Chapter 6. Technological convergence and competition

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"Telecompetition"

Chapter 6. Technological convergence and competition

In conjunction with the intention to shift regulation of telecommunications in direction of less sector-specific and more general competition regulation, convergence with its implications for technology neutral regulation is the prime basis for the new EU communications regulatory package and its implementation in EU and EEA countries. Technological convergence enhances the possibilities for a growing competition between different kinds of network providers, as they increasingly can substitute for one another. At the same time, technological convergence also changes the competitive structure in the communication markets creating new challenges for competition policy.

The focus of attention in most policy oriented work on convergence in the Nordic countries has been on the implications for the media and on relaxing regulatory hindrances for convergence. In the present chapter, emphasis is on the competition related implications of convergence, specifically with respect to telecommunications. Horizontal technology convergence allows, for instance, for cable TV network operators to offer Internet access and Voice over IP telephony. This has positive effects on competition in telecommunications if traditional telecommunication networks and cable TV networks are owned and operated by separate companies. Vertically, i.e. with respect to the different segments/layers in the value chains, the prime competition issue posed by convergence deals with the possibilities for monopoly (or near-monopoly) providers in one segment of a market to leverage their dominance in this segment into other market segments.

What is convergence?

The drivers behind convergence developments are technological as well as economic and political. In the technology area, it is primarily the digitalization and computerization of all communication and media areas, which facilitate convergence. Digitalization and computerization establish a common technological foundation for the different communication and media areas, which formerly were based on diverse analog technologies. However, digitalization and computerization also allow for an increasing separation vertically between, e.g., networks and services. Technology developments, consequently, enable convergence developments horizontally between hitherto separate sectors and, at the same time, disintegration vertically in the service delivery chains in the different sectors. The extent to which such tendencies are realized is, however, dependent on interests and activities of market players and the policy and regulatory incentives.

Box 6.1: Definition of convergence

In a description of the communication and media areas encompassing four sectors - IT, telecommunications, broadcasting, and other media (e.g. newspapers and the music industry) - the potentials for horizontal convergence (and divergence) and vertical integration (and disintegration) can be illustrated by the following table (3) dividing the four sectors up in three layers, content/services, transport/software, and equipment/hardware. It is in essence a process of unbundling and realignment of functions and activities that is underway, and the table illustrates the many new combinations becoming possible horizontally and vertically, but also diagonally.

Table 6.1: Convergence/divergence and integration/disintegration

Source: Anders Henten, Rohan Samarajiva and William Melody: 'Designing Next Generation Telecom Regulation: ICT Convergence or Multisector Utility?', WDR, Lyngby, 2003, page 9.

The table combines a description of the technological as well as market based convergence related development possibilities. It illustrates, for instance, that content like music and film can be distributed on alternative platforms, e.g. telecommunications. It, furthermore, illustrates the possibilities for diagonal integration between telecommunication network and transport service providers and broadcast content providers. The figure also illustrates that the formerly more integrated telecommunication value chain can be split up so that infrastructure provision, transport services and content services do not necessarily have to be provided by an integrated company by can be supplied by specialized companies.

Market and policy implications of technology convergence

Convergence in the communication and media areas is not a new thing. In fact, it is as old as the media and communication industries themselves. The history of these industries is, to a large extent, a case of media innovations evolving out of existing media and, therefore, a process of dissociation and re-combination of different communication and media areas. However, often policy and regulatory authorities have been seeking to limit market convergence and cross-media ownership – not only because of concerns for economic monopolies, but in order to hinder media concentration and the dominance of a limited group of owners over the means of communication. This has mainly affected the content media with their great importance for the political and ideological developments in society, but has also affected the conveyance media such as telecommunications.

There is, however, no doubt that technology convergence based on digitalization and computerization has added a new and powerful quality to the industrial convergence developments in the markets and, furthermore, has put pressure on the policy and regulatory provisions regarding market convergence and cross-media ownership. The history of these developments goes back to the 1970s in the US, where the computer industry started becoming interested in using the telecommunication networks for computer communication and in having a say in the telecommunication area, which was reflected in the different so-called Computer Enquiries⁶⁶. At present, Internet is the prime example of technological convergence, first and foremost, between the computer and the telecommunication areas, but also encompassing media from the content areas, lately also including broadcasting.

This already has and will increasingly affect the industrial structures in the communication and media areas. And, in order to reap the benefits of the possible synergies between formerly separate sectors there has been a policy shift away from limiting cross-media ownership. This policy change is partly due to a general change in the policy climate and priorities but is also related to the possibilities for creating new media products and services enabled by technology convergence.

