ITU, Geneva 20-22 November 2002
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Anti-competitive conduct
and competition policy in telecommunications ITU, Geneva 20-22 November 2002 |
| Introduction |
Thank you very much for the invitation
to speak today. I am very pleased that the ITU has addressed the question of competition policy in telecommunications. It might be thought that it was about time. Although I am not a lawyer, I have spent much of my time, perhaps too much time, over the last three and a half years on topics related to competition law, both case law and the new European Union legal framework. INTUG has been around for more than a quarter of a century, arguing for competition and liberalisation. Despite the problems amongst the operators, we continue to believe in competition. We first came to the ITU to address issues of leased lines. There are still today discussions about anti-competitive practices on leased lines. We are an association of associations, bringing telecommunications users from around the world. We have members in countries such as Australia, India, South Africa and Switzerland. We want new and innovative technologies to improve the services which business can use for their own activities. This helps economies to grow. I want to cover some of the problems INTUG has faced in trying to apply competition law as a remedy to the problems uncovered by users in the markets. |
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| Network operators |
The capacity of some network operators is
quite remarkable in the invention of new forms of anti-competitive
behaviour and in recycling old ones. They seem to forget that it is competition which drives innovation and growth. Instead, they pour their creative energies into frustrating and foiling competition. In doing so they diminish the growth of the market and discourage adoption of new technologies, reducing overall economic growth. So they not only hurt themselves, the hurt the economy as a whole. We can see a range of activities by both fixed and mobile operators, sometimes acting alone, sometimes in a concerted fashion:
Recently, some have asked for state aid. No doubt this is necessary becauseof the ravages of such intense competition, rather than wild speculation in a 3G land grab. |
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| Competition law |
A good system of competition law takes time
to roll-out and to become accepted. Many members of the ITU do not have a system of competition law and some that do might not be considered to have one that is properly functioning. Perhaps, I should not name names. Nonetheless, there is a core group of countries, mostly highly economically developed, with robust systems of:
Yet, even these countries do not work in Internet time. For example, the recent case against Microsoft, brought by the US Department of Justice and the attorneys-general of many states, took several years. There were famous IBM cases that dragged on for years and sometimes more than a decade. It is worth recalling that the most of the competitors of IBM from that time are no longer with us, they disappeared from the computer market and are now only landfill. At one time it was the "bunch"
The European competitors did little better: Groupe Bull and International Computers Limited. I think Groupe Bull just received some more "one-off" aid. IBM and AT&T were engaged in competition law cases for more of the last century than they were not. A case concerning fixed-to-mobile call termination was raised by Worldcom against KPN and KPN Mobiel in 1998 and is still not closed by the European Commission. A statement of objections is still being discussed. If it is taken to appeal that would be a further four years at the European Court of Justice (ECJ), so that we could be talking about 2007. A fundamental feature of the ICT sector is of rapid change. Yet competition law takes years or decades to reach a conclusion. So that reliance on competition law is biased in favour of those with the financial resources to sit it out and those whose business is allowed to continue on its own terms while the lawyers slug it out in protracted courtroom battles. We have made little, if any progress, in terms of the operations of competition law since the major cases in the 1970s. |
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| Why is competition law so slow? |
Cynically, one might suggest that the
combination of lawyers and economists does not make for a speedy outcome.
