Assessment of significant market power in the UK electronic communications market

17 February 2005

Richard Eccles, Karen Nightingale

The liberalisation of the communications sector within the European Union in recent years has been followed closely by convergence in communications technologies and an increasingly competitive industry sector. In response to these phenomena, the European Union has reformed the law regulating the communications sector. A key feature of the new regime is the move from ex ante regulation to ex post regulation and a closer reliance on European competition law, in preference to sector-specific regulation, as the preferred regulatory mechanism. In particular, under the Framework Directive (Directive 2002/21), which sets out a common regulatory framework for electronic communications networks and services, national regulatory authorities (“NRAs”) must carry out market reviews before competition-related regulation is imposed. NRAs can only intervene when dominance can be shown. This article reviews the steps taken by Oftel and Ofcom in the UK in the implementation of these obligations.

Implementation in the UK

Following entry into force of the relevant provisions of the Communications Act 2003 on 25 July 2003, the UK licensing regime governing telecommunications operators was abolished and replaced with general conditions, which lay down only certain basic requirements that apply to all operators. The Communications Act also established Ofcom as successor to Oftel.

Oftel continued to act as the NRA under the transitionally commenced provisions of the Communications Act, prior to Ofcom commencing operations on 29 December 2003. Ofcom or Oftel have completed reviews of, and imposed SMP conditions in, the following markets: fixed narrowband retail services; fixed narrowband wholesale exchange line, call origination, conveyance and transit; fixed geographic call termination; wholesale international services; wholesale unmetered narrowband internet termination services (in the Hull area); leased lines; wholesale mobile voice call termination; wholesale broadband access and wholesale local access. Ofcom is currently conducting a market review for broadcasting transmission services. Ofcom’s market definitions generally differ from those in the EC Recommendation, except as regards mobile markets and fixed call termination. NRAs are able to regulate markets that differ from those identified in the EC Recommendation where this is justified by national circumstances, which is the basis for Ofcom’s departures from the EC Recommendation in the UK.

Oftel concluded that the markets for retail business IDD (international direct dial) routes, wholesale unmetered narrowband internet termination services for internet traffic originating in the UK (excluding the Hull area) and mobile access and call origination on public mobile telephone networks in the UK are effectively competitive (i.e. no operator has SMP) and that existing regulatory controls for those markets should therefore be discontinued.

Assessment of individual markets

Fixed narrowband retail services markets (Markets 1 to 6 in the EC Recommendation)

Following an Oftel review concluded on 28 November 2003, BT was found to have SMP in 15 individual markets in the UK (outside the Hull area), including business and residential local and national calls, calls to mobiles and residential international (IDD) calls. Kingston Communications has SMP for the same markets within the Hull area. Conditions were imposed on both parties, requiring them to publish charges, terms and conditions and notify any amendments to these within 24 hours of introducing them and to not discriminate unduly between customers. RPI price control in respect of seven residential markets was also imposed on BT until 31 July 2006. As regards the market for retail business international (IDD) calls, Oftel found this to be effectively competitive, so no SMP conditions were imposed.

The above markets reviewed by Oftel in the UK correspond to markets 1 to 6 as defined in the EC Recommendation, but are differently defined. These markets concern access to the public telephone network at a fixed location for residential and non-residential customers (markets 1 and 2), publicly available telephone services provided at a fixed location for residential and non-residential customers (markets 3 and 5) and publicly available international telephone services provided at a fixed location for residential and non-residential customers (markets 4 and 6).

Fixed narrowband wholesale exchange line, call origination, conveyance and transit markets (Markets 8 and 10 in the EC Recommendation)

Ofcom’s review, concluded on 28 November 2003, designated BT as having SMP in each of nine individual markets covered in this assessment, relating respectively to various categories of residential and business exchange line services and of conveyance and transit. Various conditions have been imposed on BT, including requirements to provide network access on reasonable request, not to unduly discriminate, to follow cost orientation in setting charges and to notify charges and technical information. Charge controls and transparency as to quality of service have also been imposed. Kingston Communications also has SMP in the Hull area for six markets (excluding conveyance and transit). Similar, but less extensive, conditions to those imposed on BT have been imposed on Kingston Communications.

The markets assessed by Ofcom correspond to markets 8 and 10 in the EC Recommendation for (respectively) call origination and transit services in the fixed public telephone network.

Fixed geographic call termination markets (Market 9 in the EC Recommendation)

Oftel concluded on 28 November 2003that the termination of fixed calls on each fixed network constitutes a distinct market and that each operator of a fixed public electronic communications network (54 in total) has SMP in respect of the distinct market for its respective network. As a result, although the new regime generally involves a reduction and refocusing of specific regulatory controls, Oftel has in effect extended the scope of SMP controls in relation to call termination on fixed networks. Whereas, pursuant to the old EC Interconnection Directive 97/33, only BT and Kingston Communications were considered to hold SMP (in the UK generally and in the Hull area respectively), Oftel has concluded that each network operator has SMP in respect of call termination on its own network respectively.

