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Brussels, 4th June 1998
Telecoms Pricing Policies and their effect
The European Parliament, the Council and the Commission have started to set a global framework for the operation of the Internet in Europe - and we have, of course, some of the most active promoters of the Internet in Parliament here in the room.
Elements of the global framework which are high up on the agenda and which set the wider framework are well known. They range from the action plan on promoting the safe use of the Internet to the global framework for electronic commerce - and the many initiatives intended to fill in that framework, such as the recent proposal on encryption and electronic signatures.
I am sure that all of this will be covered here during the Conference and the panel discussions - it forms the global framework within which the ISPs in Europe will do business.
In my remarks, I would like to concentrate on some of the more pressing issues for the ISPs which have been put at the centre of this conference : availability of telecom infrastructure ; pricing ; transit and peering arrangements, all of which are at the very basis of the day-to-day operations of ISPs, and are issues which emerge when looking at the Internet from the perspective of Competition Law. And let me emphasise that we consider the now several hundred ISPs across Europe as an essential element for developing the Internet in Europe. I also believe that EuroIspa can play its role in making their voice heard more powerfully in Europe.
Let me then have a short tour dhorizon on four main issues :
Before I turn to these points one short remark on the close relationship of development of the ISPs in Europe, and European telecom liberalisation. The emergence of ISPs in Europe has been a major success of European liberalisation. The liberalisation of value-added and data services, first proposed in the 1987 Green Paper and implemented by the 1990 Services Liberalisation Directive has been the very basis of the emergence of ISPs in Europe. It has prepared Europe for participation in the Internet, once the Internet made its first massive appearance at the global level outside the United States in the early nineties.
I believe one could say that the emergence of ISPs in Europe has been synonymous with the rewards, but also the risks of European telecoms liberalisation. It has shown the wealth of private initiative which liberalisation can create. It is now also showing the challenges for regulation and Competition Law, in order to keep market structures open.
Let me then come to the four points I mentioned :
1. First, The new environment
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 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.
A number of new infrastructure carriers in Europe will fully reach the market in Autumn, both in international traffic, as well as for trans-Atlantic routes.
This will exert substantial downward pressure on national and international telecom pricing - and we should expect the emergence of new pricing mechanisms for backbone capacity soon - such as the emergence of spot markets, and perhaps futures markets - for telecom high speed leased lines and backbone capacity. All of this should work from Autumn onwards in favour of substantial increases in supply of capacity and a resulting downward pressure on prices for Internet backbone capacity.
2. Secondly, The essential role of regulation and Competition Law.
With the effective elimination of 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 now see emerging. Use of market power must not turn into abuse.
Let me make here some short remarks about the impact of sector specific regulation and general Competition Law on pricing.
ONP has made a major contribution to rapidly bringing the advantages of liberalisation to the customer and to the competitive service providers, such as the ISPs, and I can refer here largely to the remarks by Ms Read who has been a main actor in this process - and, I am sure, further explanations will be given by my friends from the Commission during this conference.
Therefore only these remarks :
The basic framework for pricing is set in the EU's liberalised telecom market by price regulation under ONP working essentially via the newly set up sector National Regulatory Authorities (the NRAs), and by application of general Competition Law where the Commission and National Competition Authorities, often in close co-operation with the NRA, work on the basis of complaints, or own initiatives when they discover anti-competitive practices and abuse of market position.
ONP establishes the basic principles of pricing, and the principle that national regulators "ensure" that tariffs are cost-oriented, transparent and non-discriminatory. ONP establishes also conditions for non cost pricing in exceptional cases where universal service is at stake. It limits price regulation essentially to two areas : the public network operator with significant market power - generally the incumbents - and their fixed telephony and leased lines activities.
or, in some detail :
Price regulation under ONP is focused on two markets : the retail markets concerning rates for switched public telephony traffic, under the ONP Voice Telephony Directive ; the interconnection / access rates, under the ONP Interconnection Directive - a major focus of attention during these early months of liberalisation ; and, it includes, via the ONP Leased Lines Directive, provisions for the pricing of Leased Lines. All of these prices, both retail, switched, as well as leased lines are at the very basis of ISP operations.
Competition Law takes a less sector specific approach and it also covers areas not expressly covered under ONP. The Access Notice ("Notice on the Application of Competition rules to Access Agreements in the Telecommunications Sector - Framework, Relevant Markets, Principles") which was adopted by the Commission in its final form 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 :
and a number of others.
Looking to the short to medium term, a major issue will concern the requirement to ensure that new markets are not tied down by existing dominant operators leveraging their existing power into new markets - and there the Internet is high up on the agenda.
All of this will ring a familiar bell with many here in the room, and in fact it is representative of a growing number of cases with which we are currently confronted under Competition Law.
Let me still add a more general remark on the relationship between ONP and Competition Law :
It seems that the combined use of regulatory and competition tools by the Commission has led to substantial change in the pricing of European telecommunication to date, albeit insufficient. According to more recent surveys, prices for two Megabit lines have fallen in Europe during the period 1996-1997 of up to 60% in special cases, even if in many cases tariff reductions have been substantially lower.
Without doubt this has given some oxygen to the operation of private networks in Europe and it should have helped operation of ISPs. However, we should admit that we are starting from a very high price level relative to the United States. This is emphasised by the figures floated at this conference and on the EuroISPA Internet site. Price change must come more quickly in Europe.
