French ADSL Market

31 March 2004

Orion Berg, Hubert de Boisse

Despite protracted resistance from France Telecom (FT), combined with anti-competitive practices in the retail market condemned by the European Commission in July 2003, the French ADSL market started to open up in Autumn 2002. This was mainly a result of decisions made by the French Telecommunications Regulator (Autorité de Régulation des Télécommunications – (ART)) to remove some of the existing technical and pricing barriers. However, there is still significant bias in favour of FT and its Internet Service Provider (ISP) subsidiary Wanadoo.

New players are currently being deterred from entering the market by difficulties in developing multi-service solutions combining TV transmission with voice and Internet data. There are several constraints that threaten effective deployment of TV on DSL services and competition. In the context of launching its multi-play offers, FT may try to use its position to convince customers who wish to subscribe to its TV on DSL not to switch to unbundled operators or to revert back to FT. Such an outcome can only be prevented through interim measures taken by the relevant authorities.

1. Delay in the opening-up of ADSL access and subsequent marketing of services in France

1.1 Initial resistance of France telecom (FT), the French incumbent operator, to the opening up of the ADSL market

FT has largely contributed to slowing the process of opening up the French ADSL market.

The local network is considered in the European Regulation 2887/2000 to be an “essential facility”, owned by incumbent operators. New entrants may get access to the incumbent’s local loop either on an unbundled basis (options 1 or 2, i.e. full or shared unbundled access) or on a resale business basis (option 5).

Delay in implementing option 1

Under option 1, alternative operators obtain direct access to the copper wires, enjoying full-unbundled access to the local loop. Alternative operators connect their own bitstream equipment which allows them to differentiate their offer from that of the incumbent operator. Thus, operators may compete with FT not only in the retail market but also in the wholesale market since ISPs may offer ADSL services using the unbundled network.

Local loop unbundling can only be implemented if operators are able to pick up the subscriber’s copper pairs on an operator distribution frame located near FT. For the provision of services based on ADSL technology, the operators’ equipment (Digital Subscriber Line Multiplexer (DSLAM) or similar) must be installed near FT’s main distribution frame so that the copper pairs remain at a distance that allows for the provision of services at appropriate speeds. Therefore, co-location in or near the buildings accommodating the main distribution frames is an essential pre-condition for unbundling.

Option 1 was initially scheduled for launch on 1 January 2001. However, FT insisted that it would not be technically feasible to meet that deadline. In fact, FT adopted a strategy of systematically obstructing the development of unbundling during the course of 2001 and 2002, in relation to both price and technical aspects. In the meantime, FT made a significant advance by launching its own ADSL offers in November 1999: a retail ADSL offer (Netissimo) and a wholesale ADSL offer to ISPs (Turbo IP).

Indeed, since November 2000, the date on which FT published its first reference offer, ART has been forced to summon FT in respect of various decisions, ordering FT, inter alia, to:

  • provide alternative operators with relevant information regarding the co-location process
  • modify access tariffs to reflect actual costs
  • lift any restrictions imposed on the creation and installation of new pairs
  • lift any restrictions regarding the use of new technology by alternative operators
  • deal with operators’ requests for co-location under objective, transparent and non-discriminatory conditions
  • as far as possible, allow alternative operators to install their equipment near FT’s distribution main frame
  • provide alternative operators with a guarantee in case of services being interrupted

In addition, on several occasions, ART has had to order FT to comply with its previous decisions.

As a result of the above-mentioned practices of obstruction and the lack of a definite timetable for unbundling, FT remained virtually the only provider of ADSL-enabled infrastructure.

On 1 May 2002, FT had made 500,000 lines available to DSL technology while the alternative operators had only provided 650 fully unbundled lines.

Delay in implementing Option 3

On 18 February 2000, in a request for conservatory measures filed by 9 Telecom, the Conseil de la concurrence (the French national competition authority) ordered FT to offer alternative operators technical and commercial access to a permanent virtual circuit (unbundling option 3) or to make an equivalent offer allowing operators to supply ADSL services competitive with FT both in terms of price and services offered.

Under option 3, FT is required to transport traffic from subscribers to the nearest point-of-presence (POP) on the alternative operator’s own premises. Accordingly, customers can subscribe to alternative operators for ADSL, whilst remaining with FT for basic voice telephony. Option 3 was offered to alternative operators to complement unbundling, which requires major investment and can only be implemented gradually.

