The Telecommunications Regulator (Autorité de Régulation des Télécommunications ART),

Transcription

1 Notice No issued by the French telecommunications regulator (ART) on 7 July 1999 in response to the France Telecom pricing decisions No E in relation to the new Netissimo and Turbo IP services and No E in relation to trials of the Turbo LL service The Telecommunications Regulator (Autorité de Régulation des Télécommunications ART), having regard to: The Posts and Telecommunications Code, in particular Article L Article 17 of the contractual obligations of France Telecom under Decree No dated 27 December 1996 Requests for the issue of a Notice from France Telecom received on 22 and 28 April 1999 Additional information submitted by France Telecom on 21 May, 26 May and 7 June 1999 Letter from the Chief Secretary to the Secretary of State for Industry and the Second Secretary to the Minister of Economy, Finance and Industry dated 25 June 1999 Additional request for the issue of a Notice in respect of the proposed Turbo IP service submitted by France Telecom on 25 June 1999 Decision of the Competition Council (Conseil de la concurrence) No 99 MC 06 dated 23 June 1999 in response to the request for an interim injunction submitted by the company Grolier Interactive Europe / Online Group and having considered the matter on 7 July 1999, issues this notice in respect of the following: 1. Description of the ADSL services proposed by France Telecom 2. The present situation in the Internet access market and the way in which the proposed ADSL services would be integrated into this market 3. The regulatory framework governing these services 4. The structural questions raised in relation to other players in this market 5. An analysis of the proposed price levels 6. The conclusions arrived at by ART 1. Description of the ADSL services proposed by France Telecom The pricing decisions relate to the following three separate services based on the implementation of ADSL technology on the analogue telephone lines in the France Telecom network: Autorité de régulation des télécommunications 1/15

2 Netissimo, a service enabling a subscriber to use an ADSL line to access an Internet Service Provider (ISP) Turbo IP, a service enabling an ISP to provide high speed Internet access to Netissimo subscribers Turbo LL, an experimental service providing an ATM link between a central site and remote sites connected to ADSL lines While Turbo LL can be considered as an independent service that offers end to end ATM connections, Netissimo and Turbo IP are each dependent on the other. A subscriber wishing to access the Internet using ADSL must subscribe to Netissimo from France Telecom and to a high speed Internet access service provided by an ISP. The ISP, in turn, must be connected to the France Telecom ADSL network through Turbo IP. The following diagram illustrates the relationships involved ADSL trials carried out by France Telecom Before proposing the commercial launch of these services, France Telecom began a programme of trials to test the technical feasibility of providing Internet access over ADSL lines at the start of Three commercial trials were then carried out in the following areas: Noisy le Grand, Villiers sur Marne, Neuilly sur Marne, Neuilly Plaisance and Gournay, beginning on 15 February 1998 Rennes, Bruz, Saint Grégoire and Thorigné Fouillard, beginning on 15 June 1998 Nice and Le Mans, beginning on 1 December 1998 In all these trials, France Telecom offered an integrated Internet service, combining the equivalent of Netissimo and the Wanadoo service offered by the subsidiary ISP company France Telecom Interactive. The pricing structure for these experiments was, with the agreement of the Ministers concerned, simply notified in accordance with Article 17 of France Telecom's contractual obligations mentioned above. On 16 February 1998, the Secretary of State for Industry responded to the pricing decision dated 10 February 1998 stipulating that, in the event of the ADSL service becoming generally available, "ADSL subscribers must be allowed a free choice of Internet Service Provider" Technical description of the services The provision of high speed Internet access over ADSL lines, as proposed by France Telecom, makes use of both new and existing equipment in the subscriber local loop. The diagram below shows the main components of the system. No alterations are needed to the subscriber s telephone line itself. Two new pieces of equipment are simply added at either end. These are a filter unit (at the subscriber end) and a DSLAM (Digital Subscriber Line Access Multiplexer), located in the France Telecom exchange where the subscriber s line terminates (at the distribution frame). These two units enable high speed data transmission over a normal telephone line, without disturbing normal telephone conversations and signalling. The subscriber s line becomes an ADSL line. Each DSLAM terminates a certain number of ADSL lines serving the area around the distribution frame in which it is installed. France Telecom has designed a two layer architecture to provide Internet access over the physical ADSL lines. The two layers are: Autorité de régulation des télécommunications 2/15