Pursuant to the Oftel review, obligations have been imposed requiring each operator to provide network access, i.e. call termination, to all public communications providers if they are reasonably requested to do so and to set fair and reasonable terms for their call termination services. Additional requirements have been imposed on BT and Kingston Communications (for the Hull area), requiring them to set their charges for call termination on the basis of their forward-looking long-run incremental costs and to publish cost-accounting information, separate accounts, a reference offer and give advance notification of changes to its charges. The stronger regulatory approach taken in respect of BT is due to the fact that it possesses SMP in related retail markets.

Wholesale international service markets

Oftel concluded on 18 November 2003 that BT has SMP in respect of 108 wholesale international services markets and that Cable & Wireless (“C&W”) has SMP in respect of four such markets. For each market, BT and C&W are required to provide network access on reasonable request, not to unduly discriminate, to publish a reference offer and to notify prices. BT is also required to prepare separate accounts for its retail and wholesale businesses. In relation to all other wholesale international markets, Oftel considered these to be competitive and so all pre-existing regulatory controls on BT and C&W have been discontinued.

This UK approach of defining a wholesale market contrasts with that of the EC Recommendation which does not refer to a wholesale market specifically for international telephone services.

Wholesale mobile voice call termination markets (Market 16 in the EC Recommendation)

In its market review concluded on 1 June 2004, Ofcom identified separate markets for wholesale call termination provided by each of Hutchison 3G (or ‘3’), Inquam, O2, Orange, TMobile and Vodafone. In relation to 2G call termination services, SMP conditions have been imposed on O2, Orange, TMobile and Vodafone. They are required to provide network access for 2G call termination services on reasonable request, not to unduly discriminate, supply Ofcom with copies of new or amended access contracts, notify in advance any price changes and reduce termination charges in line with proposed charge controls. The charge control will apply until 2006 and is based upon a long-run incremental cost formula, plus a mark-up for common costs and a network externality surcharge. It is important to note that the charge controls involve setting the same target average charges for fixed to mobile and mobile to mobile calls respectively for each operator, because Ofcom considers the long run incremental costs to be the same in each case.

Inquam and Hutchison must give prior notice of price changes and Hutchison must also supply Ofcom with details of call volumes. No other ex ante regulation will be imposed on the market for 3G voice call termination services. Hutchison 3G (UK) Ltd has appealed the finding by Ofcom of SMP to the Competition Appeal Tribunal. Hutchison argues in particular that Ofcom’s decision failed to give weight to the countervailing bargaining power of purchasers of wholesale mobile voice call termination services from Hutchison.

Mobile access and call origination on public mobile telephone networks (Market 15 in the EC Recommendation)

This market was found to be competitive in the UK and the Commission approved Oftel’s conclusions by means of a decision announced on 5 September 2003 (Commission press statement IP/03/1203: Commission reviews first case under new electronic communications regime). However, whilst Oftel left it open whether 3G telephony should be considered to be in the same relevant product market as 2G telephony, the Commission believed that they should be regarded as equivalent and as part of the same market, because the market definition should be based on the nature of the products or services provided and not on the technological platform used to provide them. The Commission also disagreed with the way that Oftel measured market shares. Oftel had assessed the wholesale market by reference to subscriber numbers, volume of call minutes and revenues at retail level but the Commission considered that this could be misleading as regards the relative strength of market players on the wholesale market, as the price at which access and origination is sold to ISP may be different from the retail prices charged by ISP to end users. However, these considerations did not affect the outcome of Oftel’s assessment and its review was concluded on 4 August 2004.

Wholesale unmetered narrowband internet termination services

This additional UK market assessment resulted in a finding that the market was competitive in the UK, apart from in the Hull area, where Kingston Communications has SMP. In an Oftel review concluded 28 November 2003, Kingston Communications is required to provide network access on reasonable request, not to unduly discriminate, to publish a reference order and to notify prices, terms and conditions and technical information. Existing conditions on BT have been discontinued.

Wholesale broadband access markets (Market 12 in the EC Recommendation)

In a UK review concluded 13 May 2004, Ofcom identified the following markets: separate asymmetric broadband origination markets for the UK and for the Hull area and a broadband conveyance market. BT has SMP in the markets for asymmetric broadband origination for the UK (excluding Hull) and broadband conveyance in the UK. Kingston Communications has SMP in the Hull area for asymmetric broadband origination. Conditions have been imposed on BT, requiring it to provide network access on reasonable request, not to discriminate unduly, to publish a reference offer, to notify terms and conditions and technical information, to provide quality of service information, to establish a statement of requirements for new access and to have accounting separation. Corresponding conditions (apart from the requirements to provide quality of service information and a statement of requirements for new access) have also been imposed on Kingston Communications.