Expectations to that effect were very high, especially in the late 1990s. There were spectacular mergers between giant corporations with the AOL/Time Warner merger in the US as the example most often mentioned, and there were also strategic moves in the same direction in the Nordic countries, for instance, in Denmark, where the incumbent telecommunication operator TDC tried to establish its own TV channel in the mid 1990s. The heading under which many of such initiatives were taken was the slogan 'content is king', implying that the major part of value creation in the media and communication areas in the future will be in the content areas and not in mere conveyance. However, the TDC TV initiative failed and so did many other initiatives of a similar character. But in accordance with the so-called hype curve, there is a stable build up phase after the boom and the bust, and an increasing number of convergence based business initiatives will be seen in the coming years.

Economic theory on horizontal and vertical integration

The political provisions in a number of countries hindering cross-media ownership have been part of a broader set of regulations limiting not only horizontal but also vertical integration if there could be a danger of companies leveraging their dominance in one business area into other business areas. Similarly, the lifting of regulatory barriers to integration in the communication and media areas is also part of a broader trend - inspired primarily by the so-called Chicago school approach but also the transaction cost economics approach – to not necessarily consider vertical integration as a threat to consumers and general social welfare but as a possible efficiency enhancing development. In the present sub-chapter, there is a brief introduction to the theories on horizontal and vertical integration. The reason for the brevity of the introduction in the present report is that a very good introduction has been written lately for the Norwegian competition and post and telecommunication authorities and that an extensive repetition is unnecessary⁶⁷.

In this sub-chapter, general statements based on theoretical contributions to the literature on horizontal and vertical integration are presented, followed by cursory discussions of important implications and aspects.

Horizontal technological convergence - where the same services and content can be delivered on different platforms – is potentially beneficial to competition.

An example is telephony via the traditional fixed line telephone system (PSTN) or on cable TV networks by way of Voice over IP. The reason is that providers from different communication areas can enter each others' markets and start competing on what might have been monopoly domains earlier on, and users can substitute between different technology solutions, providing similar services. This statement is quite straightforward but has, now and then, been neglected in the enthusiasm concerning the possibilities for offering and bundling different services and content on the same networks.

The competition enhancing implications of technological horizontal convergence are diminished when individual companies integrate horizontally, increasing their market power across different technology platforms.

This statement is also quite straightforward, as cross-network ownership will limit the competition enhancing implications of the technological possibilities for offering the same services and content on different networks. This can be done by a dominant operator, either by offering the same service across different network platforms or by limiting the possibilities of alternative operators for offering competing services on the alternative network platforms.

There is also the possibility for a dominant operator with control over different network platforms to bundle services in situations where the services offered on the different platforms are not perfect substitutes. This applies, for instance, to traditional fixed line telephony and mobile telephony. These two telephony modes are partly substitutes and partly complements. If an operator owns both kinds of access infrastructures, combined fixed-mobile services can be offered – a possibility which does not exist for operators with only one access infrastructure.

Vertical integration does not in itself hurt competition. However, when vertical integration is combined with horizontal market dominance in one of the market layers, that vertical may be an impediment to competition.

When involving companies with market dominance, there has often in legal provisions and decisions been a sceptical attitude towards not only horizontal integration with its limiting effects on competition between substituting markets but also towards vertical integration between companies in complementary markets. The reason has been a fear of market foreclosure by means of exclusion of competing companies or by means of discriminatory pricing – i.e. there has been a fear of a dominant company; say in an upstream market, leveraging its dominance in this market into the downstream market in which it has acquired a presence, either by ownership or alliances.

However, since the 1970s and 1980s there has been a change in policies and regulations in the area, partly inspired by the criticism from 'Chicago school' economists⁶⁸ and from another branch of economics, namely transaction cost economics, which was revived in the 1970s⁶⁹. In brief, Chicago school economists have claimed that in an industrial area with upstream and downstream market layers (for instance network operators and content providers in the communication fields) there is only one monopoly profit to be reaped, and that a company with monopoly on one of the market layers has no interest in leveraging its dominance onto other markets layers. An upstream monopoly company can even have an interest in as strong competition as possible in the downstream market, as competition there will lower prices in this layer, giving the monopoly company the possibility to increase its input prices to the downstream companies, provided that end-users will pay the same price for the final product as in a less competitive situation. According to Chicago school economists, the prime reason for vertical integration is increased efficiency – which is beneficial and not detrimental to the general social welfare. A similar conclusion is reached from a transaction cost economics approach, emphasizing the possible savings in transaction cost as a result of vertical integration.

