APEK position in Case SI/2008/0806: wholesale access and call origination on public mobile telephone networks in Slovenia1

Dr. Titiriga Remus

On 29 October 2008 the Slovenian National Regulatory Authority, Post and Electronic Communications Agency of the Republic of Slovenia (APEK) sent a draft to the Commission concerning the market for wholesale access and call origination on public mobile telephone networks.

I. DESCRIPTION OF THE DRAFT MEASURE

I. Market selection and definition APEK defines the relevant product market as a market on which a mobile network operator supplied access and voice call origination for the purposes of offering services to mobile network operators (in the form of national roaming), virtual mobile network operators and service providers / resellers. APEKs market definition includes self-supply. The relevant geographic market is national in scope. On this market there are four mobile network operators (MNOs) in the Slovenian mobile market, namely Mobitel, Si.mobil, Tusmobil and T-2. There are also two resellers or service providers, using Mobitel's infrastructure, i.e., Debitel and Izimobil. It corresponds to M15 in the terminology of 2003. The three criteria test (which are not contested by the Commission) APEK carries out the three criteria test2 with regard to the notified market. - High and non-transitory barriers to entry APEK highlights the following indicators: control of infrastructure not easily duplicated, sunk costs, economy of scale and scope, technological advantages or superiority, level of vertical integration, barriers to expansion and product diversification.

This paper is based on a presentation for the Workshop about Case SI/2008/0806: wholesale access and call origination on public mobile telephone networks in Slovenia, held in April 2009 at ICRI, Leuven. 2 According to Recital 5 of the Recommendation, when identifying markets other than those mentioned in its Annex, national regulatory authorities should ensure that the following three criteria are cumulatively met: (1) there must be high and non-transitory entry barriers, (2) the structure of the market must not tend towards effective competition within the relevant time horizon-till the new evaluation- and (3) the application of competition law alone would not adequately address the market failure(s) concerned.

APEK points out that in spite of the recent entry of Tusmobil and T-2 it considers that barriers to entry are still high as operators have to invest significant amounts of money in building up their own infrastructure. There are significant differences in terms of economies of scale and scope. Mobitel and Si.mobil have networks covering the whole territory of Slovenia, whereas the two new entrants are still far behind them in terms of network coverage3. According to APEK, new entrants which do not have an infrastructure similar to that of established operators have nevertheless to compete with those operators at the retail level. In a mature mobile market, however, new entrants without national roaming agreements would not be in a position to compete effectively. In the areas without own infrastructure, the new entrants have been relying on national roaming services provided by Mobitel by virtue of the access obligation imposed by APEK in its first review of this market. - No trends towards effective competition APEK analyses the retail market shares and concludes that the two leading operators have gained stable position in the market. On the wholesale market for access and call origination, Mobitel's market share is even higher, as besides self-supply, it also contains traffic and/or revenues stemming from services provided to service providers / resellers and national roaming partners. Based on these figures and on its finding of convergence between Mobiltel's and Si.mobil's market shares, APEK concludes that the market does not tend towards effective competition within the timeframe considered (in the following two years, until the next market review). APEK considers that Mobitel and Si.mobil have similar cost structures based on which they are able to offer comparable wholesale and retail prices. In view of this, APEK foresees that by applying common pricing policies, either at the wholesale or the retail level, Mobitel and Si.mobil could foreclose their competitors from the retail market. - Insufficiency of competition law alone APEK emphasizes the need for a prompt and effective ex-ante intervention which is not guaranteed by ex-post competition law in this case.

II. Finding of a significant market power (joint SMP)

While Mobitel and Si.mobil possess a network with a coverage close to 100% in terms of population for GSM and GPRS services, Tusmobil's population coverage is around 80% and T-2 covers 25% of the population with its UMTS network

APEK finds that Mobitel and Si.mobil hold a position of collective dominance on the wholesale market for access and call origination on public mobile telephone networks in Slovenia. It therefore intends to designate these two operators as having joint SMP. APEK emphasises a number of structural characteristics of the Slovenian market which are conducive to a coordinated behaviour between the two MNOs, most notably : the level of market concentration, barriers to entry, lack of countervailing buying power, the ability to coordinate (the existence of a focal point), the ability to detect cheating (transparency of the retail and wholesale markets), the enforceability of compliance (ability to use retaliation mechanisms) and similar costs structures. -As far as for market concentration APEK concludes that the degree of concentration on the retail market and therefore also on the wholesale market is very high and stabilised. -(As far as the barriers to entry+ lack of countervailing buying power, they were already examined in the market definition). -According to APEK, the focal point is the refusal to supply national roaming, which can happen during any phase of negotiations. In this respect, APEK notes that access seekers have already contacted both established operators in order to launch negotiations on national roaming agreements. APEK explains that in May 2006 Tusmobil tried to negotiate upon reasonable request a national roaming access to Mobitel's network. As it was not able to conclude a roaming access agreement in early 2007 Tusmobil filed a complaint to APEK, claiming that Mobitel was not negotiating in good faith, applied delaying tactics and set unreasonable commercial conditions. As defence, Mobitel claimed that the access obligation imposed on it in the first market review did not cover national roaming. APEK resolved the dispute through its mediation procedure enabling Tusmobil to rely on national roaming provided by Mobitel. In parallel, Tusmobil requested national roaming from Si.mobil as well. Although Si.mobil did not explicitly refuse to grant access, it never provided Tusmobil with its proposed price for wholesale access. In addition, Si.mobil was delaying negotiations4 which in APEK's view indicate that Si.mobil did not negotiate in good faith.