There are very many lawyer and economist jokes and too many of each category
in the room to risk using them. Sometimes the same joke can be used against
the two groups interchangeably. Economics is a far from an exact science. The views of one economist may well and almost certainly will differ from the views of others. It is an unsteady basis on which to build a legal edifice. Competition law cases are generally subject to appeal to the courts on the merits of the case, this imposes a very strict burden of proof. Given the severe nature of the remedies this is reasonable, but it can mean some very long waits. It is in the interests of many parties to delay the case, not least the lawyers. A major area of difficulty lies in the definition of the market. We have already head about some of the problems. It is made very difficult in telecommunicatoins by the constant changes in technology and by the often unpredictable ways in which markets adopt the technology. Let me take the example of fixed-to-mobile call termination. You have first to decide whether it is a separate market. That is whether the market for "mobile telecommunications", is an indivisible totality or whether you can reasonably break it up into separate markets for:
The recent launch of MMS services creates what may be a new market. You can send photos and video clips. Telecom Italia will send you the goals of your favourite football team immediately they are scored. I trust those are only the golas scored by your team and not against. A problem may arise if you are roaming abroad and a hat trick of goals are sent to you in the middle of the night at international roaming rates. You might well end up sick as a parrot. To make matters more complicated, we are seeing handsets running versions of Microsoft Windows®, which brings us into another market, one for computer operating systems. It also take us into an extremely complicated anti-trust case. We may also need a special tone to signal to call back later when Windows has finished rebooting. You can argue that call origination is a single market encompassing both fixed and mobile. That the two are contestable. Many fixed network operators are losing customers to mobile network operators as they choose to buy their access and call origination from them. The consensus is very clearly that there are several markets for mobile telecommunications and not just one. This is still unacceptable to the mobile operators. They argue that mobile telecommunications is the correct market definition and that they are ruthlessly competitive within that market. I disagree with them on both counts. There is a very clear majority of opinion, at least among regulators and competition authorities, that call termination exists as a separate market. for example, the UK Competition Commission and the NMa in the Netherlands. The market is not national but is different for each and every network operator. Thus for Switzerland, if I make a call to Utsumi-san's mobile phone my operator has to terminate the call on whichever operator he has chosen and at whatever price they elect to charge them for that call. So that the market is not mobile call termination in Switzerland, but on Swisscom, Sunrise or whoever. Traditionally, such markets have not been regulated. The operators able to set whatever price they wish. If I am foolish enough to make that call using Belgacom, the fixed incumbent operator in Belgium, I pay a surcharge of EUR 0.30 per minute over the price for calling a fixed phone in Switzerland. If I make the call from the USA, then Sprint will add US 0.18 and MCI-Worldcom US$ 0.21 per minute on top of the price of calling a fixed line in Switzerland. The higher value of these calls to me is, allegedly, because of the certainty of reaching the person. You do not have to call their office and their home or engage in telephone tag. The operators also argue that it is economically more efficient to recover the greater part of their costs from a market which is inelastic. That means they reduce the price of call origination and increase the price of call termination. A single operator market definition has the advantage of jumping over the next stage in the process which would normally be to prove dominance. If there is only one operator then the market share is 100%. Consequently, it is very straightfoward to justify the application of remedies. Nonetheless, the definition of a single operator call termination market has yet to be tested in court. So we cannot be 100 per cent certain. Having said that the market is a single operator, there remains a question of further segmentation. There may be different markets for Genevois school kids and for larger purchasers such as ABB, Nestlé and UBS. In some markets, large users have counter-vailing buyer power so that the market has different characteristics. Large corporate users may get much better prices. Some are getting mobile termination at fixed termination rates as the mobile network operators try to win them away from their fixed line operators. It would be unlikely, looking at the market today, that you would subdivide or segment the call termination market beyond those two. I do not see evidence of call termination being different on subscription and pre-paid, or on Nokia and Sony-Ericsson handsets or between people with sensible and frivolous ringtones. |
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| Collusion or joint dominance |
The core of the case against the network
operators for international mobile roaming is that there is joint dominance,
what the newspapers like to call a cartel. Indeed that is what Wim van Velzen called the mobile operators
in the European Parliament two years ago. I do not mean that the operators meet in a nice hotel in Montreux or Gstaad and set the prices and market shares. I hope that even in more traditional sectors that sort of activity has been suppressed. I have nothing against Swiss hoteliers, only their supporting role for cartels. I suppose you could set up a temporary chat room on IRC, but that is too obviously nerdy. You do not need to meet in that way to achieve the same goals. It is a virtual cartel. Rather than go through the roaming case, let me illustrate using SMS or text messaging. I offer this to any regulator or competition authority which wants to get the youth vote. You could be interviewed on children's television and appear in teenage magazines alongside popstars in addition to busting a cartel. The supply of SMS origination and termination is technically different from mobile voice telephony. The individual text message is carried in the signalling channel with a low priority. High priority messages are used for signals associated with call set-up and inter-cell call transfer. Consequently, SMS is subject to very different economics of supply from voice telephony. The most obvious difference being that it is extremely cheap, almost free. These characteristics would appear to make it a different market. It might be argued that SMS is a segment of some other market. However, it is unclear whether that market would be the mobile voice market or the mobile data market. The SMS is carried in the signalling channel which supports both voice and data communications. It is not carried on either the mobile data network or the mobile voice network. In some instances there is substitutability between voice and SMS and in other instances between data and SMS, for example, for the provision of value-added services. I should add that there are people, teenagers with mobile phones, who have to make decisions between buying chocolate and cigarettes and topping up their pre-paid phone card. Markets overlap in strange ways, when Toblerone and Marlboro compete with Orange and Vodafone. The evidence we have from the market is of a sequence of price increases.
