E-COMMUNICATIONS LAW COURSE
FALL 2008
PART 2 SIGNIFICANT MARKET POWER
PER-KAARE SVENDSEN
1.
OVERVIEW SESSION 2: SIGNIFICANT MARKET POWER

What is Significant Market Power (SMP)

SMP as regulatory tool

Definition of relevant markets

o
Framework Directive art. 14, 15 and 16
o
Recommendation on relevant product and service markets
Market analysis and designation of SMP
o

Guidelines on market analysis and designation of SMP
Consequences of SMP - remedies
Content providers
Webcast news, sports, conserts &
other MM services
Banking and e-shopping
Internet
Dataservices in
digital broadcastingnetworks,
(On-line services,
Web-TV)
Digital satellite/
Cable-TV and
broadband
E-mail, data and
Internet-access
in mobile networks
Games
VoIP
(IPTelephony)
Electronic communications services
Other
distribution
channels
(video, book
stores,
newspapers)
TV
Audiovisual
Multimedia
Telecommunications
Electronic communications networks
Broadcast
(DTT)
Cable
Satellite
Telecom.
PSTN/ISDN
/ADSL
Mobile/
Wireless
(UMTS,
WLAN..)
Full service digital distribution networks
ECOM Law – 2008 PKS
2.
WHAT IS SIGNIFICANT MARKET POWER – SMP?

Concept of SMP is redefined and is based on the concept of dominant position developed in
general competition law .

This means that undertakings (companies) with more than 40% market share are likely to
be considered to have a dominant position

The concept of SMP is based on competition law methodology. Previously SMP was based
on 25% share of the relevant market + additional discretionary criteria

In practical terms: Ex ante regulation will be applied to former monopolists and/or those
who control essential facilities (Guidelines recital 20).

SMP is equal to dominance but dominance is not equal to SMP. This means that the
competition authorities are not bound by NRAs decisions
E-communications Law Course 2008 – Part 2
3.
SMP AS A REGULATORY TOOL

SMP is a threshold for application of several obligations (Remedies). SMP therefore
represents the limit for when NRAs can apply regulation and therefore defines the
maximum regulation an undertaking can be exposed to.

Ex-ante regulation shall only be applied in certain circumstances: i.e. on operators with
SMP (see art. 16 of FD and art. 8 of AD)

NRA cannot place obligations on undertakings without SMP, but there are certain
exceptions. Certain obligations (lighter) can be placed on all undertakings (se AD art. 4 and
5 and USO chapter IV.) This includes the obligation to interconnect networks owned by
smaller operators that do not have SMP.

SMP must be defined ex ante (FD art 16 (4))
o
thresholds for definitions of SMP
o
NRA also indicates elements that may be used for assessing appropriate obligations

“ex ante” means regulation beforehand where the regulator takes a forward looking
approach and defines regulatory obligations in order to prevent future distortion of
competition.

“ex-post” means the traditional regulation of historical events. i.e. when the question of
whether an undertaking has a dominant position and if this dominant position has been
abused.
JUR5640 - Electronic Communications Law and Internet Governance. Copyrigh Per-Kaare Svendsen 2006
Intensity of regulation
4.
INTENSITY of
OF REGULATION
Intensity
regulation
Operators
with SMP
Providers of public/
publicly available
networks and services
General framework
JUR5640 - Electronic Communications Law and Internet Governance. Copyrigh Per-Kaare Svendsen 2006
Numbers of undertakings concerned
5.
Vertical integration model
VERTICAL INTEGRATION MODEL
IN
Operations
Network
operator
Wholesale/access
markets
Infrastructure
Billing
Access to network
Telephone service
Retail markets
End-users
Lecture Notes. © Per-Kaare Svendsen, 2008
Page 2(10)
JUR5640 - Electronic Communications Law and Internet Governance. Copyrigh Per-Kaare Svendsen 2006
E-communications Law Course 2008 – Part
2
6.
INTERNAL
AND EXTERNAL
RELATIONSrelations
Internal
and external
Non-discrimination, accounting separation etc.
Dominant firm
Dominant firm
Internal
External
External
Client 1
Old discrimination pattern
7.
Subsidiary of
Dominant firm
Client 2
Client 1
Client 2
New discrimination pattern
THREE STEP PROCEDURE FOR DEFINING SMP