Si.mobil and Tusmobil could not agree on the provision of termination services (location of the point of inter connection and termination price), either.

-With regard to transparency, APEK considers that although the wholesale access price offered by the network operators is confidential and as such, initially not transparent for each other, it can be revealed during the negotiation process if access seekers conduct negotiations with both operators in parallel. -APEK notes that the fact that access has been granted can be detected immediately, as the new entrant will follow with its retail marketing strategy, which would be clearly visible. Thus, an operator seeking retaliation will know immediately that its competitor granted access to the new entrant. Accordingly, it can therefore immediately react at the wholesale and/or retail level. However, as in the present case Mobitel is regulated and Si.mobil knows it, no retaliation followed at that point.

III. Commission assessment: lack of sufficient evidence provided by APEK to substantiate its finding for a joint SMP of Mobitel and Si.mobil. The Commission after examining the notification and the additional information provided by APEK considered that the notified draft measure falls5 within Article 7(4)(b) of the Framework Directive and would affect trade between Member States.6 The Commission is concerned that APEK would make part of the activities of Mobitel and Si.mobil subject to ex ante regulation on the basis of a SMP assessment which may not be in accordance with the principles of competition law. The competitive process and investment in Slovenia may hence be hindered by APEKs measure as notified. The Commission has doubts as to whether APEK's finding of joint SMP of Mobitel and Si.mobil, in particular relating to the incentives to coordinate, the ability and incentives not to deviate from the coordinated outcome as well as the existence of rents to be protected, is adequately substantiated by the evidence provided. When assessing whether a market is conducive to joint SMP (i.e., collective dominance)7 in the form of tacit collusion, an NRA should analyse whether:

APEK proposed to impose on Mobitel and Si.mobil the following regulatory remedies: i)access to and use of certain network elements and associated facilities for mobile network operators (in the form of national roaming), virtual mobile network operators and service providers/ resellers, ii) non-discrimination, iii) transparency, iv) price control and cost accounting. 6 The conditions for the wholesale access and call origination on public mobile telephone networks in Slovenia determine the costs and the ability of other operators and service providers (including those established in other Member States) dependent on that particular market, to provide electronic communication services. Draft measures designating or not an undertaking, either individually or jointly, with SMP in Slovenia may have an influence, direct or indirect, actual or potential, on the ability of undertakings established in other Member States to offer electronic communication services. Consequently, such draft measures may affect the pattern of trade between Member States. (see Recital 38 of the Framework Directive.)

a) the characteristics of the market make it conducive to collective dominance; b) the form of coordination is sustainable and examine (i)whether any of the oligopolies has the ability and incentive to deviate from the coordinated outcome, considering the ability and incentive of the non-deviators to retaliate; and (ii)whether buyers / fringe competitors / potential entrants have the ability and incentive to challenge any anti-competitive coordinated outcome.8 In the present case these requirements can be checked against the following criteria:9 1) the existence of 'pent-up demand': where there is no demand for access, there cannot be any collective denial of access; 2) the role of fringe competitors: 'maverick' operators which prove capable to break the collusive equilibrium would put into question the collective dominance finding; 3) in case MVNO / national roaming agreements are already signed absent regulation, the collective denial of access has little credibility; 4) the understanding that collective dominance need not be established at the retail level but that retail competitive conditions will inform the NRA about the state of competition at the wholesale level. In this particular case, the Commission notes that there is a demand for wholesale mobile access and call origination services as indicated by the current supply of such services by Mobitel. Under the current circumstances (in particular, in view of the access obligations imposed on Mobitel by virtue of APEK's previous market analysis), however, this demand is rather explicit and is in fact satisfied. On the other hand, what counts here is the situation which would prevail absent the regulatory obligations imposed on Mobitel on this specific market (modified greenfield approach). In this respect, it is expected that the demand for wholesale mobile access and call origination would remain the same, while the reactions on the supply side are unclear. The incentives of Mobitel and Si.mobil to provide or refuse such access are further examined below. It has to be further noted that there are two new entrant mobile network operators (Tusmobil and T-2) and two service providers (Debitel and Izimobil) which can put competitive pressure on the

