Summary and recommendations
Face - Contents - Bottom - Previous/Next "Telecompetition" Summary and recommendationsTelecommunication markets in rapid development The Nordic Working Group on "Competition in the Nordic telecom sector" has examined the telecom markets in Denmark, Finland, Norway, Sweden and Iceland. The purpose of the analysis is to provide recommendations on how to promote competition in the Nordic telecom sector and point at some of the most important problems in a Nordic perspective. The European regulation to promote competition in the European telecom sector has changed the sector dramatically since the beginning of the 1990ies. Public monopolies have been replaced by demand driven markets. Liberalisation combined with fast technological progress has brought considerable welfare benefits. Telecommunication is of increasing importance to society. Telecommunication revenue as a percentage of GDP has increased considerably across the Nordic countries. In some countries it has doubled during the last decade. Telecommunication revenue constituted from 2.6 percent of GDP in Denmark to 3.4 percent of GDP in Sweden in 2001. But the telecommunication industry is not only important by virtue of its direct contribution to GDP. The industry is also an important supplier to most other sectors and essential for communication between people. Telecommunication services are thus essential for interaction both between individuals and enterprises within countries and, to an increasing extent, across borders. In a wider perspective, telecommunication facilitates exchange of ideas and culture. And the number of individuals that can benefit from the possibilities offered through telecommunication is increasing as competition pushes down prices for customer equipment and end-user services. Price comparisons across the Nordic countries indicate that there is room for further price reductions. Average fixed line spending (subscription + usage) for a comparable consumption profile is approximately 40 percent higher in Norway than in Iceland. And Danish high usage mobile customers pay 60 percent less than Swedish customers with a comparable consumption profile. Only part of these price differences is attributable to cost differences. Penetration rates indicate the availability of telecommunication services. Measured by penetration rates, the Nordic countries are among the top performers internationally for fixed line and mobile telephony as well as Internet access, particularly through broadband technologies. Mobile and broadband services have experienced strong growth in recent years. Market liberalisation has been a crucial driver of this development. Market liberalisation was initiated in the early 1990ies when markets for data transmission and mobile telephony were opened for competition. Liberalisation picked up speed by the end of the last century as fixed line access and voice services were liberalised as well. The current market status is impressive considering the relatively short period of time markets have had to develop on open market conditions. As markets have matured so have consumers. Today, telecommunication services are in many aspects similar to other services or consumer goods. Sector specific regulation – how much is necessary? Due to different starting points when markets were opened for fixed line, mobile telephony and Internet access the needs for sector specific regulation have differed across the countries. Competition in mobile telephony has evolved as competing networks have been built and incumbents have had no significant first mover advantage. But fixed line penetration was already high when fixed line markets were opened for competition giving incumbents a significant first mover advantage. Broadband services likewise depend heavily on existing infrastructure. Building new fixed line networks for telephony or broadband is costly but marginal costs of providing calls are very low. Once entrants have built networks with sufficient coverage to engage in serious price competition with incumbents prices are thus likely to fall to levels that do not permit entrants to recoup their investment. As part of a common European initiative in the 1990ies to promote competition in telecommunication markets, fixed line entrants have therefore been granted access to the incumbents' networks at regulated terms. Generally, two categories of problems require regulatory intervention: one-way and two-way access. Currently, fixed line retail suppliers need access to incumbent operators' networks to be able to offer services at retail markets. This is called "one-way access" because entrants depend on access to incumbents' networks but not vice versa. One-way access will require regulation as long as absence of wholesale network competition enables incumbents to foreclose competitors at retail markets. The need for regulation of one-way access is likely to diminish as new network technologies are developed. Two-way access concerns incumbents' and entrants' reciprocal need to terminate calls in each others' networks. Each network has a monopoly on termination of calls to its subscribers. Only countervailing buying power between operators can prevent the individual operators from monopolistic pricing practices. But even in that case, operators have an incentive to keep termination rate above costs. Two-way access may thus require continued regulation. Telecommunications is among the most regulated sectors of all. This implies a risk of regulatory failures and of too much regulation distorting investment incentives and market development. Consumers and society in general will therefore be better off if sector specific regulation is introduced and maintained only when strictly necessary. Sector specific regulation shall be the exception rather than the rule. As competition is gaining foothold across markets and countries, the need for regulation that better adapts to market developments has increased. By mid 2003, a new EU-regulatory framework has been implemented in national legislation in most European countries. Under the previous framework, operators with a market share in excess of 25 percent for a given product (not to be confused with a given product market) were to be regulated. The new regulatory framework secures a greater coherence between sector specific regulation and general competition regulation. Only companies who hold a dominant position (which usually requires a market share in excess of 40 percent) on a product market as defined in competition jurisprudence can be subject to sector specific regulation in the future. In other words, only companies who are potential candidates for regulatory intervention according to general competition regulation can be subject to sector specific regulation. Even though the new regulatory framework raises the threshold for when a company can be subject to regulation (from 25 percent to at least 40 percent market share), the Nordic competition authorities do not expect the new regulatory framework to significantly bring down the number of regulated companies and markets in the short run as the new regulatory framework paves the