Complaint of price related anti-competitive practices

In this short note I will consider price-related anti-competitive practices from a regulatory authority point of view, where considerations on competition authorities are sometimes very similar. From my viewpoint to understand the situation better, a separate and more detailed description of the context is needed.

Introduction

Price-related anti-competitive practices could exist when an alternative operator is not able to effectively replicate the offer of the SMP operator within a sufficient reasonable margin (margin squeeze) or when the offer is below cost (predatory pricing). In fact, there are many types of behaviour that could be regarded as anti-competitive by nature, namely

a. Predatory pricing, or selling a certain good or service below a certain cost threshold

b. Price squeeze, or the setting of margins between upstream and downstream services at levels which are insufficient for alternative operators to trade profitably

c. Cross subsidies, or the use of funds from a market to compensate losses in another market

d. Price discrimination or discounting, which implies the use of offers and discounts as a mechanism to drive competitors out of the market.

Predatory pricing can be defined as the situation where an undertaking is deliberately incurred through losses or foregoing profits in the short term, also called “sacrifice”. It can occur within the telecommunications sector when the SMP operator charges a price for the product on the retail market which, when compared to the price it charges on the wholesale market, does not allow a competitor buying equivalent services to trade profitably in the retail market. In other words the SMP Operator either sells equivalent regulated services to its own internal business units at a price below costs in order to have a competitive advantage on price, leveraging its market power, in the retail market.

Context

As a starting point I will investigate the two principal cases in which a pricing issue could be identified. Following this I will outline and discuss the remedies that could be imposed.

Regulatory authorities are usually able to identify pricing issues in two main non-exclusive contexts, these are:

1) During a market analysis

2) As a result of complaints from players in the market

A market analysis can identify pricing issues by comparing the wholesale and retail prices (see figure 1). By comparing the two it could be possible to establish the existence of competitive problems. If the investigation into market players is carried out to a greater extent, and if further requests are made on the preliminary high level costing data from operators, it may just make the identification of an issue more viable.

A market player can also file a complaint to the regulatory authority for anti-competitive behaviour on behalf of the SMP operator. Usually, alternative network operators (Altnets) explain with simple calculations that the margins are insufficient to trade in the market, for example this could be:

Retail Costs - Wholesale Costs = Loss

Other times, the pricing practice of the SMP operator would implicitly give an unfair vantage to its own retail business via volume discounts or by a complex pricing list for services. LLU services, for instance, could be the right usher to premises, security, air condition and rack spaces.

Finally, it is possible that the SMP operator is using non-regulated wholesale service prices to leverage its market power or that it bundles retail services together taking a loss in the non-regulated services.

Remedies

In the case where a regulator is confronted with pricing issues it has two key tools at its disposal:

- reducing wholesale rates to a level that permits an efficient operator to trade efficiently

- impose non-discrimination, cost orientation and price control remedies

I consider that, for both instances, a test to determine either the right level of wholesale rates or to approve the retail offer of the incumbent is needed to evaluate the entire situation.

As a final comment to this it should be noted that by reducing wholesale rates as such it may lead to the start of a vicious circle whereby the retail prices would follow the wholesale rates, which in turn would further reduce the margins of both SMP Operators and Altnets. Although this circle can be seen by some stakeholders as positive for consumers and far from self-destructing, in the long-run, and especially in competitive markets, this would deter investments in the communications market. For this reason a price control tool is usually recommended to monitor margins.

Predatory pricing in the broadband market

A pricing issue, and more precisely predatory pricing in the broadband market, could arise when the wholesale rates for direct (e.g. LLU) and/or indirect access (e.g. bitstream access) are considered by a party (the complainer) to be too high to be able to trade profitably in the retail market.

For detecting a pricing issue the most common methodology used is a predatory (or margin squeeze) test. In general mathematical terms this can be expressed as

P – C ≤0 [1]

Where (1) P is the price of the service or product and (2) C is the related costs incurred in the production of the product of service being tested.