However, the Chicago school conclusions are based on very strict assumptions and have later been criticized by other economists⁷⁰, relaxing the different assumptions, for instance, by introducing competition in the upstream market, by reducing the number of companies in the downstream market to an oligopoly market, or by introducing regulation in the relations between the upstream and downstream market. If, for instance, in a market with a monopoly infrastructure provider and competitive service/content providers, the interconnection or access price paid by the service/content providers to the infrastructure provider is regulated and set at a low price limiting or even abolishing the monopoly rent of the infrastructure provider, the monopoly provider can have an interest in integrating vertically with a service/content provider and out-compete its competitors in the service/content market in order to obtain high prices for the integrated product and compensate for the limit on the interconnection/access price. It can also be the case in an infrastructure duopoly market, as the infrastructure providers will have an interest in making exclusive agreements with service/content providers in order to limit infrastructure competition⁷¹.

The outcome of the discussions on the different theoretical approaches and cases is that vertical integration can be an impediment to competition, but that the Chicago school approach constitutes a point of departure and is robust towards many changes in theoretical assumptions. Real world decisions must, therefore, be based on specific evaluations of specific cases, and it is only when companies engage in strategic behaviour – as pointed out by the transaction cost approach – that there is reason to be concerned about vertical integration.

If vertical integration leads to greater efficiency, this will improve the general welfare in society, and there can also be cases where integration will prevent double marginalization, where margins are added to production costs in both the upstream and the downstream markets. In general, competition will improve social welfare but there are cases where more competition does not necessarily lead to increased social welfare. This also means that regulatory interventions focusing solely on competition increasing measures, in specific cases, can hurt general social welfare, including consumer welfare.

Market developments in the Nordic countries

Horizontal integration can take place at different layers in the communication value chain – physical infrastructure, conveyance or content⁷². The present sub-chapter is, however, only concerned with the infrastructure layer and more specifically with the access part of the infrastructure layer. The infrastructure layer also encompasses the backbone infrastructures, but the main focus here is on the access part, as this constitutes the basis for the direct enduser contact in an industry where this is of crucial importance.

In the communication markets, the following access paths are the most important presently:

• Fixed line (twisted copper pairs)
• Mobile
• Cable TV
• Terrestrial broadcast
• Satellite broadcast

In addition to this could be mentioned fiber cables (Fiber to the Home/Curb), Fixed Wireless Access (FWA) and Wireless LANs (WLAN, for instance 802.11b). All of these access technologies – and others - may become increasingly important in the years to come, and especially WLAN is diffusing quickly in the markets currently. Primary focus here is, however, on the first-mentioned 5 access technologies and especially twisted copper pairs, mobile and cable TV networks.

In the Nordic countries, the incumbent telecommunication operators are involved in the following horizontal infrastructure access markets (see table 3).

Table 6.2: Involvement of incumbents in infrastructure access markets, 2004

As shown in table 4, the Norwegian incumbent Telenor is the most 'complete' communication operator among the Nordic telecommunication incumbents. Telenor is not only active in the two-way point-to-point telecommunication markets but also in the wireless (terrestrial and satellite) broadcast markets. Telenor owns Norkring which operates the terrestrial broadcast network in Norway, and Telenor also owns Canal Digital which is one of the two broadcast satellite operators in the Nordic countries – the other one being ViaSat. Furthermore, Telenor owns Canal Digital Kabel TV that has more than half of all cable TV customers in Norway.

Telenor is not the only telecommunication incumbent operating cable TV networks in the Nordic countries. This also applies to Denmark, Finland and Iceland. In Denmark, TDC is the largest cable TV provider. In Finland, the incumbents (including the different local incumbents) are the only cable TV providers except for the capital Helsinki, and on Iceland, Siminn provides cable TV services, however with a relatively small number of customers. The cable TV infrastructure is seen as the most promising alternative network to the traditional PSTN for large scale access provision. The reason is that cable TV networks, which traditionally have been one-way point-to-multipoint distribution networks, can be converted to also encompassing two-way point-to-point network facilities and thus be an alternative access infrastructure to the PSTN.

Apart from the traditional PSTN, which is the original business of telecommunication operators, all incumbents also have mobile networks. Formerly, mobile networks have not been considered as direct substitutes to fixed line access but have been seen as complements to the fixed networks and have not been subject to the same scrutiny with respect to horizontal integration as cable TV networks. However, the present trend is that mobile and fixed networks increasingly are seen as substitutes and may in the future be subject to discussions regarding horizontal integration. But, at the same time, it should be taken into consideration that the mobile area is the most competitive access market in all countries.

Fiber access and WLAN access have not been discussed in light of the problem concerning horizontal integration, but FWA has been seen in this light. In Denmark, a conscious decision by the telecommunication regulator was made not to assign a FWA license to TDC in 1999. As it has happened, FWA has not (yet) turned out to be a success. In Denmark, there were no more than app. 2,300 customers by the end of 2003, but the explicit reason for not assigning the incumbent in Denmark was to build infrastructure competition and not only rely on service competition. Service competition, where alternative operators use the networks of the incumbents, is much easier to create than infrastructure competition, as the investments in alternative infrastructures are high, especially in the fixed network markets. This fact is evidenced in table 5, which illustrates that the prime Achilles heel for competition in the telecommunication area is the total dominance of the incumbents in the fixed line access market.