way for regulation of markets that have so far have been exempted from regulation (markets for international roaming, fixed line termination in entrants' networks, and wholesale broadcasting). One market that is particularly likely to become subject to increased regulation is the market for termination of calls to mobile phones. Each mobile network has a monopoly on terminating calls to their own subscribers. In Norway, both operators' termination rates are regulated. In Sweden, Finland and Iceland mobile termination rates for some but not all operators are already regulated while all operators in Denmark have full commercial freedom to determine their termination rates. This is one reason why call termination charges for mobile is 8 - 15 times the price for terminating call on the fixed network. When evaluating the need for regulation of mobile call termination the positive effects from high earnings on this particular service need to be taken into account. High profits on call termination increase operators' incentives to attract consumers through low prices for outgoing calls. Moreover, profits from call termination have helped build network coverage and retail market penetration. But as mobile markets mature, artificially high termination rates can do more harm than good as they distort competition because of too low prices for mobile originated calls and too high prices for calls from fixed line to mobile telephones. Whether the new regulatory framework represents a step forward or backwards for liberalisation and deregulation depends on the remedies employed by regulatory authorities to redress current market failures. The new regulatory framework orders regulators to impose at least one remedy on any operator having significant market power (SMP), corresponding to a dominant position according to competition jurisprudence. It is important to keep in mind that, generally, holding a dominant position does not per se constitute a competition problem that calls for intervention. Regulatory authorities need to demonstrate that remedies imposed on regulated operators do not exceed what is strictly necessary to redress the problems detected on the markets in question. More international cooperation between authorities Increased cooperation between the Nordic competition authorities can facilitate deregulation. As competition authorities' experience builds in this and other infrastructure sectors so does the scope for better and better use of general competition regulation. Increased cooperation between competition authorities will ensure that valuable experience in one country is put to work against similar kinds of abuses in other countries. As sector specific regulatory intervention may only be used in cases where ordinary competition regulation is insufficient to adequately address the market failures concerned, increased scope for intervention using horizontal competition regulation will reduce the need for sector specific regulatory intervention in the future. The new regulatory framework also calls for close cooperation between sector specific regulators and competition authorities at both national and international level. Closer cooperation between all authorities can lead to better understanding of the market and more appropriate use of remedies imposed on regulated companies. This objective can be achieved through closer cooperation between competition authorities and regulators at national level and by competition authorities establishing a new international forum to influence future regulation of the industry. But uniform implementation of common regulation does not lead to a common market. Despite the progress achieved in introducing competition, markets remain national rather than international. A common Nordic market – a long way from vision to reality The most obvious sign of absence of a common market for telecommunication services is differences in tariffs for national and international calls. Even though prices for fixed line international calls have fallen considerably retail prices for inter-Nordic calls remain 2 - 8 times higher than prices for domestic calls. For residential consumers, significant extra costs for cross-border calls compared to national calls imply an additional impediment to keeping in touch with Nordic friends and family members. For enterprises, separate national markets for telecommunication services make cross-border cooperation more difficult and increases costs for cross-border trade. Labour markets are affected as well, as high telecommunication costs are yet another hindrance to living in one country and working abroad or to moving to another country to find work. In all respects, Nordic integration is thus impeded by retail price structures where cross-border calls between locations only a few kilometres apart are much more expensive than long distance national calls. The vision for a single Nordic telecommunication market where cross-border calls are more or less priced as domestic calls is thus an integral part of ambitions to further Nordic integration in business and culture, and relations between people. Internationalisation may naturally include even more countries. The creation of a single Nordic telecommunication market should therefore not bring price increases for other international calls – on the contrary, international call tariffs should generally be reduced. Current price differences seem largely unjustified by costs. For mobile telephony, differences in mobile termination rates may to a certain degree justify price differences but not of the magnitude experienced by consumers today. This is particularly evident in the case of roaming. Norwegian customers visiting Sweden pay more than twice as much as Swedish customers for calling another Swedish customer. And Danes visiting Sweden pay more than three times as much as the Norwegians for exactly the same call. The significant price differences illustrate that even though suppliers operate in several bordering countries they still treat each country as a distinct market. As national markets for national call origination, transit and call termination are already regulated according to sector specific regulation and markets for international transit are relatively competitive, high end-user prices do not appear attributable to problems at wholesale level. Consumers may spur competition and thereby lower prices by using opportunities already present in the market (e.g. various types of low cost carriers). It is therefore important that national competition authorities as well as regulators cooperate with national consumer authorities to find ways to encourage consumers to find and use these opportunities. Introduction of IP-telephony to residential customers may lead to lower prices for international calls as some providers of IP-telephony already offer free calls between their end-users irrespective of call destination. There are strong positive network effects in this pricing policy. If these operators achieve a sufficient number of consumers this will in itself induce new users to join. It may therefore suffice to add momentum to a development already on the way. The