(See Guidelines recital 9)
1. Defining the relevant markets
2. Market analysis and SMP
o
2 A: Analyse the markets
o
2 B: Determining who has SMP
3. Determining proportionate obligations for the SMP undertaking
o
8.
to ensure that undertakings cannot use their market power to restrict, to distort
competition, or to leverage such market power to adjacent markets (see Guidelines
recital 16)
STEP 1: DEFINING THE RELEVANT MARKETS
8.1 Market definition procedure

FD Art 15 describes the methodology for defining SMP

Principles for market definition.
o
FD Art 15 + Annex I of the Framework Directive identifies the markets that the
Commission has identified as relevant for regulatory intervention (i.e. that
competition problems are excepted to occur)
o
Commission recommendation on relevant product and service markets OJ
1
2007L344/65 28.12.07 (hereinafter "the Recommendation")

EU Commission has determined the product and service markets (see
below).

Previous Recommendation described 18 markets

Revised Recommendation defines 7 markets

NRAs will determine the geographical markets

Market definition shall be done in accordance with the principles of competition law
o
Previously under the old regulatory framework the markets were defined based on
end-to-end connectivity rather than demand and supply-side criteria.
1
http://eur-lex.europa.eu/LexUriServ/site/en/oj/2007/l_344/l_34420071228en00650069.pdf. Replacing the former Commission Recommendation
OJ 2003L114/44 08.05.03
Lecture Notes. © Per-Kaare Svendsen, 2008
Page 3(10)
E-communications Law Course 2008 – Part 2
8.2 Art 15 of the FD:
“1.
After public consultation and consultation with national regulatory authorities the
Commission shall adopt a recommendation on relevant product and service markets
(hereinafter “the recommendation”). The recommendation shall identify in accordance with
Annex I hereto those product and service markets within the electronic communications
sector, the characteristics of which may be such as to justify the imposition of regulatory
obligations set out in the Specific Directives, without prejudice to markets that may be defined
in specific cases under competition law. The Commission shall define markets in accordance
with the principles of competition law. The Commission shall regularly review the
recommendation.
2. The Commission shall publish, at the latest on the date of entry into force of this Directive,
guidelines for market analysis and the assessment of significant market power (hereinafter
“the guidelines”) which shall be in accordance with the principles of competition law.
3. National regulatory authorities shall, taking the utmost account of the recommendation and
the guidelines, define relevant markets appropriate to national circumstances, in particular
relevant geographic markets within their territory, in accordance with the principles of
competition law. National regulatory authorities shall follow the procedures referred to in
Articles 6 and 7 before defining the markets that differ from those defined in the
recommendation.
4. After consultation with national regulatory authorities the Commission may, acting in
accordance with the procedure referred to in Article 22(3), adopt a Decision identifying
transnational markets.”
[Our underlining]
8.3 Prospective (ex-ante) assessment

Market definition procedure is prospective rather than behavioural and is based on
assessment of barriers to entry that are expected to last.
8.4 Product (Service) markets and Geographical markets
8.4.1
Product markets

The main criteria for defining the relevant product/service markets are linked to
substitutability tests:

Demand side substitution (i.e. Ramsey pricing): Are consumers prepared to substitute
other services for the relevant service? Significant non-transitory increase in price (SNIIP)
– shift in demand?

Supply side substitution (quick responses from competitors): Would a supplier of other
services switch to “compete” immediately or in the short term without incurring significant
additional costs?