3 The data transport layer using ATM (Asynchronous Transfer Mode). Data is carried over the ADSL line between the modem, connected to the ADSL filter at the subscriber end, and the equipment making up the BAS (Broadband Access Server). Each BAS accepts ATM traffic from around ten DSLAMs, i.e. from all the ADSL lines in the area served by each DSLAM to which it is connected. The total service area covered by a BAS is known as a "patch" (plaque) in France Telecom terminology. Upload and download ATM circuits are set up between each subscriber and the corresponding BAS. The IP (Internet Protocol) service layer. The IP data from the connected computers is carried over the ATM circuits established between the subscriber ADSL modems and the BAS. The data is then transmitted by the BAS to the IP routers that France Telecom intends to install at the ISPs or IP carriers. The France Telecom IP routers will communicate with the IP routers belonging to the ISPs or IP carriers. The ISPs are responsible for providing IP connectivity to the rest of the Internet, together with various additional services ( , chat groups, etc.). France Telecom proposes to deliver the following services using this architecture: The Netissimo service to end users, including provision of the ADSL line and the transmission of IP data between the subscriber and an ISP connected to the system. The Turbo IP service to ISPs and IP carriers, providing a connection between the ISP and the system described above. Any ISP who wishes to offer services to Netissimo subscribers (i.e. who wishes to provide a high speed Internet access service using France Telecom ADSL lines) will be obliged to either purchase the Turbo IP service directly from France Telecom, or make use of the services of an IP carrier who, in turn, will have to purchase the Turbo IP service from France Telecom. France Telecom is also intending to offer the experimental Turbo LL service. According to France Telecom, this service is aimed at businesses and telecommunications operators. The service provides for the transport of ATM data between a subscriber with access to an ADSL line (included in the Turbo LL package) and a central site located upstream of a DSLAM. All these services assume that the total service area is divided into patches. Eventually, the whole country will be covered by around 100 patches (including three in central Paris and one in each of the immediately surrounding départements). In each patch, the Turbo IP service will collect all the traffic generated by the subscribers located in the patch. The present pricing decisions refer only to the Paris patches and those in the Hauts de Seine département, and the Netissimo pricing decision relates only to the launch of the service to end users in the six central Paris arrondissements (1 to 6) and three towns in the Hauts de Seine; Issy les Moulineaux, Neuilly sur Seine and Vanves. France Telecom suggests that the extension of these pricing decisions to any future patches should simply be subject to a notification procedure, and should not require official approval The pricing structure proposed by France Telecom a) Netissimo Two levels of Netissimo service are proposed. These are: Netissimo 1, providing permanent and unlimited access to an IP service from a single computer at peak data rates of 500 kbit/s for download traffic (from the IP network to the subscriber) and 128 kbit/s for upload traffic (from the subscriber to the IP network). The connection charge, including installation of the filter and ADSL modem, is FF net (FF775 inclusive of VAT). The monthly subscription is FF net (FF265 Autorité de régulation des télécommunications 3/15

4 incl. VAT). The subscriber has the choice of either buying the ADSL modem outright at a cost of FF net (FF1990 incl. VAT), or of hiring a modem at a monthly rental charge of FF37.31 net (FF45 incl. VAT). Netissimo 2, including the hire of an ADSL modem and providing permanent and unlimited access to an IP service from either a single computer or a local area network at peak data rates of 1 Mbits/s (download) and 256 kbit/s (upload). The connection charge is FF990 net (FF incl. VAT) and the monthly subscription is FF700 net (FF844 incl. VAT). b) Turbo IP The pricing for Turbo IP depends on the bit rate of the connection and the physical distance of the ISP from the France Telecom point of presence. Connections are available with bit rates of 2, 34 or 155 Mbits/s with connection charges of FF40,000 net for a 2 Mbits/s connection and FF80,000 net for 34 and 155 Mbits/s connections. If the ISPs point of presence is close enough to that of France Telecom (i.e. in the central "core" of the patch), France Telecom will charge a monthly subscription of FF19,000 in the case of a 2 Mbits/s connection, FF40,000 for 34 Mbits/s and FF80,000 for 155 Mbits/s. If the ISPs point of presence is outside the patch core, France Telecom will make an additional charge of FF1000, FF3000 