Nordic competition authorities will monitor the development closely and give priority to removing obstacles to increased internationalisation. But the creation of a single Nordic telecommunication market, where geographical borders become irrelevant and where fixed and mobile technologies compete to an ever greater extent, depends both on consumer and supplier behaviour and may therefore take years to achieve. The competition authorities will therefore also strengthen their contact to the sector regulators to keep cheaper international calls on the agenda. Finally, the authorities will strengthen cooperation with the European Commission/the EFTA Surveillance Authority in order to increase European efforts to step up internationalisation. Problems are even worse for international termination of mobile calls than for fixed line calls. Retail providers of mobile services relying on third party access to mobile networks depend completely on their network provider to supply international access. Network operators can therefore limit competition on mobile originated international calls by keeping wholesale prices high. For mobile telephony there is an additional problem. A basic prerequisite for trans-national markets is low-cost access to mobile networks in areas where the individual operator's own network does not provide coverage. Such network access is called roaming. Prices for roaming in foreign countries (international roaming) are determined in commercially negotiated contracts between mobile operators. Wholesale as well as retail prices have so far been high. National regulatory authorities are currently analysing national wholesale markets for international roaming. Regulatory authorities are obliged pursuant to common European legislation to impose one or more remedies on operators if they are found to hold a dominant position on the markets. In most countries there are several mobile networks with national coverage. But until recently, techniques directing roaming consumers' handsets to connect to a preferred network have not been available to an extent allowing buyers of roaming to direct an appreciable proportion of consumers onto the cheapest network. Since buyers of roaming were unable to respond to high prices by changing supplier, all suppliers had an incentive to keep wholesale prices high. This may be the primary reason for the high roaming prices experienced so far. Techniques used to direct consumers onto a preferred network when roaming in foreign countries are gaining ground. But operators buying roaming may still need to enter roaming agreements with several local suppliers to secure the desired quality of service. It is therefore uncertain how strong competition will become at wholesale level in the short to medium term. And even if competition at wholesale level does lead to lower wholesale prices it is not certain that retail customers will benefit from this. Caution and further analysis is therefore warranted when potential regulation of roaming markets is considered. Particularly because price regulation unduly can distort market development while technical development in itself might lead to effective competition on the markets. Challenges for fixed network competition Providers of telecommunication services depend on network access to be able to compete at retail level. Telecommunication networks are characterised by significant fixed costs and low marginal costs creating considerable economies of scale and scope. This is one of the most important reasons for the ongoing consolidation in the telecom sector. But benefits of increased concentration in the form of increased economies of scale may be offset by the effects of weaker competition. Economic analyses show that even few market players may be sufficient to secure workable competition. In contrast to mobile markets, network competition on fixed line markets is relatively weak. Cable-TV networks are due to their geographical roll-out the most likely source of network competition. In most Nordic countries (except Sweden and Helsinki metropolitan area) incumbent operators still own and control the largest cable-TV providers. This reduces competition between cable-TV networks and PSTN (fixed line telephone) networks significantly. Forced divestiture of incumbents' cable-TV operations is not practically feasible except as when considered an appropriate remedy in a merger case. Absence of fixed line network competition makes non-discriminatory access to incumbents' infrastructure a key issue for entrants. Discrimination may come in many forms; e.g. discounts favouring large operators or particularly cumbersome procedures when entrants order technical assistance at incumbents' exchanges. Non-price discrimination is often as detrimental to competition as non-cost based price discrimination and as the quality of price regulation increases more cases addressing discriminatory practices can be expected. Entrants' dependence on access to incumbents' networks does not only call for intervention by regulatory authorities. Competition law has been a powerful tool for combating abusive behaviour by dominant companies in this sector as well and competition authorities have been called upon several times to intervene against potentially abusive practices like margin squeeze and predatory pricing exercised by incumbents. Most Nordic countries are currently dealing with such cases and case law is developing rapidly. As experience increases, so does awareness of other kinds of abuses preventing entrants from competing on a level playing field. But despite all efforts, incumbents' markets shares for fixed line subscriptions remain relatively high. End-user prices for subscriptions have increased considerably in all Nordic countries. Part of the reason for this relatively poor performance is absence of profitable ways for entrants to offer fixed line subscriptions. In some countries, entrants have no choice but to rely on access to the local loop. But margins between retail prices for fixed line subscriptions and wholesale access to the local loop are often insufficient to allow efficient entrants to profitably undercut incumbents' retail prices. Only in Norway and Denmark do entrants have access to resale of incumbents' fixed line subscriptions. But even in those countries competition remains relatively weak on the markets for fixed line subscriptions. Recommendations On this background the competition authorities present the following recommendations. The recommendations are based on experiences from all countries and some countries may therefore already fulfil some of them. The recommendations are made without prejudice to the market analysis currently being carried out by regulatory authorities and future regulation based hereupon. The Nordic competition authorities recommend: To promote common Nordic markets by
To promote dynamic market driven price and product development through deregulation by
To secure a level playing field across markets, incumbents and entrants by
To push for less and better regulation through increased international cooperation by
Version 1.0 October 2004 • © Danish Competition Authority. |