Assessment of potential competition (more time for competitors to respond)
8.4.2

Geographical markets
Geographical markets are determined based on (i) Areas covered by a network and (ii)
Existence of legal/regulatory instruments. In addition the actual offerings of a particular
service will be considered.
8.5 Key principles from the Recommendation

The Recommendation identifies markets in which ex ante regulations may be warranted
(FD recital 3)

If no effective competition (one undertaking in a single or jointly dominant position) (FD
recital 4)

Annex to recommendations indicated how each market is linked to the market areas in
annex I to FD.
Lecture Notes. © Per-Kaare Svendsen, 2008
Page 4(10)
E-communications Law Course 2008 – Part 2

The identified markets have high and non-transitory entry barriers (FD recital 8)

Structural barriers (cost, demand conditions, economies of scale/scope, network
components that cannot be duplicated or duplication is uneconomic) (FD recital 10)

legal/regulatory barriers (FD recital 11)

expected to persist over a foreseeable period (FD recital 13)
8.6 The relevant markets
Access and call
origination on public
mobile telephone
networks
Voice call
termination on
individual mobile
networks
Call termination on
individual public telephone
networks provided at fixed
locations
The wholesale national
market for international
roaming on public
mobile networks
Call origination on the
public telephone network
provided at fixed
locations
Wholesale unbundled access
(including shared access) to metallic
loops for the purpose of providing
broadband and voice services
Wholesale
broadband
access
Broadcasting
transmission
services, to deliver
broadcast content
to end users
Transit services in the
fixed public telephone
network
Wholesale terminating segments of
leased lines
wholesale level
Publicly available telephone
services provided at a fixed
location (Art 17/19 USO)
Access to the public telephone
network at fixed locations
(Art 17 USO)
Minimum set of
leased lines (Art 16/18 USO)
Retail level
8.7 Further segmentation of retail markets
Publicly available telephone
services provided at a fixed
location (Art 17/19 USO)
Access to the public telephone
network at fixed locations
(Art 17 USO)
Business
Local
9.
Minimum set of
leased lines (Art 16/18 USO)
Residential
Regional
International
STEP 2 A: MARKET ANALYSIS

The legal instruments are the FD Art. 16 and the Guidelines

NRA shall determine whether a relevant market is effectively competitive (art 16 (2))

Step 2 B and 3 depends on the state of the market

The main question: Is the relevant market effectively competitive?
Lecture Notes. © Per-Kaare Svendsen, 2008
Page 5(10)
E-communications Law Course 2008 – Part 2
9.1 STEP 2 A: Outcome depends on competition


If the market IS effectively competitive:
o
NRA shall not impose or maintain obligations in art. 16 (2)
o
NRA shall withdraw existing obligations after an appropriate period
If a market is NOT effectively competitive
o
NRA’s shall identify undertakings with SMP
o
Art. 14 applies + Guidelines
o
Impose obligations
o
NRA shall at least impose one obligation (art. 16 (4))
o
May impose several obligations
o
Maintain or amend existing obligations
9.2 When is the market competitive?

When no operator enjoys a single or joint dominance on the relevant market

i.e. when no operator has significant market power. Rule of thumb: when no operator has
more than 40% or controls essential facilities
9.3 Principles for assessing a relevant market

Forward looking

Structural evaluation

Based on the existing market conditions

Is the market prospectively competitive?

Is any lack of competition durable?

Expected market developments over a reasonable period

o
specific characteristics (new licenses, new entrants etc.)
o
expected timing for the next review
Take past data into account
9.4 STEP 2 B: Defining SMP (dominance)

Definition of SMP in FD art. 14
o
the same as definition of “Dominant Position”
o
Dominant Position developed in case law
o
Case law: European Court of Justice (ECJ) and Court of First Instance (CFI) applies
under art. 81 and 82 of the Treaty (FD preamble recital 20 and Guidelines recital
62)

NRA must ensure that they apply the definition consistently with ECJ and CFI case law

Different methodology:
o
Different sets of assumptions and expectations
o
Lack of evidence of past behaviour
o
prospective instead of retrospective approach

Existence of SMP does not mean that there is no competition (Guidelines recital 72), but
may indicate that competition may not be effective.