Following the decision of the Conseil de la concurrence, FT designed a new “ADSL Connect ATM” offer at the end of 2000. ART was again forced to intervene to set the pricing terms for 2001 and to request structural changes to FT’s offer to allow alternative operators to offer ISPs ADSL services under conditions economically equivalent to those of FT’s own services. ART pointed out that the delay in making an option 3 offer available at competitive prices while option 1 (unbundling) also faced serious delays caused a serious gap in the market which was attributable to FT.

ART also mentioned that other players, mainly access providers, in particular Club-Internet, Mangoosta, Liberty Surf and Infonie, had entered the market under precarious economic conditions.

Anti-competitive practices on the retail market

In a landmark (unpublished) decision given on 16 July 2003, the European Commission found that Wanadoo Interactive, FT’s subsidiary, had engaged in predatory pricing in the field of consumer ADSL access to the Internet.

The Commission found that between March 2001 and October 2002 the retail prices charged by Wanadoo for the sale of its services known as Wanadoo ADSL and eXtense were below their average costs. From the Commission’s findings, it appears that the prices charged by Wanadoo were well below variable costs until August 2001. In the subsequent period they were approximately equivalent to variable costs, but significantly below total costs. However, the Commission considered that the anti-competitive practices started with the mass marketing of Wanadoo’s services in March 2001. In view of the seriousness and duration of the practices, the Commission imposed a fine on Wanadoo of €10.35 million.

The Commission also found that the practice coincided with a company plan to pre-empt the strategic market for high-speed Internet access. While Wanadoo was suffering large-scale losses on the service FT, which at that time held almost 100% of the market for wholesale ADSL services for ISPs, was anticipating considerable profits in the near future on its own wholesale ADSL services. At the beginning of 2002, the company was still expecting to continue selling at a loss until 2004.

It appears that from January 2001 to September 2002, Wanadoo's market share rose from 46% to 72%, in a market which saw more than a five-fold increase in size over the same period. This had a dissuasive effect on competitors. At the end of the period of anti-competitive practices, no competitor held more than 10% of the market share and Wanadoo's main competitor had seen its market share plummet. In addition, Mangoosta, an ADSL ISP, went out of business in August 2001. The effects of Wanadoo's conduct also extended to cable operators offering ADSL Internet access.

The Wanadoo decision followed an earlier decision of the Conseil de la concurrence rendered on 27 February 2002 relating to a request for conservatory measures filed by T-Online France, an ISP. The Conseil de la concurrence ordered Wanadoo to suspend the marketing of its ADSL packages, including high-speed access, an ADSL modem and a subscription to Wanadoo Interactive through FT’s retail market. It found that FT engaged in discriminatory practices as Wanadoo was benefiting from advantageous terms compared to those offered to other ISPs (a shorter timeframe for the supply of ADSL connections, a more efficient ordering system and access to an electronic system to verify the ADSL eligibility of a telephone line).

1.2 Opening up of the French ADSL market since the second half of 2002

The turning point for the ADSL market came in the second half of 2002. The market took off largely as a result of decisions made by ART in which it removed some of the existing technical and pricing barriers.

On 16 April 2002, ART ordered important changes to be made to FT’s reference offer by 2 May 2002. It required significant reductions to the fully unbundled access tariff and connection costs. It also requested changes in operating conditions, requiring FT to allow alternative operators to co-locate their equipment in areas where FT houses its own equipment rather than in physically separate rooms.

On 30 April 2002, ART ruled against FT’s 30% reduction in Internet access tariffs to ISPs (option 5). ART considered that such a reduction would prevent alternative operators from proposing similar or lower tariffs to ISPs. FT was forced to revise its prices and on 18 July 2002, ART approved FT’s proposed tariff changes, which included a significant decrease in the tariffs for ISPs as well as a decrease in the tariffs for alternative operators (option 3).

The above mentioned decisions have had a positive impact on unbundling with 273,255 lines providing local loop access to alternative operators (including business customers) on 1 January 2004 compared with only 4000 lines in the previous year.

In addition, ten operators have already signed a local loop access agreement contemplating various strategies. Only LDCom and Cegetel are targeting both residential and business markets on a national level. The other signatory operators are focusing either on the residential market (Free and Telecom Italia), the business market in Paris (Colt and Easynet) or at a regional level.

However, a close look at the figures shows that the situation is still heavily biased in favour of FT.