These look to be an upward spiral. This is very strange, since costs
ought to be declining not least because of economies of scale. The only
significant costs the operators incur relate to billing and to advertising.
To make this look more impressive that took to charging each other
termination fees for SMS, both for domestic and international interconnections.
There have been a number of reports and conferences on marketing
strategies of operators and the considerable potential they have to increase
their revenue from SMS and SMS-based services. For example:
Thus it is common knowledge in the telecommunications sector, that
operators are striving to increase their revenue from this source. In raising the prices, the operators appear to have been testing the price and demand elasticity of the market. Pushing up the price, in order to see how it affects the growth of SMS traffic. If the growth continues to looks good, then they can try another increase. Operators report to financial institutions the income they generate from SMS separately from voice revenues. Generally it is put with data services, in the hope of deceiving people into thinking that mobile data is taking off -- it is not. The operators have indicated their intention to generate more revenue from SMS in order to stabilise or, if they can, increase their Average Revenue Per User (ARPU). Operators have used specific advertisements for SMS, including services available exclusively on SMS. For example, we had adverts in Brussels telling us that we could send text messages in the metro stations. The barriers to entry to this market are the same as those for other
services using the GSM networks, namely shortage of spectrum, very limited
numbers of operators and a refusal to deal by those operators on the
market. The market is affected by the ability of the operators, the dominant
oligopoly, to know exactly how the other operators are behaving. In this
way they can determine that they are keeping to the common policy.
The incentive not to depart from or to jeopardise the results of
that policy is the very strong perception in the financial markets that
anything less than rising contributions (compared to other operators)
to ARPU would constitute a failure and would result in a reduction of the
share price and of the credit rating, having direct financial effects on
the operators. Thus the financial markets act as a check and an encouragement
to continue the oligopoly. All this evidence points very strongly to joint dominance. If you return home and in a few days time get a roaming bill from your visit to Switzerland, you can hardly go to your home regulator, it has no competence in Switzerland. If you write to the Swiss regulator it has very limited responsibility for visiting foreigners. The operators have found a way to rip off visiting foreigners which is proving very hard to crack. |
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| Refusal to deal |
Part of the roaming game is a refusal to
deal. You are only allowed into the game if you have a ticket, a GSM
licence. It matters little if that is for China, Iceland or the Åland
Islands, just so long as you have it. It is possible to buy air-time in different countries. However, nobody has been allowed to patch such purchases together in order to make a cheaper alternative to international mobile roaming. The KPN case revolves around the refusal of the operator to allow direct termination to the KPN Mobiel network. It is a very simple case, breaking not only competition law but also European Union directives. We have seen many problems where interconnection. has been refused or effectively deined. This ranges from the KPN case I mentioned earlier, the refusal to interconnect SMS in Philippines and ..... |
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| Walled gardens |
The concept of the walled garden is easy
enough to understand. You offer customers everything you think they might
want within the confines of a specially created version of the Internet
and either block access to the public Internet or make it extremely difficult.
In this way you ensure that all the revenues stay within the garden. The term "walled garden" comes to us from a competition law case lost by France Telecom. It involved something called WAP, a technology killed by an overdose of self-administered hype. France Telecom wanted to sell 2,000,000 mobile phones with access to information services using WAP, but only those services it selected. Interestingly, this is the same model used by the famous i-mode run by NTT DoCoMo. In Japan it seems to face no problems with the competition law authorities. DoCoMo also does discriminatory billing for third parties which would be illegal under EU or US competition law. So do not expect competition law to be even across the world. You might also like to watch what happens when they try to extend that walled garden abroad, with international mobile roaming. We will see the interaction of different jurisdictions. For today we can ignore the fascinating question of whether the walled garden is a commercially attractive model. Many people would argue that it detracts so much from the appeal of the service, that it will collapse and fail in the market, long before competition authorities get around to asking difficult questions. To date, there is little evidence that the walled garden is a successful business model for fixed or wireless Internet. An enormous effort has gone into developing GPRS, a form of 2.5G. It is like ISDN for mobile phones. It has a private IPv4 addressing scheme and operates within a .GPRS top level domain. GPRS networks are protected from the wilds of the Internet by a Network Address Translator (NAT). You may better know this better as a firewall. The mobile network operators can use this as a means to charge for services such as telling ASPs the IP address, location or handset ID of their customers. Some of you may know that I spent many years in universities, mostly teaching business strategy and information technology. The link to competition law comes from something known as Customer Reservation Systems (CRS). The competition lawyers here will know of a very long case law involving Sabre and its European equivalent Galileo. Put simply, the accusation against the airlines running the CRS was their flights always came up at the top of the list seen by travel agents, even if those flights were more expensive or involved changes of planes. Other airlines were relegated to the next screen or worse. The courts have consistently found that this was not acceptable. There was an obligation under competition law to provide the information on a non-discriminatory basis. Additionally, there is strong case law for Electronic Programme Guides. In my view, these are both directly applicable to the case of walled garden versions of the Internet. Now that must be a constraining factor when looking at income for 3G operators. |