When related to electronic communication services a predation can be identified as

P- (CW+CR+CN)≤0 [2]

Where (1) P is the price of the service, (2) CW is the wholesale costs, (3) CR is the retail costs and (4) CN is the specific own network costs.

The test would evaluate if an operator buying wholesale services at regulated rates from the incumbent operator could be profitable, in other words ending in the “replicability” of retail services.

The cost standard against which a predation is tested is an operator (either as efficient as the incumbent or as alternative operators) serving the national market with direct and indirect access technologies. It is important to clarify that from the equations presented above P and C do not refer to specific profits and costs of a specific operator (e.g. the complainer) but most frequently to an efficient operator.

How to evaluate a complaint in practice

The first step for the regulator is to perform a standard administrative analysis in order to evaluate the scale and weight of the complaint. The analysis has the option to incorporate four main steps:

Verification of compliance with competition obligations: the tariff should be produced by a SMP Undertaking, no other case similar to this should be opened by the competition authority

Verification of compliance with regulatory obligations: the tariff’s analysis should be the consequence of a remedy imposed during a market analysis

Assessment of technical replicability: The assessment of technical replicability applies only to those service components within a service that affects markets where an obligation to provide non-discriminatory access has been imposed as a remedy to the SMP operator. In other words, an SMP operator will not be obligated to guarantee the technical replicability of other operators with those retail service components within the service that lies outside the markets affected by the aforementioned obligation.

Assessment of type of bundling (if relevant): the regulator will examine the bundle characteristics to determine whether the proposed bundle constitutes mixed-bundling, pure-bundling, tying or commercial packaging.

In the case where the bundle is found to constitute pure bundling or tying, the regulator will not approve it.

If the tariff is found to constitute mixed-bundling, the approval process will continue and the tariff will be subject to an economic analysis to detect potential anti-competitive pricing.

If the bundle is found to constitute commercial packaging - that is, if all the components within the bundle can be bought individually and the price of the bundle is equal to or higher than the sum of the corresponding stand-alone retail services, the tariff will be approved without the need for further investigation.

The second step involves the evaluation of the tariff under investigation in a testing tool that calculates wholesale, retail costs and profits of an efficient operator. To ensure a successful calculation there are some key elements that need to be factored in: size and demand of the operator, cost standard used, time value for money, source of data and cost of capital.

Subsequently, with reference to broadband services, there could be a discussion on the inclusion of costs and revenues of natural services to broadband (e.g. calls and other services, such as voicemail) or bundles (e.g. line rental for not naked ADSL) that should or should not be included.

There are three possibilities that could be concluded from the testing tool, namely

Pass: A tariff passes the test when there is a profit to be made in the sale of the reference tariff. The tariff is approved.

Not pass: A tariff does not pass the test when there is a loss. When the tariff fails the test the tariff is rejected or conditionally approved (for example, season offers).

Grey area: A tariff is in a grey area when the model does not give net results. In this case the service should be tested with direct costs only (no common and joint costs).

Conclusions

In case of review or complaint regarding pricing issues, it is usually recommended to perform a detailed analysis of the market, the scale and weight of the complaint and finally the replicability of the retail offer. In case of broadband services and in mature markets the existence of bundles (multi-play offers) increases the complexity of the exercise.

Termination a new step ahead, or not... (update)

Update from 18/08/09 post

Today some friends of mine are celebrating after the Commission's new heartbreaking announcement regarding termination rates. Others will be surprised and astonished, as I am now.

This revelation could be the result of the hot summer in Brussels or the start of a new trend. This is for you to decide.

On 17/08 the Commission released a comment "Telecoms: European Commission comments on the German regulator's proposals for the regulation of fixed and mobile termination rates" regarding the German NRAs proposal to not regulate alternative operators and MVNOs’ termination rates.

BNetzA's argument is very simple - in my view - since termination rates of fixed alternative operators are the same as those of DT and MVNOs, as well as mobile termination rates being the same as the hosting operators, there's no need to regulate. Regulation would be not proportionate to the case and would do more harm than good.