Let me then turn to my third point :
3. The balance of market power within the Internet.
We must address the balance of market power within the Internet. At the moment, the balance of market power in Europe is tilted in favour of the telecom incumbents, which in many markets are at the same time major ISP providers.
Just one figure : the total revenue of all ISPs - not including electronic transactions on top of this which will represent a much larger figure - is still below 1 billion Euro. But telecom incumbents derive an income estimated at 5 to 10 billion Euros from Internet access alone, dial-up and leased line links to ISPs and related high tariffs - and this compares to total revenues of telecom incumbents from traditional fixed telephone business of now somewhat 130 billion Euros in Europe.
The major cost to the European user is therefore not the ISP, but the price paid to the Telco. In fact, it means that ISPs tend to be squeezed between high costs in Europe for the backbone capacity on the one hand, high costs for the users dialling into or accessing their systems, on the other hand. To this must be added the threat of rising costs for transit agreements, which the highly concentrated nature of the Internet at the US level - as it has emerged from the NSF 1995 handover of responsibility for the US backbone to major US carriers - entails.
The Worldcom/MCI case has for the first time raised general attention to the competitive threats to the Internet. While this case is still yet not decided and therefore not suited for public debate, substantial guidance can be expected from the decision which the Commission is due to take at the latest by mid-July. The fact remains that the Internet, throughout its transition over the last three years to the commercial phase, has managed to avoid major public regulation - however, it has still not proven that it may not fall under the control of a few dominant global players.
This takes me to my last point :
4. What can regulators and Competition Law do for the ISPs.
The immediate central tool for ensuring open access conditions for ISPs will be ONP. I believe that it is un-contested that ONP via its development over the last years into a general regulatory framework for a competitive telecom market in Europe has efficiently opened the networks of the incumbents, all of which continue to hold significant market power. It has given the necessary instruments to the new sector National Regulatory Authorities.
At the same time we will have to strike hard under Competition Law, and without hesitation wherever the abuse of market power becomes obvious. We will have to guard carefully against the formation of international cartels, in order to ensure that prices really come down. We must avoid leveraging of market power by incumbents into down-stream markets, be it in Europe by the telecom incumbents, or be it pressure by US actors on the European market.
This explains the major focus of Internet cases currently being dealt with under Competition Law. We are basically confronted with four lines of cases : the local access issue ; abuse of market power by incumbents by favouring their own ISP operators; abuse of control of the backbone ; and - in the future - risk of abuse of market power by a few in peering and transit agreements.
More generally, the danger is very real that Internet self regulation turns into dominance by a few or, at a global level, into a permanent dominance of the US actors over the Network. These trends are also visible in the current reform of the domain name system, and the Commission has expressed its concerns during the current debate on the US Green Paper in this area.
But let me also make here a note of caution. The ultimate solution cannot come from more regulation, even if more regulation may be necessary in the short term to protect weaker market participants, and more generally, the public interest. The Internet has grown out of the conviction that only competitive supply can provide the basis for the broad range for technologies, innovation and services which must evolve. The 34 Mbit and higher transmission links which we need for the development of powerful European Internet backbones can only come from competitive infrastructure supply which the liberalised market now allows. No regulator can regulate the provision of future oriented ATM-based backbones into the market place. Regulation can open existing networks efficiently. But regulating future networks which have not even been built, would risk entailing substantial impact on investment - and in fact, it could lead to investment dis-incentives.
Therefore, the best guarantee for rapid Internet infrastructure development is to increase competitive pressure. This is the reason why we have strongly resisted in a number of competition cases, the establishment of exclusive agreements for laying cable along physical infrastructures most suited for rapid deployment of long distance and international lines in Europe - such as railway tracks. I am sure that we will have to continue to be watchful to pre-empt attempts to create oligopolistic structures and to keep prices high.
This is also true for local access. If we want to see the next generation Internet access infrastructures established early in Europe, cable-TV networks will play a decisive role. In more than half of EU Member States, telephone and cable networks, have been traditionally under the control of the dominant incumbent - a heritage from monopoly times. Neither can cable networks develop into true multi-media networks under those conditions - and this must mean carriage of broadband Internet and voice on those networks, additionally to the traditional and the new digital TV-channels. Nor has the incumbent sufficient motivation and competitive pressure to rapidly develop under those circumstances the telephone networks, via deployment of technologies such as xDSL, into high speed multi-media Internet access channels - allowing carriage of a broad range of services, including broadband Internet access. This has been the basic subject of the EU's Cable Review and the proposed Commission Directive which has been submitted to Parliament and the Member States, as well as for public comment.
As you will have noted, under the impact of the Review, the situation is changing. One by one, the incumbents are realising that it will not be compatible with a pro-competitive market structure, to monopolise all effective access means in the local loop. All of these developments will be of major importance for the pricing of local access - time sensitive or flat rate - and the future environment for the Internet in Europe.
let me conclude on one last thought.
The operational environment and - the opportunities - for the ISPs will ultimately depend on the global environment for the Internet in Europe. There seem to be two major conditions for ensuring a rapid global development.
We have followed this line in the Notice on the treatment of Voice Telephony on the Internet published in final form in February. Maintaining this balance - public regulation where required to provide a stable framework, but restricted to the necessary minimum to allow innovation and competitive market development - will be fundamental.