ;

Pricing. Both excessive and predatory ;


and, a number of others.

In fact, we have seen during recent months important cases along all these lines, particularly in the field of pricing and access. Looking to the short to medium term, important issues to resolve will include :

Ensuring that new markets are not tied down by existing dominant operators leveraging their existing power into new markets e.g. interactive TV services and the Internet ;

Ensuring that second or third entrants onto markets do not create oligopolies, preventing further entrance.

The Access Notice also sets out the balance between application of sector specific regulation  - in telecoms mainly the ONP Directives  - and the general application of Competition Law, both of which set the framework within which market power in the sector has to be exerted.

This dual regime of regulation also characterises the postal sector. There, it is defined by the Postal Directive (Directive 97/67/EC of the European Parliament and of the Council of 15th December 1997 on Common Rules for the Development of the Internal Market for Community Postal Services and the Improvement of Quality of Service") and the Postal Notice ("Notice from the Commission on the application of the Competition Rules to the postal sector and on the assessment of certain State measures relating to Postal Services", 98/C/39/02).

Let me therefore now turn to this sector. Allow me first make a few points on the current situation in the postal segment which is still quite different from the situation in telecoms  - and where progress has also been substantially more difficult for us.

The basic policy package of the Commission is well known :

The Postal Directive for the harmonisation of the monopoly areas and of universal service ;

and, the Communication on the Application of Competition Rules to the sector.

The reservable area is defined as the clearing, sorting, transport and delivery of items of domestic correspondence, the price of which is less than 5 times the public tariff for an item of correspondence in the first weight step of the fastest standard category where such category exists, provided that they weigh less than 350 gr. This area can be reserved by Member States for the universal service provider(s) "to the extent necessary to ensure the maintenance of universal service". Also can be reserved "to the extent necessary to ensure the maintenance of universal service" : cross-border mail and direct mail within the price and weight limits laid down above.

However, the Directive also sets up a detailed time schedule for further liberalisation. According to the Directive the "European Parliament and the Council shall decide not later than 1st January 2000" and "without prejudice to the competence of the Commission "on the further gradual controlled liberalisation of the postal market, in particular with a view to the liberalisation of cross-border and direct mail as well as on a further review of the price and weight limits with effects of 1st January 2003, taking into account the developments, in particular economic, social and technological developments".

The Directive sets therefore the basic regulatory framework for the sector  - similarly as does the ONP for the telecoms sector  - with the obvious substantial difference that it defines a core area (letter service) where exclusive and special rights can be maintained by Member States for the time being, therefore institutionalising market power and market position of the incumbent.

In more detail, the Directive defines  - as set out  :

the area for which the universal service provider can for the time being enjoy a legal monopoly ;

the scope of universal service ;

certain quality criteria ;

however, also the principle of making the sector subject to regulation by an independent regulator.

It should be noted that the immediate liberalisation effect is limited. According to estimates, the Directive will generally across the European Union only liberalise an additional 3% of the market which currently has been kept under monopoly regime. However, more important are the provisions which foresee a precise time schedule for further proposals for liberalisation, as set out.

We expect that this programme for liberalisation will be further accelerated by underlying market trends which seem to gain speed :

According to estimates by incumbents themselves, the erosion of the core letter business through substitution by electronic and other means over the next five years could concern up to 10% of current volume ;

Therefore, all of the postal incumbents will see the requirement for extending their activities into new market segments which are already under competitive regime. Just look at the economic pages of our newspapers to find confirmation ;

This requirement for relocating activities will however imply a temptation for the incumbents to abuse their market power allocated in the core sectors under monopoly regime, in order to extend into new areas to the detriment of competitors. A growing number of complaints which reach the Commission from competitors in this area testify to this.

This translates into clusters of cases in the postal sector :

One cluster concerns the so-called "physical" and "non-physical" remail cases. In particular in the "non-physical" remail cases (where competitors generally combine electronic transmission, computer printing and physical remailing) competitors try to optimise their market operations in the given market structure which is characterised by a mixed competitive / monopoly regime. Inevitably, the monopoly holders will be tempted to keep the situation under control by using their monopoly powers.

A second "cluster" concerns cross subsidies. Given that postal incumbents will try to enter or expand their activities in areas already under competitive regime, such as parcel or express courier operations, they will be tempted to use profits from the monopoly area to subsidise the new ventures. Inevitably this will lead to complaints by competitors in those areas.

Thirdly, quite generally, extension of the monopoly holders into newly emerging "grey" areas, with an inevitable uncertainty concerning the areas on which monopoly rights can be claimed.