Leased lines markets (Markets 7, 13 and 14 in the EC Recommendation)

The relevant markets for leased lines specified in the EC Recommendation are market 7 at retail level and markets 13 and 14 at wholesale level (terminating and transit segments respectively). For the UK, Ofcom, in its review concluded on 24 June 2004, identified the following markets: retail low bandwidth traditional interface leased lines; wholesale low bandwidth traditional interface symmetric broadband origination; wholesale high bandwidth traditional interface symmetric broadband origination; wholesale alternative interface symmetric broadband origination at all bandwidths; and wholesale trunk segments at all bandwidths. For each of these markets, BT holds SMP in the UK (excluding the Hull area) and Kingston Communications holds SMP in the Hull area, apart from the final market, in which BT holds SMP in all of the UK, including Hull. Conditions have been imposed on BT and Kingston Communications requiring them to provide access on reasonable request, not to unduly discriminate and to publish information on prices, delivery, repair and other conditions. An RPI-only price control has also been imposed on BT until 2006 in relation to retail leased lines. Furthermore, charges for all types of traditional interface symmetric broadband origination must be based on a cost-orientation and cost-accounting system. Ofcom has imposed, for private partial circuits, a four-year charge control in RPI-X form, with X ranging between 4% and 8.9% for the different products covered.

Wholesale access market to local loops (Market 11 in the EC Recommendation)

Ofcom published its market assessment on 16 December 2004 for the wholesale local access market generally and for local loop unbundling (“LLU”) services respectively. LLU services fall within the overall wholesale local access market but are being dealt with separately for market assessment purposes. Ofcom’s conclusions are that BT holds SMP in wholesale local access in the UK, excluding Hull, in which Kingston Communications holds SMP.It has set out regulatory conditions requiring BT and Kingston Communications to provide network access on reasonable request, not to unduly discriminate, to implement cost-orientated charge controls, to publish reference offers, to notify charges and terms and conditions and to notify technical information. Further SMP conditions applicable only to BT require publication of quality of service data, transparent processing of requests for new products and financial reporting obligations. Ofcom also requires BT to provide various specified LLU services.

Broadcasting transmission services, to deliver broadcast content to end users (Market 18 in the EC Recommendation)

Ofcom’s draft decisions on the UK broadcasting transmission services market were published on 11 November 2004 and notified to the Commission. Its analysis aims to cover broadcasting transmission services to deliver broadcast content to end-users over the period up to around 2007, when Ofcom envisages that contracts for achieving switchover of terrestrial television from analogue to digital transmission should have been agreed.

Ofcom designated two companies as having SMP in separate markets for provision of access to masts, sites and shared or shareable antenna systems for the purpose of providing analogue and/or digital terrestrial broadcasting transmission services within the UK, to deliver broadcast content to end users. In the market for access to the mast and site network and shared or shareable antenna systems acquired, constructed or installed by Crown Castle UK Ltd, Crown Castle is identified as the SMP operator. Similarly, in the market for access to the mast and site network and shared or shareable antenna systems of National Transcommunications Ltd (“ntl”), ntl is identified as having SMP. This is a further instance of markets being defined by reference to an individual operator’s network.

Ofcom also identified a market for the provision of managed transmission services to provide analogue and/or digital terrestrial broadcasting transmission services within the UK, to deliver a national broadcast service. Crown Castle and ntl were designated by Ofcom as enjoying SMP jointly - the first such designation of SMP in the UK. However, on 24 January 2005, Ofcom withdrew its notification to the Commission regarding the national managed transmission services market and regarding joint SMP held by both ntl and Crown Castle. This follows discussion with the Commission and should lead to Ofcom formulating a revised position.

Remedies proposed by Ofcom in the markets for access to masts and sites are for ntl and Crown Castle separately to provide network access on reasonable request and on cost-orientated terms, not to unduly discriminate and to publish a reference offer for provision of network access. Requirements set out prior to withdrawal of the notification for the SMP operators in the market for managed transmission services were to provide network access on reasonable request and on cost-orientated terms and not to unduly discriminate in the provision of such services.

Conclusion

The national market assessments carried out by Ofcom reveal a difference in approach to market definition identified in the EC Recommendation. Notable variations in Oftel and Ofcom’s market definitions include international services, wholesale fixed network services and retail fixed telephony markets. As regards call termination on fixed networks, the approach in the UK is to treat call termination on each network as a distinct market. Ofcom also treats call termination on individual mobile networks as distinct markets. Finally, Ofcom’s assessment of broadcast transmission services is a further instance of market definition by reference to (access to) individual networks.

Ofcom has not yet carried out a market assessment for the wholesale national market for international roaming on mobile networks (market 17 in the EC Recommendation).

A wider range of access and interconnection obligations can now be imposed, where appropriate, in cases of SMP. Arguably, the full potential of the regulatory conditions that can be imposed under the EC Access and Interconnection Directive 2002/19 has yet to be fully exploited, even in the UK which is ahead of most Member States regarding its market assessments.

Authors