Main test:
Lecture Notes. © Per-Kaare Svendsen, 2008
Page 6(10)
E-communications Law Course 2008 – Part 2

o
Does an undertaking have the power to raise prices by restricting output without
incurring significant loss of sales or revenues (Guidelines recital 73)
o
Does such behaviour have an “appreciable effect on competition“.
o
What is the Likelihood of potential competition (Guidelines recital 74)
There are several alternative findings that a regulator may reach:
o
One undertaking has SMP in one market
o
Several undertakings have SMP in one market (single or joint dominance)
o
One undertaking has SMP in several markets (leveraging)
9.5 FD Art. 14 Undertakings with SMP
1.
Where the Specific Directives require national regulatory authorities to determine whether
operators have significant market power in accordance with the procedure referred to in
Article 16, paragraphs 2 and 3 of this Article shall apply.
2.
An undertaking shall be deemed to have significant market power if, either individually or
jointly with others, it enjoys a position equivalent to dominance, that is to say a position
of economic strength affording it the power to behave to an appreciable extent
independently of competitors, customers and ultimately consumers.
In particular, national regulatory authorities shall, when assessing whether two or more
undertakings are in a joint dominant position in a market, act in accordance with
Community law and take into the utmost account the Guidelines on market analysis and
the assessment of significant market power published by the Commission pursuant to
Article 15. Criteria to be used in making such an assessment are set out in Annex II.
3.
Where an undertaking has significant market power on a specific market, it may also be
deemed to have significant market power on a closely related market, where the links
between the two markets are such as to allow the market power held in one market to be
leveraged into the other market, thereby strengthening the market power of the
undertaking.
9.6 Step 2B: Criterias for SMP


(Guidelines recital 75-82)
If market shares remain stable over time, the rule of thumb is that
o
Under 25% - unlikely single dominance
o
Between 25 and 40 – uncertain
o
Over 40% - normally and likely single dominance
o
Over 50% - highly likely (save in exceptional circumstances)
How is market share measured? The normal way of measuring market share is to look at
the
o
Volume (i.e. aggregate number of call minutes in a network and each operators
share of minutes)
o
Revenue (i.e. aggregate revenues from termination of calls in a network and each
operators share of these revenues)

See Guidelines recital 75-77

Market shares alone does not mean SMP

NRA must therefore analyse the economic characteristics of the markets

Several criterias must be assessed (See Guidelines recital 78)
9.7 Step 2B Criterias to be assessed (Guidelines recital 78)

What is the overall size of the undertaking?

Does the undertaking have control of infrastructure not easily duplicated?
Lecture Notes. © Per-Kaare Svendsen, 2008
Page 7(10)
E-communications Law Course 2008 – Part 2
o

Does the undertaking have technological advantages or superiority, compared to other
competitors?
o

Example: If the operator is owning the infrastructure that the service is depending
on. (as compared to a service provider that do not have a large network, but only
provide services on the other operators network.
a highly developed distribution and sales network
o

Example: If the operator has several different products or services that can utilise
the same underlying technology or infrastructure this could result in lower marginal
cost for the relevant service.
vertical integration
o

Example: If the operator has an existing large customer base and is able to
produce services with a lower marginal cost.
economies of scope
o

Example: Ownership of access lines and provision of fixed voice telephony service
and mobile telephony service.
economies of scale
o

Example: If a company has excellent credit rating and therefore the ability to
borrow money, if the owners have vast financial ability, if the company has large
reserve funds, or high cash flow
Does the undertaking have several product/services (i.e. that several diverse products and
services are offered) that enable the undertaking to bundle products or services together in
a manner that competitors cannot?
o

Example: If relatively large customers exist and these customers are able to
demand lower prices by threatening to move to a competitor.
Does the undertaking have easy or privileged access to capital markets/financial resources?
o

Example: If an operator has a large research and development department and
owns intellectual property rights in or to the services, if an operator has a superior
human capital (i.e. skilled workforce)
Does the market show that there is absence of or low countervailing buying power from
buyers of the relevant products/services?
o