Table 6.3: Market shares of incumbent operators in infrastructure access markets, based on number of subscribers, 2003 (percent)

Notes:
a. The figures are for TeliaSonera alone. The figure 95 percent under twisted copper includes all the local incumbents in Finland.
b. Figure based on Telenor share of total turnover from subscriptions, movement of subscriptions and installations.
c. This figure includes not only GSM subscribers but also NMT450 subscribers, as there are still a relatively large number of NMT customers on Iceland – 24,240 in September 2003.
d. There are two mobile network providers in Norway, Telenor and NetCom. In addition, there are a number of service providers. The 56 percent represent the Telenor share of subscribers in relation to all mobile providers in Norway, the other network provider and the service providers. When including the subscriptions of service providers, Telenor has 70 percent of the mobile access market.
e. There are 2 major cable TV providers in Denmark, TDC and TeliaStofa. In addition, there are a large number of smaller independent cable TV networks. The 60 percent figure represents the TDC share of the customers being serviced by TDC and TeliaStofa.

Sources: The figures in the table are from a number of different sources and should, therefore, be taken as indicative. Figures are from 2003, either first or second half-year.

In Sweden, the incumbent has an almost total monopoly in the fixed line access market. If including all the local incumbents in Finland, the market shares of the incumbents in Finland, Iceland and Norway are around 95 percent, and in Denmark the corresponding figure is 84 percent. Furthermore, the 16 percent that competitive operators have in Denmark is not for the largest part an expression of ownership of the physical access paths but represents direct customer relationships with respect to subscription – meaning that the physical access paths are still mostly owned by the incumbent but is operated entirely by an alternative operator. This is called wholesale line rental (WLR) and has been part of the requirements on the Danish incumbent since the beginning of the liberalization of the telecommunication infrastructure in Denmark. Alternative operators have the right to rent access lines from the incumbent at a price equaling the retail price minus 21 percent. Similar arrangements in other Nordic countries have come later, which is part of the explanation for the higher degree of fixed access competition in Denmark compared to the other Nordic countries. Fixed line access competition in Denmark is thus primarily service based⁷³. However, the fact that an incumbent owns the physical access lines does not need to be an insurmountable problem for competition if competitors can get access to operating the access lines on terms that are sufficiently profitable for them. But the figures indicate that this kind of competition has not come far – yet, at least.

In addition to competition from cable TV operators, the greatest access infrastructure challenge in the fixed line area, which incumbents are facing in the coming years, will most likely come from local area networks set up by local cooperatives in city districts or by municipalities. Independent cable TV operations can be part of such initiatives, and new high-speed communication technologies can be part of it, allowing for an integration of telephony, broadband data communications (Internet), broadcast, Video-on-Demand, etc.

In the mobile field, there is much more access competition than in fixed line communications. In the Nordic countries, there are in each country 2-4 mobile operators in the GSM area with their own access networks – Mobile Network Operators (MNOs). In addition, there are a larger number of service providers and Virtual Mobile Network Operators (MVNOs). The reasons for the larger degree of competition in the mobile field, as compared to the fixed line field, is that it is cheaper to establish an access infrastructure in mobile communications and that incumbents do not have a century of head start as they have had in the fixed line market.

To the extent that mobile communication is a real substitute for fixed line communications, this has important implications for competition in the access market. In the Nordic countries, the penetration of mobile telephony has been high (above 80 percent of the population) for a number of years and is considerably higher than the fixed line penetration. In Finland, this started affecting the fixed line penetration a decade ago, and in the other Nordic countries similar developments are seen with decreasing numbers of fixed line subscription⁷⁴. The real substitution, presently, is between having a fixed line plus a mobile connection and having a mobile connection only. And, when the prices for mobile and fixed line communication to an increasing degree will converge, and when the quality of mobile connections become comparable to fixed lines, mobile communications and the competing operators offering mobile communications will be a serious threat to the incumbent fixed access line monopolies. With the development of 3G communications and the increasing spread of WLANs, this is a very plausible development.

Finally, in the cable TV market there are duopoly situations in Norway and Denmark with some independent cable TV operations at the fringes. In Finland, the incumbents are the only cable TV network operators except for Helsinki. On Iceland, the incumbent is the only operator on the (presently very small) cable TV market, and in Sweden the incumbent is legally prohibited from providing cable TV access.

The primary focus is now on vertical integration and the market shares of incumbent telecommunication operators in the different communication conveyance services markets and the relationships between infrastructures and conveyance services, while content issues only briefly are touched upon.