It is the very purpose of the Postal Notice to clarify the application of Competition Rules in these situations. The main purpose of the Notice therefore is :

to clarify the application of Competition Rules for both postal incumbents and new entrants ;

while, on the one hand, respecting the recognition of reserved areas according to the Directive ;

and, on the other hand, defining the obligations which result for the holders of the legal monopoly for minimising the distortion of competition which monopoly areas will inevitably entail.

This then explains the most important points which are treated in the Notice :

Application of the Competition Rules to the incumbents which hold monopoly rights, within the framework given by Article 90(para 1 and 2).

Non-discriminatory access to the postal network, in order to reduce the impact of the maintenance of monopolies on competitors in the liberalised areas, allowing them economic operations under given conditions.

Dealing with the problem of unjustified cross-subsidies.

Closely related to this, dealing with the application of State Aid rules in the sector.

The concrete categories of cases are well known :

Remail, as mentioned.


Extension by the holders of monopoly rights into new areas.

Agreements between the holders of monopoly rights, such as the REIMS agreement on which the Commission has published a Carlsberg Notice in February (Renewed Notifications of an Agreement on Terminal Dues (Reims II) between Postal Operators - Case IV/36.748 - Reims II  - 98/C 53/03).

Let me then conclude with a summary of the basic issues which define the framework for the use and  - potential abuse  - of market power in the telecoms and postal sectors. This may also give a contribution to answering the question of our session "How much is too much".

In the telecoms sector, we are faced with the major short term questions how to create real competition in the local loop.

We have changed regulations, but we have not taken radical steps for changing market structures. Divesting cable from telecoms will be one necessary route towards this goal in most European countries. This is the aim of the EU Cable Review we have undertaken  - and we are witnessing within these very days major progress in this area as dominant players understand that they have to create the right pro-competitive structures for the expansion into the multi-media field by relaxing their control on cable. BT has announced one week ago that it will divest its cable interests and not expand them further, in order to meet one of the necessary commitments for a green light on its proposed Joint Venture with BSkyB  - the BiB, British Interactive Broadcasting.

The major other immediate question underlying most competition cases in the sector is how to allow integration  - be it by co-operation or merger  - media / telecoms or mobile /fixed in a situation where competition in these markets is clearly still insufficient. We have liberalised to allow innovation. Convergence cannot now mean the creation of new super-monopolies  - and this danger is very real.

Finally, the Internet puts all concepts for the telecoms / media sectors in question.

In the postal sector, the real issues of the sector are just now emerging and the agenda is becoming clearer :

How to open expansion into the future markets for the postal incumbents ;

While securing universal service  

But maintaining a pro-competitive structure of the markets they want to enter.

I believe that the forthcoming second stage liberalisation proposals for the postal sector for which the Commission has initiated a certain number of studies will have to keep this goal carefully in mind.

But I believe, that  - very soon  - many of the incumbents will review their position as they will have to undergo substantial transformation, prompted by the market place. It will not be acceptable to use market power derived from monopoly areas, the legal justification of which was securing universal service, to justify market expansion to the detriment of other competitors. Such an approach will lead to a series of complaints and we see this process starting.

But I believe that we will see emerging out of current lead cases a clearer definition of general principles which apply for the use of market power, particularly in situation of convergence and extending into new markets.

While the Commission will in general take a favourable attitude in order to promote innovation and market development  - the very basic objective of Competition Policy, it will also have to apply stringent conditions. This has again been made clear in yesterday’s Decision on Kirch/Bertelsmann.

Looking at recent cases, a number of principles seem to emerge :

Such projects and alliances must not lead to the strengthening of the dominant positions of parent companies in upstream or related markets.

They must not allow the parties to use facilities, to distort competition in related markets. Issues such as bundling and discrimination are clearly important here. Exclusivity would tend to distort competition in these areas.

They must, obviously, not themselves eliminate competition in any of these markets.

In essence, conditions must be met that guarantee that markets are kept open and can evolve on a competitive basis, as the Commission has said in yesterday’s Press Release.

I believe this will be the basic test which will have to apply to the critical question "Market power : how much is too much".

I would not like to conclude on the telecom and postal sectors without mentioning one additional aspect.

The ‘avant garde’ nature of the sectors puts them at the forefront of the innovation of European Competition Law via its lead cases as discussed, as well as via the requirement to use to full extent the new procedures put into place  - particularly in the field of alliances where the aspects of concentration and coordinative behaviour touch on each other. It is not by chance that the first application of the new Article 2(4) test concerning coordination of competitive behaviour according to the revised Merger Regulation has concerned one of these sectors, as announced by the Commission’s Press Release of today on the approval of the Telia/Telenor/Schipsted Joint Venture  - and that it has concerned an Internet case.

It just underlines that these sectors will continue to test the principles of Competition Law and that they will test our ability to deal with the challenge.


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