Background

In its decisions of mid-2006 BNetzA expressed its expectation at that time that this would be the last time asymmetric rates were accepted. Previously BNetzA accepted asymmetric rates for two reasons:

1- Limited impact (traffic of alternative operator was very low)

2- Structural cost differences due to economies of scale

BNetzA is of the opinion that alternative operators’ rates should be below the one of an efficient operator

“Entgelte an ihren Kosten der effizienten Leistungsbereitstellung erfolgt, so dass die Entgelte gegenüber der Deutschen Telekom AG nur eine Obergrenze darstellen und eventuelle Effizienzgewinne der alternativen Teilnehmernetzbetreiber bei diesen verbleiben.“

Therefore, they should be the same of DT.

What is the Commission’s point of view?

"The Commission stressed that commercial agreements together with a non-discrimination

obligation cannot always ensure interconnection and that operators do not raise termination rates above costs."

This is true, but it's also true that we do not have an indication of termination costs of these operators in Germany right now. The French NRA indicated in 2008 in a Market Analysis that cost-orientation obligations for Altnets were not proportionate

"It has invited BNetzA to impose an access (interconnection) obligation and a cost

orientation obligation on each of the alternative fixed network and virtual mobile network

operators, taking into account the Commission's recent Recommendation on termination rates

(IP/09/710)."

What are the implications for fixed operators?

All 56 small operators should calculate the costs of providing termination services and set termination rates on costs. [can you imagine reviewing and negotiating the new tariffs?]

Potentially some will have higher termination rates of DT, therefore, I am sure DT will not accept them and go to court. Moreover, it is possible it will have an impact also on the retail market.

NOTE:

I cannot be certain that 56 termination rates are consistent with the recent recommendation on termination rates that advocate one single termination rate for mobile networks. What do you think?

What are the implications for MVNOs?

MVNOs will have to set termination rates at the same levels of the negotiated MVNO termination price (for non full MVNOS) or as a combination of their costs. Also, in this case it is probable that we will have several MTRs for every small MVNO.

NOTE:

Again, as above, I am not sure the commission has really internalised its own recommendations. What do you think?

What about in other countries?

UK

There are reciprocal termination rates since 1997. In a statement issued in July 1997, Network Charges from 1997, the Director General supported the principle of reciprocal charging for Operators termination. The aim of reciprocity was to ensure competitive neutrality between BT and Operators and to remove the distortive effects of the call termination externality. The current Operator Charge Change Noticedistinguish between single switching operators and multi switching operators.

France

In France, reciprocal termination charges were ordered in earlier rulings, in 1999 and 2001. In decisions taken on 20 June 2003, ART has allowed Completel, Estel and UPC France to require charges from France Télécom until the end of 2007 not more than the level of charges that the incumbent had levied for like services five years previously. In 2008 Arcep in a market review proposed new caps and a glide path to reach harmonisation.

Italy

In Italy Agcom decided with a costing model differential termination rates for Altnets, however, the asymmetry will be eliminated in July 2010. As you can see from the table below Fastweb had in 2007 a 400% higher termination rate than Telecom Italia.

	Fastweb	Wind	BT Italia	Tiscali	Tele2	Eutelia	Other Operators
1/07/2007	2,01	1,90	1,78	1,76	1,45	1,25	1,25
1/07/2008	1,53	1,44	1,38	1,36	1,15	1,02	1,02
1/07/2009	1,05	1,01	0,97	0,97	0,86	0,80	0,80
1/07/2010	0,57	0,57	0,57	0,57	0,57	0,57	0,57

My view

It is a very interesting development to a very boring and old subject. I don't think the effort is worth the costs (potentially very high for operators and regulators) of developing costing models, negotiating new tariffs, changing business models and retail rates. It will be interesting to see the development of this new trend and monitor its implication.

The international experience highlight that harmonisation will be reached in two or three years in Europe. Thus, the burden or calculating with a cost model termination rates for alternative operators is very high, and, in my view, it does not justify the effort.