The market shares of incumbents in the conveyance services markets are, generally, lower than in the infrastructure access markets. This applies, first and foremost, to fixed line communications.

Table 6.4: Market shares of incumbents in communication services markets, 2003 (percent)

Notes
a. The figure 60 percent represents the share of subscribers, which have been active during the past 6 months.
b. Market share of Elisa Corporation.
c. The figures cover broadband subscribers, primarily xDSL but also cable modem and other access modes. In Finland xDSL represents app. ¾ of the total broadband market.
d. Siminn has app. 55 percent of the customers paying for access, which equals app. 35,000 customers. In addition to these customers, there are users not paying for access but only for download per megabit. This is a service started by the banks in order to attract customers to Internet banking.
e. Figure for 2002. The fixed line telephony figures are measured by traffic revenue.

Sources: The figures in the table are from a number of different sources and should, therefore, be taken as indicative. Figures are, generally, from 2003, either first or second half-year, but the estimates from Iceland are from 2004.

The reason for the considerably lower market shares of incumbents in the fixed line traffic markets than in the access markets is that alternative operators can enter the traffic markets by way of interconnection agreements with the incumbents and offer telephony services to customers via carrier selection, either by-call or pre-selection. In Denmark, there were a little more than 3 million registrations to carrier selection codes out of 3.8 million fixed subscriber lines in the first half-year of 2002. The number of registrations has dropped slightly since to app. 2.8 million, but the number of fixed subscriber lines has decreased similarly⁷⁵.

It is clearly easier for alternative operators to enter the telephony market by way of carrier selection codes than by taking over the whole customer relationship, e.g., by means of a local loop unbundling (LLUB) agreement. The reason is that the margin between the end-user price and the LLUB price for the 'raw copper' is so small that it is extremely difficult to make a profitable business. This was also the case with carrier selection codes in the beginning after the liberalization of telephony services in the 1990s. However, since then interconnection prices allowing for carrier selection services have been lowered on basis of interventions from the telecommunication regulatory authorities.

The margin for xDSL services is considerably bigger than for telephony services, as the enduser price for xDSL subscriptions are much higher than for telephony subscriptions. In spite of this wider margin, the incumbent operators have a strong dominance on the national xDSL markets. The Danish development is a case in point. The incumbent TDC was not the first operator to introduce xDSL on the Danish market. However, very quickly TDC gained the major share of the market and has approximately 80 percent of the fast growing xDSL market. Alternative providers have claimed that the incumbent is abusing its market dominance and the matter has been examined by both the sector specific telecommunication regulator with respect to installation procedures and by the competition authority with respect to price squeezing. But neither the telecommunication regulator nor the competition authority have ruled against the incumbent.

The xDSL development is clearly an example of the advantages that operators with dominance in the access infrastructure market can have with respect to services using this infrastructure. It is a case of leveraging, where the power in an upstream market (access infrastructure) is 'exported' to a downstream market (xDSL). Even if there are no abuses of dominant position, there can still be advantages of the character dealt with by transaction cost economics. By having a vertically integrated business operation, transaction costs are saved as opposed to the competitors buying access to the infrastructure. And, according to theory, even if this is unequal competition, there may still be efficiency gains from a societal point of view in the integrated business operation.

The xDSL case may also be seen as an example of the theoretical possibility of competition problems in a monopoly situation with regulated access prices in the upstream market. In order to clear the way for competitive operators, the LLUB price for the 'raw copper' is regulated, creating an incentive for the access monopoly operator to integrate vertically (or favor their own operation) with the purpose of maintaining higher end-user prices. There is clearly a dilemma here, as the regulation of LLUB prices is important for the competitive operators. However, it requires a strict follow-up regulatory intervention in order to prevent the dominant operator from implementing non-price discriminatory means.

The obvious problem with respect to creating competition in the fixed line infrastructure access market and the corresponding difficulties in promoting competition in the xDSL market has fuelled a continuous discussion concerning the advantages and possible downsides of splitting up the infrastructure market from the services and content markets, i.e. dividing up the incumbent operators and forcing them to divest their physical infrastructures. This would create a more level playing field for competition between service providers, which would all have to buy their access to the physical facilities. Such a proposal has surfaced many times, for instance, in Sweden and in Denmark, where lately Tele2 has promoted the view that the infrastructure of the incumbents should be split off from the service operations of the companies.