or FF4500 per month per kilometre, depending on the bandwidth of the connection. France Telecom will also charge for the IP traffic bandwidth made available to the ISP. The charge is based on the number of 500 kbit/s units, on a reducing scale from FF3000 per month per 500 kbit/s between 0 and 2 Mbits/s, down to FF2200 per month per 500 kbit/s above 34 Mbits/s. France Telecom will restrict each ISP to a maximum capacity of 3.6 kbit/s per Netissimo 1 subscriber. c) Turbo LL The pricing for the Turbo LL service is split between the connection to the subscriber s central site and the connections to remote sites. The connection charge for the central site is set at FF30,000 net for a 34 Mbits/s or 155 Mbits/s connection. The monthly subscription depends on the distance of the central site from the patch core. If the site is located within the core, the charge is FF37,000 per month for a 34 Mbits/s connection and FF58,000 per month for a 155 Mbits/s connection. Outside the core, an additional charge of FF3000 or FF4500 per month per kilometre is also imposed depending on the bit rate. Each remote site uses ADSL technology to connect to the central site. The connection charge is FF4000, with a monthly subscription charge dependent on the type of connection. This charge is FF1800 per month for a constant bit rate connection at 2 Mbits/s download and 320 kbit/s upload, and FF1200 per month for a variable bit rate connection with a maximum of 2 Mbits/s download and 320 kbit/s upload. 2. The market for Internet access in France and the implications of ADSL Access to the Internet requires a local loop, to which the end user is connected, an Internet Service Provider (ISP) providing and controlling access to the Internet itself, and a national data network to carry the data traffic from the interface to the local loop to the servers operated by the ISP The present situation in the market According to the French Association of Internet Access and Service Providers (AFA), whose membership claims to provide access to over 80% of the individual Internet users in France, there were around 1.5 million Autorité de régulation des télécommunications 4/15

5 ISP subscribers in France at the end of April The telephone traffic generated by these Internet users represented a total of 13 millions hours online in April If the current rate of growth continues, the telephone traffic generated by users accessing the Internet over the Public Switched Telephone Network (PSTN) will reach some million minutes in 1999, representing around 12% of the total local traffic on the France Telecom network. The value of the retail Internet access market may be estimated by adding the total cost of telephone communications between the subscribers and the ISPs and the total amount of subscriptions paid to ISPs for Internet services. On the basis of the usage figures given above and the estimated income of each provider, ART believes that the total turnover for 1999 will be FF1600 million in communication costs and FF1300 million in ISP subscriptions The position of the France Telecom Group in this market The France Telecom Group is active in all segments of the Internet market, either directly or through subsidiaries. The breakdown is as follows: At the local loop level, France Telecom holds a virtual monopoly of end user access through its telephone network. France Telecom Cable also provides Internet access over the cable networks that it operates and markets. At the data transport level, the France Telecom subsidiary Transpac provides a national IP data service on behalf of a number of ISP offering non geographic local rate telephone access. France Telecom provides leased lines to all data carriers and ISPs. Competition in this segment of the market remains limited, essentially to the Paris region and a number of national and international trunk routes. France Telecom Interactive offers its Wanadoo ISP service to residential subscribers, independent professionals and schools. Oleane, another France Telecom subsidiary, claims to be the market leader in the provision of services to businesses. France Telecom has also developed a range of value added Internet services, including a web search engine, website hosting services and through its subsidiaries ODA and France Telecom Hosting. Additional e commerce services are also offered, as is a wide range of educational services in collaboration with educational publishers Internet user behaviour and coverage of ADSL offering The average time spent on line by individual Internet users in France has increased continuously from 4 hours per month in 1996 to 8.75 hours per month at the beginning of In addition to this average figure, ART has estimated the distribution of on line time among Internet users. Using the combined telephone charges and subscription charges applying to Internet access through traditional ISPs, this analysis has been extended to include the distribution of total Internet access charges paid by individual Internet users. On the basis of these estimates, it appears that between 3% and 5% of Internet users currently pay more than the FF330 (incl. VAT) per month that they would pay for Internet access via ADSL. This figure is based on the proposed Netissimo 1 service from France Telecom, including hire of a modem and with the connection charge written off over three years, together with a subscription to a high speed ISP (cost not yet known, but probably higher than that for Internet access over the PSTN). In view of their high usage levels, these Internet users may represent between 18% and 25% of the Internet access market by value. Autorité de régulation des télécommunications 5/15