What do you think?

www.regulation.tk

Telecoms Cost Accounting Conference Dubai

Meet me at the IIR's Telecoms Cost Accounting Conference Mövenpick Hotel Bur Dubai, Dubai, 25th - 29th October 2009

I will present a workshop on “Strategic Costing for Practitioners and Decision-Makers".

www.regulation.tk

Margin Squeeze Testing

SVP Advisors has provided NITA (the Danish National IT and Telecom Agency) with a document on margin squeeze tests in Denmark, including a methodology report, a description of the model and a trial version of the model employed for testing.

If you have any comment don't hesitate to contact me at marco.gatti svpadvisors.com

www.regulation.tk

MENA and New Markets MVNO Executive Forum 2009

Meet me at the MENA and New Markets MVNO Executive Forum 2009 Dubai, 28th-30th September 2009


Assessing the Costs and Benefits of Emergent MVNOs.

I am presenting "Implementing a MVNO offer that satisfies commercial objectives and regulatory obligations"

www.regulation.tk

The Regulatory Cost Modelling and Accounting Conference,

30/05/2009 - Movenpick, Berlin, 25th -29th May 2009
The Regulatory Cost Modelling and Accounting Conference,

I gave a workshop on "Building a reliable price squeeze model", reviewing the current situation in Europe and highlighting the importance of price squeeze tests in the current regulatory environment.


www.regulation.tk

Fibre: a new bottleneck?

Spain was on summer holidays, but on the hot morning of friday 1st August, CMT (the Spanish NRA) ruled out that Telefonica will not be regulated in wholesale fibre market, opening up the launch in September of their first commercial offer. See here.

It was my first summer in Madrid, and I thought it was a joke when one of my colleagues explained to me about the perfect move of the Spanish regulator. In Telecom regulation slang this practice is called "regulatory holidays", and CMT couldn't find a better time for it. But,...

...as the new manager of the Irish Football Team ,Giovanni Trapattoni, once said "don't say cat, if you don't have it in the bag",....

... in the meantime, during the summer, Vodafone and Orange's regulatory experts and lawyers have been called back to work on preparing their positions and propositions to the press and finally the court. They are questioning why Telefonica's investments in new technologies are protected, and why theirs are not.

After critics from the EU commission and a preliminary hold ruled by a national court, (La Audiencia Nacional) Telefonica had to stop its plans to commercialise FTTH in Spain.

Is this decision Bad or Good for the market? Let's try to evaluate the possible impact.

Bad for Innovation in the short term: In general terms we can say that with this move the Audiencia National has postponed FTTH in Spain for at least one year.

Good for service competition: It is certain that giving absolute rights on the fibre network would have reduced competition on the very high speed internet market. It is most unlikely that competitors, like Jazztel, would have been able to provide a comparable offer to Telefonica's.

Bad for infrastructure competition: It is also true that by launching new services competitors would have felt the pressure to combine their resources with other investors, like public utilities for example, and invest in open access models. Moreover, communities can promote open system networks, instead of closed ones.

Neutral for municipalities: It is also true that in some Municipalities the incentives to protect Telefonica (a major contributor to the national welfare) might be very hight. However, in distant locations and autonomous regions local partnerships have more possibilities to build FTTH networks than the Spanish giant.

Good for new entrants and investors: New entrants, such as utility companies that do not suffer from economic downturns, cable companies, that do not have a modern network infrastructure that can compete with FTTH, and financial investors, have the opportunity to profit from a polical/burocratical/legal still-stand and invest in the lucrative areas.

For example, if compared to other European cities Madrid has bad coverage of the ADSL and Fibre access network: there are many areas of the city where the maximum speed offered by Telefonica for DSL is still 3MB!
__________________________________________________

I personally like the French approach, of having only one operator cabling the building, while the others can access on an equally first come first basis of the house infrastructures.

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Finally, what are the options policy makers have?