There are thus, in fact, competition problems not only in horizontal integration but also in vertical integration, especially in the cases where the downstream services are closely related to the infrastructure access services and are communication conveyance services. With respect to content services and even higher level communication services, the same problems have not arisen⁷⁶. There are different interrelated reasons for this difference between conveyance services and content services. First and foremost, infrastructure provision and conveyance services have traditionally been integrated business areas. There are thus experiences to build on, technologically as well as market-wise, while telecommunication operators have no tradition for activities in the content markets and, therefore, no experience with the technical, organizational and market oriented issues related to content provision. There are economies of scope in the provision of infrastructure and conveyance services and transaction costs involved when splitting up infrastructure and conveyance services. Even if we are dealing with vertical integration in the cases of integration of infrastructure and conveyance services as well as infrastructure and content services, there are thus differences in the competition issues involved.

Norway is the Nordic country where the issue of vertical integration involving content has been most pronounced. In a recent analysis of the Norwegian telecommunication and media markets⁷⁷, it is described how Telenor has integrated vertically into the content market. Telenor has shares in A-pressen and, as mentioned in the sub-section on horizontal integration, Canal Digital, which has made exclusivity agreements with the television station TV2. Telenor has been buying rights to the football world championship in 2002 and the premier football league (Tippeligaen) in Norway. The affiliate Zoniva produces interactive services for digital TV; djuice is active in SMS, MMS and WAP services; and, iCanal delivers game and music services via Internet⁷⁸. In Denmark, the incumbent TDC has been considering being part of a bid for the Danish TV station TV2, when it will be privatized – but has retreated.

The issue of vertical integration into the content markets mostly appears in relation to portals in fixed line communication as well as mobile communications. Most Internet service providers (ISPs) offer portal services, where different kinds of content and more advanced communication services are offered. The purpose of offering portal services is (apart from offering an attractive service package to users) to tie subscribers closer to the ISP in question. However, as there are many ISPs and as the dominance of one or a few provider in this market is weak, and furthermore, as users mostly can access similar or even the same services from other ISPs, there is no competition problem here.

In the mobile area, there has not hitherto been the same structure as in the fixed line area with independent ISPs. This will blossom with the next generation wireless and mobile services, e.g. 3G communications, where Wireless ISPs are foreseen to play a much greater role. However, at present, portal services are closely aligned with the mobile network operators. In Japan, where mobile Internet services have developed much faster than in Europe, the business model used by NTT DoCoMO, but also other mobile operators, has been to construct portal services with easy access to content and service providers with which they have established close relationships. However, content service providers can also use other avenues for their services, and users can also access services outside the portal. There is, therefore, no competition problem involved in this kind of vertical integration.

In the years to come, networks and communication services will not only be based on digital technology but more specifically on IP technology, meaning that the Internet Protocol (IP) will constitute a common basic soft infrastructure for different kinds of services and content. This development comprises both fixed line and mobile communications and is summarized under the heading of Next Generation Networks (NGN). In the broader public, this development has, e.g., been discussed in relation to mobile communications with the deployment of 3G networks, where not only data communications will be based on IP technology but also eventually voice services. Furthermore, a similar development is taking place in the fixed networks, and technologically this will allow for a vertically disintegrated market for communication and content services. The present Internet is an illustration of a far greater vertically disintegrated market for communication and content services than has been seen in the traditional telecommunication area.

This is the vision and has been the vision for a number of years under the slogan of 'networks of networks'. The idea is that independent networks can be integrated horizontally in a seamless way and that many different market players vertically can work together in order to deliver communication and content services to the end-users. This vision was strong around the turn of the century and technology developments will increasingly make it possible. However, traditional communication markets have witnessed a strong tendency to resist this kind of development, and incumbent operators in the telecommunication markets have shown an ability to retain a dominant position in the telecommunication markets and have even been able to regain market shares during the past couple of years after the losses of market shares just after the liberalization of telecommunications in the 1990s⁷⁹. This leads to the conclusion that technological solutions will not necessarily by themselves open the communication markets to a greater degree of competition. However, the possibilities are there.

Legal cases
The two most internationally known cases in a Nordic context with some relation to the issue of convergence are the two merger cases involving Telia, first with Telenor and later with Sonera⁸⁰. In both cases, the companies involved have been ordered, among other things, to divest their cable operations, as network convergence allows these infrastructures to be used also for telecommunication services and, therefore, could limit a potential for competition. Both cases are mainly related to the issue of horizontal integration, but also, to some extent, to vertical integration, and there have been other cases related to vertical integration, where the xDSL issue has been the most important question, lately, because of the focus on broadband development (see paragraphs on vertical integration).

The Telia/Telenor merger as well as the Telia/Sonera merger would or will have such impact on the telecommunication markets in the countries involved that they were dealt with by EU competition authorities. Under the EU Merger Regulation, a joint venture or merger shall be prohibited if it creates or strengthens dominance in a market, significantly impeding effective competition. This may apply to horizontal integration, where the market share of a dominant company in a specific market exceeds 40 percent, as well as vertical integration, where the possibility of leverage and foreclosure exists.

