INTUG - International Telecommunicaitons Users Group

Competition law and consumers
the case of telecommunications

Ewan Sutherland  

given on 20 June 2003 at the Katholieke Universiteit Leuven
Leuven Centre for a Common Law of Europe & Leuven Centre of Consumer Law



Mr Chairman

Thank you very much for the invitation to speak today.

INTUG is the International Telecommunications Users Group, we comprise national associations from around the world, such as BELTUG here in Belgium and the Nederlandse vereniging van bedrijfs telecommunicatie grootgebruikers (BTG), plus multinational companies and some individual members.

When issues come to INTUG they are often already quite serious, since it implies that individuals and companies have tried to negotiate with operators in their home country and failed. The national associations may also have tried and failed. Then we look for an international solution. That might be through an intergovernmental body such as the OECD or through the European Commission.

The primary issue of this year's conference is whether and how competition law benefits the consumer.

I presume we can take it for granted that it benefits the lawyers, since they are charging fees.

As the presentations have made clear, that benefit may be specific or more general, it may be immediate or delayed.

There is a complex relationship between general competition law and sector-specific regulation. INTUG works exclusively in telecommunications and confines its activities to parts of that sector, we simply cannot do everything. We have to set priorities.

For most of the last thirty years we addressed our complaints and requests to the PTTs, such as the Belgian Regie de telegraphes et telephones of recent and fond memory. Increasingly, telecommunications became the subject of sector specific regulation and more recently still of general competition law. The overall policy has been one of introducing competition to a sector once a vertically integrated monopoly.

INTUG continues to favour a pro-competitive stance. We support the view of the OECD in its most recent Economic Outlook No. 73. Competition continues to the answer.

As has been indicated, the aim of the new European Union legislation is to take a major philosophical jump towards competition law. That is due to have been transposed in just a month from now. Though several member states are badly delayed and some are not really making an effort to keep their commitments.

How quickly we will see truly competitive markets remains to be seen. Only then will the sun set on sector regulation.

A strong case can be made that we have gone too far in adopting competition law, that we need first to see some real competition.


Internet time

One of the problems with competition law is that it is not fast, at least not in commercial terms. For what may seem to lawyers to be good reasons, they move slowly, even ponderously.

The cases of the United States versus American Telephone and Telegraph and the United States versus International Business Machines both ran for more than a decade. In the former, the company was divested or broken up, while in the latter, the case was dropped but not before it had imprinted itself on the company, taking years to undo.

The case of United States versus Microsoft has been somewhat faster, though it is still not closed. We are in the surreal position of settling the browser wars years after commercial hostilities ceased.

That can be contrasted with the important decision to force IBM to separate off its software business in the late 1960s, until then hardware and software were previously bundled. So competition law can and does make a significant contribution in the high technology sector.

In some sectors of the economy this sort of delay may not matter. In steel production or in sugar refining, I believe innovation is not fast and market entry is not something for which companies are clamouring. So delay does nor appear to be a problem of the same order of magnitude. High technology is characterised by short product life-cycles, by the desire for market entry and complicated funding by sequential bursts of venture capital and an Initial Public Offering (IPO).

Delay creates problems in rapidly changing markets. There are new products and services, there are new tariff schemes. An obvious strategy of established market players are to create Fear, Uncertainty and Doubt (FUD) about market conditions and about the future survival of their competitors. This may buy them time to catch up or to allow them a pre-emptive strike in the market.

For the competition lawyers, the pace of change is problematic. The market definitions and conditions will change. If a case runs too long, then they will constantly be catching up.

In an important sense, this is a problem for lawyers and not for consumers or indeed for INTUG. If the lawyers can only produce a remedy in a railway age time scale and not in Internet time, then we have to look elsewhere for remedies. It is not much more sophisticated than that. Four years for an appeal may have been considered expeditious to our great grandparents, it is laughable today, when product life-cycles are weeks or months.


International mobile roaming

I can talk at great length on the subject of international mobile roaming, but I will not.

For those interested, INTUG recently set out its position to the European Regulators Group and I gave a speech on this in London a few days ago.

Roaming is a blatant and obvious abuse of market power. It is devious and it is clever. It separates the retail market in one country from the wholesale market in another country. It allows operators to charge for calls at rates they would not dare attempt in a domestic market. It brings in about 15 to 20% of the revenues of a typical European mobile network operator. It is a game in which all the operators win, only the consumers lose. It is a cartel.

INTUG first presented its data on this to the European Commission in early 1999. The result was the inclusion of roaming in the sector inquiry launched by Karel van Miert, of the outgoing European Commission, on 27 July 1999. That inquiry continues today. It is not unduly slow by the standards of DG Competition, compared with say the investigations into the distribution of motor cars described by another speaker

The issue was also considered in the merger case of Vodafone and Mannesmann (Comp/M.1975). Undertaking were made by Vodafone, but these were never used by another operator and recently expired.

If we try to test progress against the benefit for consumers, then competition law fails. To date, it has not delivered benefits to the consumer. It might do so in a year or two or then again it might not. INTUG continues to argue strongly that the inquiry should and must be completed.

The delay has been caused by formidable problems. It was first necessary to define a market, to split mobile telephony into its component parts and to be convinced that those parts were different markets and should be treated as such.

There were and remain formidable problems of data gathering, in framing the questions and persuading operators to provide the data. The European Commission had to persuade the Bundeskartellamt (Germany) and the Office of Fair Trading (United Kingdom) that they should help by conducting dawn raids.

Such investigations are not made any easier by the often difficult and even bloody-minded tactics of the operators.

The roaming case was held back by the need to use the doctrine of joint dominance. Last year, the judgement of the European Court of Justice in the case of Airtours versus European Commission (T-342/99) meant it was necessary to reconsider all cases involving joint dominance.