There are approximately 3 million lines providing access to ADSL technology. FT operates 86.8% of these lines. According to the recent statement made by its CEO, FT expects to cover approximately 95% of the French population by the end of 2005.

2. New struggle over TV on DSL services

2.1 Launch of TV on DSL services at the end of 2003

ADSL enables simultaneous use of telephone lines for telephone calls, broadband Internet access and reception of TV broadcasts. Thus, the development of multi-service solutions that combine TV transmission with voice and Internet data (“Multi-play” services) on a single network allows a significant reduction of investment-related costs.

In particular, ADSL makes it possible to provide consumers with digital TV in densely populated areas without their having to acquire a satellite dish. That is why the commercial deployment of ADSL technology has reached a new stage with the launching of “TV on DSL” services in the first quarter of 2004.

TV on DSL is based on the distinct use of higher frequency bands for the transmission of video data. Thus, TV on DSL service requires specific equipment. On the operator’s side, a specific Video DSLAM with an Ethernet-Commutator must be installed on the main distribution frame of the local operator’s network. On the subscriber’s side, the channel must be terminated with a specific modem with a video output.

On 1 December 2003, Free (an ISP) launched the first Multi-play service in the French market combining the major French terrestrial free to air channels with optional subscription-based premium channels. Customers decode signals using the “Freebox”, an integrated ADSL set top box which connects directly to standard TV, telephone and PC cables. This offer proved successful and Free’s precedent has certainly helped to stimulate other operators to enter the market.

Subsequently, FT and satellite TV company TPS (owned by French TV networks TF1 and M6) have launched “MaLigne tv” a TV on DSL service first launched in Lyon in mid-December 2003 and which is expected to be launched in Paris in Spring 2004. The service will be available from FT’s sales office. FT has entered into a similar agreement with Canal Plus, a French pay-TV company.

In the meantime, Canal Plus has also concluded a partnership with LDCom, one of the major alternative operators, mainly in the wholesale market in the launch of a TV on DSL service on 22 March 2004 in the southern French city of Marseille, with the intention of extending the service to Paris.

Canal Plus has also concluded an agreement with another alternative operator, Cegetel, for an offer to be launched in Spring 2004 in the western French city of Rennes.

The geographic deployment of TV on DSL services is expected to rise sharply in the nearfuture. By the end of 2004, TV on DSL offers are likely to be available in 100 of the main French cities.

2.2 Struggle over the TV on DSL services

The effective deployment of TV on DSL services faces two main constraints.

First, TV on DSL services architecture is designed so as to allow customers to subscribe to Internet access with any ISP and, in the meantime, to choose a TV on DSL service offered by FT or an alternative operator. However, FT’s TV on DSL service is not compatible with telephone services that require unbundling. Therefore, customers who choose FT’s TV on DSL will be forced to cancel their telephone subscription with unbundled operators and to switch to FT for telephone services. Considering both the significant advance of FT in terms of geographic coverage and the serious delay in the implementation of unbundling, such a technical constraint poses a real threat to competition. A serious risk exists that FT could take advantage of the development of the TV on DSL services to implement “win back” practices whereby FT may try to use its position to convince customers who wish to subscribe to its TV on DSL offer not to switch to unbundled operators and to revert back to FT.

Secondly, unbundling of the local loop is essential for the development of TV on DSL by alternative operators. However, in its current form, FT’s reference offer for unbundling is not technically able to allow to the implementation of this new service. Notably, it does not provide for alternative operators install their Video DSLAMS in FT’s premises or to migrate their connections from IP DSLAMs used for Internet transmission to Ethernet-Commutators required for TV transmission. On a strict interpretation of the reference offer, FT has refused to implement any technical measures requested by alternative operators regarding co-location.

So far, regulatory authorities have refrained from intervening. In view of the technical constraints described above, coupled with serious anti-competitive concerns raised by the agreement concluded between FT and TPS, the re-establishment of FT’s monopoly on the emerging ADSL market cannot be excluded. Such an outcome can only be prevented through the intervention of ART and/or the Conseil de la concurrence, ordering FT to lift any technical barriers to the implementation of alternative TV on DSL offers and to suspend the marketing of its TV on DSL service until conditions for effective competition in the market can be ensured.

Important - The information in this article is provided subject to the disclaimer. The law may have changed since first publication and the reader is cautioned accordingly.