In the case of the Telia/Telenor merger, which was notified in 1999 but was never realized because of disagreement between the parties involved, the decision of the European Commission was that a merger would strengthen the dominant position of the incumbent operators on several market segments in telecommunications as well as broadcasting. The merger could, consequently, only be approved if the two operators would divest their overlapping activities in the two countries (i.e. the overlapping activities of Telia in Norway and vice versa of Telenor in Sweden), furthermore, divest their cable TV activities, and finally implement local loop unbundling (before the general EU Regulation of 2000 in the field)⁸¹. Requirements were thus related to horizontal (divestiture of overlapping activities and cable TV operations) as well as vertical (unbundling of the local loop) activities. The Commission decision also illustrated another characteristic feature of many merger decisions, namely the approval of mergers only with strict conditions.

The case of the Telia/Sonera merger was notified in 2002 and the merger between the two operators has actually been realized. The European Commission concluded that the merger would strengthen the dominant position of the merging operators on several telecommunication market segments in the two countries. The merger was, therefore, only cleared when the parties had agreed to divest their overlapping activities and the cable TV operation of Telia in Sweden. Furthermore, fixed and mobile activities in Sweden and Finland were to be legally separated⁸². Again, the focus is mainly on horizontal issues, but vertical issue also arise in connection with the strong position of the merged incumbents and their possibility to leverage the dominance in the infrastructure markets into the services markets.

Another important aspect is that the Commission decisions that cable TV operations had to be divested in the Telia/Telenor and Telia/Sonera cases go beyond the sector specific regulation in the field, which only requires telecommunication activities and cable TV activities to be operated in separate legal entities⁸³. In Denmark, this is the case, and as cable TV networks are an increasingly important aspect of broadband access, this is a significant issue. TeliaStofa was the first operator in Denmark to offer cable modem services, but TDC has followed suit and has the potentials to become the largest cable modem operator in Denmark, as it is has the largest cable TV network. A noticeable aspect of cable modem services is that there is no competition at present regarding this service on the individual networks. In Denmark, local loop unbundling regulation encompasses all kinds of access infrastructures, however, there are no service providers using the cable TV networks of the two large cable TV network operators to provide cable modem services. The cable TV operations of TDC and TeliaStofa thus, presently, constitute a kind of 'safe havens' in the broadband access market.

Summary and conclusions
Technology convergence between IT, telecommunication, broadcasting and other media allows for formerly dedicated services to be delivered on new platforms. Telephony can, e.g., be delivered on cable TV networks and broadcasting via Internet. This potentially opens the different communication and media markets for increased competition, as the technological possibilities for providers of communication services and content to enter each others' market segments increase. The new technological possibilities, therefore, change the conditions for horizontal and vertical integration market-wise and put new focus on the rules and regulations for horizontal and vertical integration with respect to mergers and joint ventures.

On basis of economic theory, at least two basic rules of thump can be deducted:

• Horizontal joint integration will generally constitute a problem to competition if involving companies with market dominance,
• Vertical integration does not necessarily constitute a problem to competition even if involving companies with market dominance on one of the market layers

However, in both cases there are exceptions to the general rule and specific cases of integration have to be examined thoroughly, and there are also countervailing considerations. The countervailing considerations in the case of horizontal integration are related to potential efficiency gains and the resulting general welfare benefits. This could be the case if there were scale or scope advantages. However, if a company operates different access infrastructures in parallel, there are generally no scale or scope advantages involved, and if this company concentrates all its communication services on one access infrastructure and, therefore, saves maintenance and innovative investments in other access infrastructures, there are certainly scale and scope advantages but no competition problems from horizontal integration, as other operators can use other access infrastructures. With respect to the backbone infrastructures there are advantages of scale and scope even if the operators have different access networks. The backbone networks for fixed line and mobile communications can, for instance, be the same and even cable TV distribution and telecommunication operations can be conducted on hybrid networks.

The countervailing considerations in the case of vertical integration are related to competition problems regarding leveraging or transposition of market power in one layer into other market layers. Especially the discussion in the chapter on the xDSL market has illustrated that serious competition problems can arise in relation to vertical integration. In this case, the incumbent operators are able to build and retain large market shares partly because of dominance in the fixed line access markets. When comparing services that are 'close' to the physical infrastructure, e.g. conveyance services, with content services, which are higher up in the hierarchy of protocol layers, there is clearly a difference with respect to the competition issues involved in vertical integration. While the competition problems are small regarding the involvement of telecommunication operators in the content markets, there are competition problems with the integrated access infrastructure and conveyance service providers. It is very difficult for alternative operators not only to build competitive infrastructures but also to compete on services closely related to the access infrastructures. This is the basis for the continuously re-surfacing discussion on a separation of the infrastructure part and the service provision part of the incumbent operators.