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| Excessive pricing |
In competition law it is hard to prove excessive
pricing. It is pretty easy to find potential examples:
However, getting the details is hard. It is likely to require the use of "dawn raids". It is also likely to be out of date by the time you complete the analysis. |
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| Price squeeze |
Much harder than excessive pricing is proving
a price squeeze. Here the trick is to find out what the real costs are. I recall the comment by a board level sales director from a leading telco: "I don't know the costs, I just set the prices. You could ask the regulator, they know more about our costs". Examples of price squeezes are:
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| Mergers & acquisitions |
One area where there has been a lot of activity
in telecommunications in recent years has been in the buying and selling
of companies. There are some very beneficial examples, where merger controls have been used to accelerate the opening of markets. The European Commission was able to use the Atlas decision to accelerate opening of the French and German markets. |
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| Complaints under competition law |
The use of competition law has been a great
change for users. We are familiar with the traditional processes and remedies of ex ante regulation. We know to whom to go and the sorts of arguments that work. We are accustomed to pretty fast service. We have had to learn the idiocyncrasies of ex post regulation. It is a different world, one that is slower, like wading through treavle. It is one that relies on a much higher standard of evidence, evidence that is hard to produce. It is one where the results often come too late, the potential beneficiaries are dead or mortally wounded. The adjustment to competition law is still in its early stages. We are learning a lot about competition law, to collect data and to make new analyses. Some of my colleagues were quite surprised by the detail we had to provide in our submission to the UK Competition Commission on fixed-to-mobile call termination. Yet that is as nothing to the sum of £20 millions allegedly spent by the operators on that case. My colleagues in the Nederlandse vereniging van bedrijfs telecommunicatie grootgebruikers (BTG) were the first user group to be served with an Article 11 letter by the European Commission. This obliged them to provide data to DG Competition on the Worldcom KPN case. Competition law is supposed to be less political than ex ante regulation. This is not true. In recent months we have seen the enormous efforts by the GSM Association to bring political pressure to bear on the European Commission not to act on the questions of fixed-to-mobile call termination and international mobile roaming. If you regulate these you will not get 3G. I think I would call their bluff on that one! It cannot be easy as a Commissioner to return to your office to be told that the President of France or the German Chancellor called while you were out and wanted to talk about these issues. Or that the CEOs of Ericsson and Nokia want the same discussion. The pressures are severe. |
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| Competition law in Internet time |
Perhaps the simplest way to improve the
application of competition law would be through more and better resources.
This could be by supplying additional lawyers and economists to the
appropriate authorities. However, I am suspicious of solutions
that involve employing more economists and lawyers, it does not sound as
if it is adding to sum of human happiness or to the growth of the world economy. NRAs and NCAs are unlikely ever to match the resources of the operators. Their efforts will almost always exceed those of the state, they have more at stake. There are substantial benefits to be achieved by sharing expertise between different authorities and by doing so quickly. For example, work on market definitions. It would require translation, both of language and also of legal systems, but that is not impossible. There is already work through the OECD and the European Union plus the bilateral discussions, for example, between the European Commission and the US Department of Justice. There might be merit in creating specialist courts, with the expertise to dispense justice in telecommunications or more broadly in ICT cases at a more rapid pace. It been suggested that companies are insufficiently afraid of competition law or at least by any immediate threat of enforcement. That is something that must be addressed. Like the changes instigated last summer by the Securities and Exchange Commission (SEC), a sworn attestation of compliance with competition law would be a step forward. It would oblige chairmen and CEOs to think more carefully about compliance. |
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| Thanks |
Thank you very much for your time and your
attention. I hope there was something of interest in what I said. A copy of my presentation will be available on the INTUG web site later today, courtesy of the ITU's Wireless LAN. |
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