- the deep pockets firm takes all model: we let operator X with larger capital build the network and maintain a monopoly for following years. Operator X will invest in the most lucrative areas, and postpone the entrance in rural areas. The entrance of a second large operator is unlikely. A small regional operator, with regional financial aid, might be able to build regional FTTH networks.

- the sharing model: operators that invest in FTTH are obligated to deploy extra fibre to rent to competitors and permit access to the houses and to other firms. It might be possible also to introduce obligatory network coordination. All operators have the same chance of entering the market and investing.

- the utility-type model: network providers build regional networks and offer dark fiber or wholesale services. This model would probably promote service competition in rural areas.

- a combination of the three: there is a first mover (investor) advantage of 2 years, but it has to build a network that supports the sharing model and open access. Moreover, ADSL and VDSL wholesale prices will be massively reduced, to increase competition from alternative operators in areas where FTTH is deployed.

The best model? Drop me a line and we can discuss about it.

The national and European policy on this subject is still wide open. Many European countries these days have policy makers, regulators, stakeholders and investors who are discussing how to bring Europe into the next century of communications services. Interests are very strong for one and the other model, and the threat of another era of high prices/low quality monopoly is back!

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The Audiencia Nacional has given right, for the moment, to CMT on 26/09/2008. The case is still to be decided in court, probably before December.
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www.regulation.tk

See also my previous posts on NGN.

Managing Regulation in a NGT World

I have been asked to organise a workshop in Berlin at the next Next Generation Telecom Wholesale forum organised by Marcus Evans in January 2009.

I will chair the event's first half workshop and my colleague Julio Villalobos will do one of the presentations.

The topic for this year is Managing Regulation in a NGT World:

The bottom line of regulation: producing innovative regulatory practices

- Discussing current and future challenges in regulation

- Inspecting the current regulatory toolbox and its usefulness for NGT

- Analysing how the current framework can develop

- Introducing to new regulatory practices

- Developing a regulatory strategy that can adapt to a changing environment

How to succeed in turbulent waters: regulatory strategy in practice

- Proposing models to exploit opportunities and avoid risks in regulation

- Analyzing how strategic games are being played by operators and regulators

- Introducing innovative practical techniques to take advantages from regulatory gaps

- Presenting most likely future scenarios and their regulatory implications


If you are interested in partecipating please contact Sumreen Rizvi, at Marcus Evans mentioning my name, you will receive a discount:

e-mail: SumreenR@marcusevansuk.com

5th Annual Next Generation Telecoms Wholesale Forum 2009
Berlin - Germany
12-14 January 2009

Download here the draft program.

www.regulation.tk

MVNO Congress Monaco: Mon 20 Oct 2008 - Thu 23 Oct 2008

I have already published several posts on MVNOs business and the impact of regulation in this blog.

I will be giving an overview of the regulatory situation at the next IIR MVNO Congress, The Riviera Marriott Hotel La Porte de Monaco, Monaco in October.

My presenation focuses on the impact of regulation on MVNOs business, more precisly has as objectives:


•Introduce to relevant issues on regulation

•Explain their importance for MVNO business case, value chain and business strategy

•Evaluate the impact of recent and future regulation on the MVNO business model.


If you are interested contact Sara Bishop, event organiser sbishop@iirltd.co.uk mentioning my name and you will get a discount.


www.regulation.tk

A Regulatory Strategy that Last

In the recent months more and more operators relized the importance of regulation and their impact on their business case.

It is always difficult to organise the information available in the company in a structured and logical way in order to evaluate the opportunitie, risks, treaths and impact of the regulatory agenda on the whole market.

This kind of impact analysis is important not only for operators, but also for policy makers that have to evaluate how their decisions can shape the market and whether information received from stakeholders are plausible.

We at SVP Advisors have developed a methodology and a model that is able to give decision makers the impact analysis every regulatory specialist would like to have.

The model is simple but detailed, it combine information from different sources to give an exact overview, a simulation of the internal situation of the company, the external competitive market and the company's retail market.

Interesting, isn't it?


www.regulation.tk