In the opposite direction pulls the potential efficiency gains from vertical integration, and in the case of horizontal as well as vertical integration, competition problems have to be weighed against efficiency gains in the policy decisions and case rulings on mergers and joint ventures. However, in the case of horizontal integration, the competition problems are generally grave and the efficiency gains small, and in the case of vertical integration, the competition problems are small and there are potentially efficiency gains. Therefore, the two general rules of thump mentioned provide good initial guidance.

In the chapter, it is briefly discussed to what extent technology developments in connection with Internet technology will diminish the problems of vertical leverage. Internet, which is the prime example of converging communication technologies, is in its existing form, to a large extent, characterized by a layered structure not only technologically but also with respect to ownership. Internet illustrates the point that digital technology allows for layered structures in communications with clear demarcations between the physical, the transport and the content and application layers. Internet is a network of networks horizontally but is also vertically layered technologically and ownership-wise. Internet technology thus has potentials to change significantly the competitive structures on the telecommunication markets. However, as stated in the chapter, operators with market power have shown a significant ability to incorporate new technologies in existing power structures. Convergence will thus continuously change the conditions for competition but will not eliminate competition problems.

Footnotes

63 COM(97)623, page 1. The examples are included by the authors of the present text.

64 E.g. the Norwegian report NOU 1999:26, 'Konvergens: Sammensmeltning av tele-, data- og mediesektorene', the Swedish report SOU 1999:55, 'Konvergens och förändring. Samordning av lagstiftningen för media- och telesektorerna', and the Danish report from 2001 'Konvergens i netværkssamfundet', IT- og Forskningsministeriet/Kulturministeriet.

65 Taken from the Danish 2001 convergence report 'Konvergens i netværkssamfundet', page 35. The examples are included by the authors of the present text.

66 The US Federal Communications Commission held Computer Enquiries in the 1970s and 1980s on the regulation of computer communications.

67 Espen Moen and Christian Riis: 'Samtidig deltakelse i flere markeder: Velsignelse eller forbannelse?', Oslo, Eoconomica, August 2003. Another theory overview can be found in Rey, P. and Tirole, J.: 'A primer on foreclosure', forthcoming in Armstrong, M. and Porter, R. eds.: Handbook of Industrial Organization III, 2003.

68 E.g. Richard Posner: 'Antitrust Law', Chicago, University of Chicago Press, 1976 and Robert Bork: 'Antitrust Paradox', New York, New York Basic Books, 1978.

69 See Oliver Williamsons piece on antitrust policy in 'The New Palgrave: A Dictionary of Economics', no. 1, page 95-98.

70 See, e.g. Michael Riordan and Steven Salop: 'Evaluating Vertical Mergers: A Post-Chicago Approach', Antitrust Law, 1995.

71 These two examples are taken from the publication by Oeconomica and ECON Analyse on 'Effektiv og bærekraftig konkurranse i tele- og mediemarkedene – hva skal til?', Oslo, 2003, page 57.

72 In table 3, the more generalized terms equipment/hardware, transport/software and content/services are used, as the figure encompasses not only the telecommunication sector, but also IT, broadcasting and other media. When dealing specifically with telecommunications, the preferred terminology is physical infrastructure, conveyance services and content.

73 The country in Europe with the highest degree of fixed access competition is the UK. In the UK, fixed access competition is, however, mainly infrastructure based, as the main fixed access competitors in the residential market are the cable TV operators, which have deployed fixed telephony cables when deploying their cable TV cables.

74 This is, however, also due to increases in private fixed line networks outside the public switched networks – which are measured in statistics on fixed line penetration.

75 The number of carrier selection registration in Denmark, which have been active during the past 6 months, is app. half of the total number of registrations, i.e. 1.4 million, but has maintained at a stable level.

76 With content is meant pre-produced data, information or knowledge services, whereas communication services consist of the mere conveyance of signals between the users. Examples of content are music, film or newspaper articles, while examples of communication services are telephony or data communication services. In some cases, however, the borderline is blurred, for instance with respect to electronic games, which are designed and made in advance but may involve communication over networks between users.

77 ECON Analyse: 'De norske tele- og mediemarkedene', Oslo, ECON Analyse.

78 Information on Norway is based on the abovementioned ECON report, page 4-5.

79 This issue is discussed, e.g., in Anders Henten and Markus Schneider: 'Has Liberalisation of Telecommunications Failed in Europe?', Communications & Strategies, issue 50, 2nd quarter 2003, pp.19-48.

80 The description of the two cases is based on a paper by Alexandre De Streel: 'European merger policy in electronic communications markets: Past experience and future prospects', 2002.

81 See Commission Decision of 29 October 1999.

82 See Commission Decision of 10 July 2002.

83 See Commission Directive 1999/64/EC of 23 June 1999.

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