The definition of SMP is equivalent to the concept of dominance as defined in the case law of the Court of Justice and the Court of First Instance of the European Communities (Article 14 and Recital 25 of the Framework Directive). Consequently, the notion of joint SMP is equivalent to the EC competition law concept of collective dominance and the two notions should be considered as interchangeable for the purposes of this assessment. 8 Point 96 of the Guidelines, referring to past decisions of the Commission related to collective dominance and the judgement of the Court of First Instance in Case T-342/99 Airtours [2002] ECR II-2585. 9 See for example Commission decision in case IE/2004/0121.

two established market players, i.e. Mobitel and Si.mobil. Each of these competitors is however essentially reliant on the access services provided by either Mobitel or Si.mobil, thus it is questionable whether they can be regarded as 'maverick' operators. Some elements in Commissions analysis -Retail price competition As it has been mentioned above, the finding of collective dominance at retail level is neither necessary nor sufficient to demonstrate collective dominance at wholesale level. However, in view of the limited number of transactions at wholesale level, the characteristics of competition at retail level are informative as to the existence of collective dominance at wholesale level. For such coordinated behaviour to be plausible, members of the oligopoly) must be aware, sufficiently precisely and quickly, of the way in which the other members market conduct evolving and, ii) the alleged collusion at wholesale level must manifest itself in some degree of coordinated behaviour at the retail level which has as its ultimate aim the creation and/or protection of rents. The information provided by APEK seems to be ambiguous in this regard. On the one hand, APEK suggests that business strategies of new entrants (i.e., Tusmobil) have a direct impact on Mobitel and Si.mobil which modified their prices as a response to Tusmobil pricing strategy. On the other hand, the evolution of Average Revenue Per Minute (ARPM) suggests that prices are rather stable. The Commission further notes that the retail prices charged by the two established operators correspond to the European average.10 -Level of profitability The current and future level of excessive rents which MNOs may aim to protect by not granting access to potential competitors at retail level will inform NRAs about the incentives to coordinate behaviour. The existence of rents to be protected may in itself be indicative of a lack of competition. The data provided by APEK illustrate that these figures do not seem to be excessively high in a European comparison. The sustainability of a collusive outcome would however require the market players to generate a level of profits above the competitive level for a certain period of time or at least allow the prospect of a sustainable high level of profits over a certain period of time. This has not been demonstrated by APEK. -Retaliation mechanism
See Figures 17-19 of Commission Staff Working Document accompanying the Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions Progress Report on the Single European Electronic Communications Market 2007 (13th Report).
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APEK considers that retaliation in this case may take place at the retail and the wholesale level. It explains that the non-deviating MNO would respond by decreasing its own prices at retail level. If the two established operators entered into a price war, market shares would remain the same, albeit at lower prices. Given that this outcome would lower the profitability levels of the MNOs, the retaliation mechanism at retail level constitutes a credible incentive not to deviate from the common policy. The Commission notes, however, that although it cannot be excluded that such a retaliation mechanism may occur, on the basis of past retail price movements it is difficult to draw a clear conclusion regarding the future behaviour of the two established mobile operators. -Individual incentives to refuse access APEK explains that Tusmobil and T-2 entered the market being aware that Mobitel is obliged to provide access in a form of national roaming. Mobitel, however, was reluctant to provide such access referring to its interpretation that the access obligation did not cover national roaming and APEK's intervention was required. In any case, the new entrants' business strategy was based on the reliance on Mobitel's network. On the other hand, although Si.mobil did not formally refuse to provide access to Tusmobil an agreement was never concluded between them. On this basis, APEK draws the conclusion that Si.mobil did not want to provide access, either. APEK considers that the strategy adopted by the two larger players inevitably means collusion. Refusal to supply can only be effective under the assumption that the other party would also refuse to provide national roaming services. However, the Commission is of the view that being aware of Mobiltel's obligation to grant wholesale access, Si.mobil could be encouraged to provide access in order to generate wholesale revenues. Thus, the fact that Si.mobil has not successfully finalised any negotiations in that regard, may indicate that it has its own individual incentives for not granting access. In any event, the existence of the focal point would need to be further substantiated by APEK.

IV. APEK has withdrawn his draft in order to realise a deeper analysis of Commission conclusions (2 months were considered as insufficient). What can APEK do by now? - No SMP will be identified. That is unlikely, since there is no fundamental change on M15 market (relative to 2005 market analysis). -Chose a simple SMP qualification for Mobitel (as before)? But what will happen with Simobil which may occupy Mobitels position? -Provide further argument and proofs for the joint SMP on the market 7

a) Contest the conclusions of the Commission. As a matter of fact Commission expressed just doubts about insufficient factual grounds for some of APEK analysis (however the Commission has always a veto power and-at least in the administrative phase- the final word). b) Refine the analysis on the basis of Commissions findings and jurisprudence (and not on the basis of ECJ case law).