6 2.4. The future of the Internet access market The introduction of new technologies such as cable networks, ADSL, and radio local loop will result in a considerable growth in the number of Internet users over the next few years, coupled with a rising demand for high speed access. The provision of Internet access over cable networks offers high speed access to subscribers and represents a diversification in the provision of local access. However, given the present situation in relation to Internet access via cable (Plan Cable, where the technical operator is France Telecom, and other networks operated and marketed by France Telecom Cable), the cable operators themselves believe that the number of cable connections that may eventually be used to provide Internet services in competition with France Telecom remains small in comparison with the 34 million telephone lines in the France Telecom telephone network. The commercial development of Internet access via cable is still at an embryonic stage. On the basis of data available at 1 May 1999, the total number of Internet access subscribers on cable networks not operated commercially by France Telecom Cable is only around 28,000. By contrast, ADSL is capable of providing high speed Internet access (at similar bit rates to the cable networks) over the ordinary telephone lines in the France Telecom network. These high speed Internet access services are charged at a fixed rate, irrespective of the time spent on line. This is made possible by the technical architectures of ADSL and cable networks, which are not subject to time based costs in the same way as the PSTN. These new services, offering high speed and permanent Internet access, together with a fixed monthly charge, are responding to a definite market demand Potential effects of the advent of ADSL services on the market for Internet access and associated markets a) Effects on demand According to the information available to ART, potential subscribers likely to be attracted by an Internet access service based on ADSL fall into two main groups. The members of the first group are already heavy users of the Internet who will see the ADSL services as a means of reducing the amount they pay for Internet access by removing the link between cost and time on line. The other group is attracted by the high quality of an ADSL connection and would be prepared to pay more for the benefits of permanent access at high data rates. Three effects of the advent of ADSL Internet services may already be predicted. These are: Substitution. A number of existing ISP subscribers will cancel subscriptions offering access via the PSTN in favour of a service accessed via ADSL. Growth. The total market will grow, although the rate of growth is difficult to estimate at present. Market awareness. In a market where technological innovation is an important differentiating factor, those ISPs who offer ADSL access will derive a competitive advantage, even in the traditional market for Internet access via the PSTN. Although their numbers are negligible at present, a number of sources maintain that subscribers to high speed services may account for between 5% and 7% of all subscribers by the year 2000, eventually reaching between 15% and 30% in Assuming a pricing structure similar to that currently offered by cable operators or that proposed by France Telecom in respect of ADSL (between FF300 and FF400 per month), the market for high speed Internet access may reach a value of between FF500 million and FF900 million in 2000, growing to between FF3 billion and FF6 billion in Autorité de régulation des télécommunications 6/15

7 b) Supply side effects In addition to the obvious effects on France Telecom and the ISPs who choose to associate themselves with the scheme proposed by France Telecom, the introduction of ADSL services may have an effect on the associated markets for national data transmission and multimedia content. The data carriers will see the volume of data increase in line with the number of users and the higher data rates. This increase in volume will provide a strategic opportunity for national data carriers. Those transmitting data traffic originating from the subscribers to high speed Internet services will enjoy a considerable competitive advantage in all markets, and in particular in their relationships with ISPs. They will benefit from lower costs arising from the economies of scale associated with the increased volumes, and they will be able to offer a full range of data rates. This raises the important question unanswered at present of unbundling the local loop, at present the exclusive domain of France Telecom, and providing equal access to all operators. Those ISPs operating in the high speed Internet access market are likely to develop new multimedia services to take advantage of the high bandwidths available. These new services may include downloadable encyclopaedias, radio, music and video. The presence of a large number of ISPs will tend to ensure that a wide range of content is available. 