In part, problems of relative slowness could be solved by the use of more people. If an authority was willing to throw a lot of people at the problem, perhaps only for a short time, it could reach a solution promptly. However, that would require the cooperation of the courts to act equally quickly and to force the pace of all parties. It would require primary legislation.


Fixed-to-mobile termination rates

The charges for fixed-to-mobile call termination are another way for the mobile network operators to gouge customers. They offer cheap handsets and cheap calls to other networks, but then make money from incoming calls. Around 25% of their revenues come from inbound calls. The prices charged, at EUR 0.20 or more per minute, are far in excess of cost, which is around EUR 0.05 per minute.

One of the big arguments was over the market definition. Again, whether mobile termination was a separate market, or had to be considered as part of some larger mobile telecommunications market. The conclusion here has been that it was separate and a distinct market. It was then necessary to decide if the market was Belgium or separate for Proximus, Mobistar/Orange and KPN/Base. The conclusion was that each operator had a separate termination market. It was hard to imagine a phone ringing and your screen showing three different prices for an incoming call allowing you to pick. It is human weakness to pick the operator with cheap outbound calls and ignore inbound costs. The operators never advertise the inbound rates.

The single operator market definition is the view of:

DG Competition has an open case on MCI versus KPN. This began in 1998 and might be closed this year. Again, it is a question of time and resources. The benefit for consumers will be in future reduced charges and not compensation for past excessive prices. Nor will the outcome of the case have stopped KPN from limiting competition in the Dutch market.


Broadband

One of the great surprises in the world of telecommunications is that Belgium is the European leader in broadband. Belgacom, once the almost entirely inert Regie des Telegraphes et Telephones, has surprised even or perhaps especially itself.

There is, unfortunately, a catch, in that when you open up the Belgian broadband box, you discover Flanders doing very much better than Wallonie. The underlying causes seem to be the fragmented nature of the cable television companies and the differential take-up rates in the two language communities. I have seen no data for the German language community. It is not a matter of competition law to remedy, it is one for a pro-competitive policy to push the cable companies to act before Belgacom overwhelms them in the content business.

An example of the rapidity of commercial developments is that companies such as Belgacom are trying to take advantage of their initial dominance in the broadband market by signing exclusive content deals. This is understandable for them and for the content owners. However, it may preclude or make much more difficult future market entry for other players. So that one has to go back and ask why and how Belgacom obtained its dominance in the market and whether it can bundle this with market power from specific content.

This is not an easy problem to solve. Sometimes the remedies may be worse than the problems.

An even harder problem can arise with price squeeze in broadband. Here we have seen several regulators struggle with the differences in prices between wholesale and retail, between xDSL and unbundled local loop. They have proved extremely hard to understand, let alone resolve. It is not easy to explain to consumes that the market is now more competitive because your prices have gone up!


Conclusions

Sometimes competition lawyers seem like Marxists, in that they view the whole world very narrowly. Competition law, like dialectical materialism, has limits beyond which it cannot usefully be applied. There are problems which it cannot solve.

Economic activity in the European Union operates within a complex set of interlocking policies:
The need beyond this for sector specific regulation arises from the peculiar characteristics of telecommunications markets, to some extent shared with other high technology sectors. There need to be solid reasons to justify such regulation.

Competition law has some severe remedies and we need to be careful how these are applied. We need to ensure due process and appropriate appeals procedures. Equally, we need to recognise that the world has changed, that the pace has accelerated in some sectors of the economy and that regulation has to keep up.

We also need to consider whether there is sufficient fear of penalties to discourage companies from contravening competition law. If telecommunications operators can be made sufficiently fearful of competition law, then they will conduct a proper analysis of their behaviour as they go along, in order to ensure proper compliance. At present, they veiw regulation as a game which they play for competitive advantage and time.

It is often very hard for consumers to participate in competition law proceedings. They are highly technical and will require professional support. The nature of the analysis and the search for remedies are so complex, that many participants are lost even before the process begins. Our own work in INTUG on the surveys of international mobile roaming have been very time consuming.
   
The argument put by Professor van den Bergh about ensuring economic efficiency is interesting. However, in many cases it is a political decision that is made, overriding economics and legal opinions. Politicians, for the most part, cannot distinguish Higgs Boson (a sub-atomic particle) from Kaldor-Hicks (economic efficiency). They take decisions at a less abstract level.

In the case of the mobile sector the efforts of INTUG have been the subject of counter-vailing political power. The mobile network operators have been shameless is using their political leverage. Countries have been told that their "struggling" third or fourth mobile operator, perhaps with a modest market share, would not survive when revenues from fixed-to-mobile and international roaming are cut. That the subsequent outbreak of competition in call origination prices would be too much for them. It is certainly hard to argue for the correct and proper application of competition law if you genuinely believe that it would kill off smaller players.

In the cases of France and Germany the staggering debts of the incumbent operators, respectively €70 and €60 billions would be even harder to reduce if their mobile revenues were to be reduced. Of course, the position would be very different, if the operators had been prevented from engaging in their abuses.

Clearly, life would be easier if the mobile operators had not gone down the road of anti-competitive practices. If they had seen regulation as a matter of compliance and not a game to be played. If penalties and fear of being caught were sufficient to ensure compliance.

Like other high technology sectors, the pace of scientific and commercial development is very rapid and sometimes frenetic. It is complicated by the dominance and the re-emerging dominance of the incumbent operators. Broadband Internet access seems to have given them a new burst of life. At the same time, they have been abject failures as new entrants in other countries. Their core competences are incumbency are manipulating the regulatory framework


Thank you very much for your attention.


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Last updated 20 June 2003.