Example: If an operator owns the local loop (i.e. copper cables to every household)
or own a nationwide mobile network.
Example: If the undertaking has a well established organisation or agents that
distribute the services (i.e. sales outlets). Many operators seek exclusive
distribution agreements so that agents can only sell one service.
absence of potential competition
o
Example: If it is not likely that new entrants will come into the market and offer
services in the event prices remain high.
9.8 2B: Findings and evaluation


Ease of market entry
o
Absence of barriers to entry may mean potential competition
o
Barriers are often high (due to large investments required, i.e. to build a mobile
network).
o
Legal barriers (i.e. that an operator needs to obtain a license before offering
services)
o
large investments and capacity (man power) required in order to provide services.
Essential facilities
Lecture Notes. © Per-Kaare Svendsen, 2008
Page 8(10)
E-communications Law Course 2008 – Part 2
o
Essential facilities are infrastructure that cannot easily be duplicated (i.e. the costs
are too high)
o
No relevant jurisprudence in the E-Com sector but the Regulation on Local Loop
shows that this is a relevant issue.
o
Does the control of a facility mean that the operator has significant market power.
It is not necessary to establish that the facility can be considered ”essential” or
”indispensable” under existing Competition Rules case-law (Bronner, Night
Services, etc).
9.9 Step 2B: Leveraging (Guidelines 3.1.1)

SMP in one market may be used to dominate another closely related market (adjacent
market) where the operator does not have SMP (FD art. 14.)

Criteria used in the assessment:

o
Horizontal links
o
Close and associative links
o
Often found in vertically integrated markets (the case in the telecom sector)
o
If an operator has SMP on the upstream (wholesale or access) market the NRAs will
normally prevent a spill over to downstream markets (retail).
It is only when ex ante obligations on the SMP operator in the upstream market does not
result in effective competition in the retail markets (downstream) that art. 14 (3) may
apply (Guidelines recital 84)
9.10 Step 2B: Collective dominance

There are several indications that collective dominance exist. The regulator has to assess if
the market is characterised by
o
mature market
o
stagnant or moderate growth on the demand side
o
low elasticity of demand
o
homogeneous product
o
similar cost structures
o
similar market shares
o
lack of technical innovation, mature technology
o
absence of excess capacity
o
high barriers to entry
o
lack of countervailing buying power
o
lack of potential competition
o
various kind of informal or other links between the undertakings concerned 94
o
retaliatory mechanisms
o
lack or reduced scope for price competition
10. SUMMARY

More competition law – NRAs must adhere to competition law principles

Relevant Product and Service markets

Basic: Geographical markets

More flexible (dynamic instead of static)

Annual assessment necessary – focus on lifting regulation when competition is sufficient
Lecture Notes. © Per-Kaare Svendsen, 2008
Page 9(10)
E-communications Law Course 2008 – Part 2
10.1 Step 3: Consequences of SMP - Remedies



FD art. 16 (4): NRAs ”shall on such undertakings with SMP impose appropriate specific
regulatory obligations”
FD art 16 (2): Refers to USO D art. 16, 17, 18 or 19. Refers to AD art 7 and 8
”impose, maintain, amend or withdraw obligations on undertakings”
SMP
Retail markets
Access/
wholesale markets
USO D
Access and IC D
Art 16: maintain obligations on
retail tariffs, carrier selection,
leased lines
Art 7: maintain existing
obligations
Art 9: Obligation of transparency
Art 17: Regulatory control on
retail services
Art 10: Obligation of nondiscrimination
Art 18: Regulatory control on
the minimum set of leased lines
Art 11: Obligation of accounting
separation
Art 18: Carrier selection and
carrier pre-selection
Art 12: Obligation of access to
and use of specific network
facilities
Art 13: Price control and cost
accouting obligations
10.2 Important remedies

Transparency (art. 9)

Non-discrimination (art. 10)

Accounting separation (Art. 11)

Price control and accounting obligations (art. 13)
Lecture Notes. © Per-Kaare Svendsen, 2008
Page 10(10)