3. The status of Turbo IP Under the provisions of Article 17 of the France Telecom contractual obligations referred to above, the pricing structure for Netissimo, Turbo IP and Turbo LL have been notified and submitted to ART for formal approval. These services are offered by France Telecom without any competition in the market. In the absence of any significant alternative local loop suppliers, and the absence of any proposal from France Telecom to allow access to the local loop to third party operators, France Telecom has an effective monopoly on the local loop and is the only operator in a position to provide services based on technical improvements to subscriber s telephone lines. France Telecom has suggested that the pricing structure for Turbo IP should not be subject to the approval process as it constitutes provision of access as defined in Article L II of the Posts and Telecommunications Code, rather than a service as defined in Article 17 of its contractual obligations. France Telecom is seeking to make a distinction between the provision of access to service providers, regulated by Article L II of the legislation, and the provision of services to end users, governed by Article 17 of the contractual obligations. As Turbo IP is offered to ISPs rather than to end users, the approvals procedure laid down in Article 17.2 does not apply. However, while Article L II does define the concept of access provision, and Article 17 of the contractual obligations specifies the applicability of the pricing approvals process, nothing suggests that these areas of application cannot overlap. Article 17.2 does not specify which types of customer are covered by the requirement for pricing approval, and nothing in the Article restricts its scope to end users. To prove the point, France Telecom has not sought to exempt the provision of access to Teletel and Audiotel service providers from the requirement for pricing approval. From a regulatory point of view, Turbo IP is both access provision and a service without competition subject to pricing approval under the provisions of Article 17.2 of France Telecom's contractual obligations. This latter point has been confirmed by the Ministers with responsibility for pricing approval, and France Telecom has submitted a request for such approval to ART in the letter dated 25 June 1999 referred to above. Autorité de régulation des télécommunications 7/15

8 4. Structural problems in relation to other market participants In view of the implications for competition in the areas of data transmission and the provision of Internet access services and, equally, the desirability of providing useful innovative services to subscribers, ART has undertaken an analysis of the ADSL services proposed by France Telecom in as much depth as possible, given the short time scales and limited information available. From a competition point of view, it appears essential to ART that France Telecom should not be able to abuse its effective monopoly of the local loop and use the provision of ADSL services to improve its position in other markets, particularly in respect of subsidiaries such as France Telecom Interactive, Oleane and Transpac. In view of the monopoly situation in relation to the local loop and the regulatory framework under which it operates (in particular, Article L II of the Posts and Telecommunications Code), France Telecom is required to provide non discriminatory access to its network. It follows, from both telecommunications and competition legislation, that France Telecom must treat all market players in the same way as it treats its own services and subsidiaries. This requirement for equal treatment applies to ISPs, customers for the Turbo IP service and other operators, all of which must be in a position to compete effectively with the combination of Netissimo and Turbo IP Equal treatment for ISPs a) The purchase of Turbo IP and the launch of services ISPs wishing to provide a high speed Internet service using ADSL lines operated by France Telecom have no alternative but to connect to the France Telecom system via the Turbo IP service. The purchase of the Turbo IP service is therefore primary point at which the equal treatment of ISPs must be ensured. The technical conditions and pricing applied to each Turbo IP customer must be identical. The fact that Turbo IP is subject to the approvals procedure and that the pricing structure must be published in the France Telecom price list is sufficient to guarantee non discrimination between ISPs in respect of access to pricing information and the prices actually charged. However, the pricing structure proposed by France Telecom in respect of Turbo IP may, in itself, be a source of discrimination by virtue of the sliding scale of prices applied both to bit rates (the price of a 2 Mbits/s connection is proportionally much greater than the price for a 34 Mbits/s or 155 Mbits/s connection) and to IP traffic. These scales discriminate in favour of the larger customers for Turbo IP, in particular the IP carrier Transpac. In the absence of detailed information from France Telecom regarding its costs, ART cannot give a final decision on this pricing structure. In the opinion of ART, the main problem in relation to the technical characteristics of the services is the time scales involved in setting up a connection to Turbo IP. The implications of this are as follows: ISPs must be given sufficient notice of the patches in which the Netissimo is to be provided in order to make their own decisions concerning the launch of their services. In this respect, ART cannot accept the proposal by France Telecom that any geographical extensions to ADSL services should be subject simply to notification of the appropriate supervisory authorities, implying as it does a delay of just eight days before the service becomes operational. Any such geographical extensions must be subject to a new approval procedure with adequate advance notice being given to ISPs by France Telecom. Autorité de régulation des télécommunications 8/15

9 The negotiation of a contract with France Telecom must be carried out quickly. The openness provided by the formal approval of Turbo IP will help in this respect. Once the contract is signed, there must be no discrimination in the time taken by France Telecom to provide access to the service. The draft Turbo IP contract submitted to ART by France Telecom refers to a document entitled "General conditions for data transmission services" that is "still being written" according to France Telecom. ART therefore has no information on this important point. ART also wishes to stress that, as Turbo IP is also an access service as defined in Article L II of the Posts and Telecommunications Code, any inordinate delay in concluding or implementing a contract for Turbo IP may result in the application of the remedies prescribed in Article L of that legislation. Finally, the principle of equality between ISPs implies that ISPs in competition with France Telecom Interactive, and who were not involved in the technical and commercial trials carried out by France Telecom since the beginning of 1998 (see Point 1.1), must be in a position to launch their commercial services at the same time as Wanadoo. The Competition Council, in response to a request for an interim injunction from Grolier Interactive Europe, issued the decision dated 23 June 1999 referred to above requiring France Telecom Interactive to "delay the commercial launch of any high speed Internet access service based on ADSL for a period of 15 weeks following the installation of the necessary equipment, from which date France Telecom is required to provide any ISP, on request, with all the information needed to launch their own ADSL Internet access service. This delay period shall be terminated if any ISP other than France Telecom Interactive launches an ADSL Internet access service during the delay period". As a consequence of this decision of the Competition Council, and as France Telecom expects to receive the equipment on 15 July 1999, ISPs within the France Telecom group will be unable to launch their ADSL Internet access services before the beginning of November b) Conditions applying to the marketing of services to the public ART considers it essential that the manner in which ADSL services are marketed to the public does not conflict with the requirement for equality between ISPs. Under the scheme proposed by France Telecom, customers must subscribe to the France Telecom Netissimo service, and the installation of the filter and ADSL modem on the customer s premises must be carried out by France Telecom, regardless of the ISP chosen by the customer. Under these conditions, it is essential that France Telecom markets the Netissimo and Wanadoo services completely separately. ART notes the undertaking by France Telecom, as quoted in the Competition Council decision referred to above, that "the France Telecom Interactive Wanadoo ADSL service will be marketed separately from the Netissimo service". ART considers in particular, that any marketing literature issued by France Telecom in relation to its ADSL services must distinguish clearly between the Netissimo service, enabling access to a number of ISPs, and Wanadoo, the France Telecom Internet service. Separate marketing literature must be provided for each service. Moreover, France Telecom has informed ART that "in each patch, France Telecom will provide prospective and actual Netissimo subscribers with a list of service providers accessible from within the relevant coverage area. Any service provider who so wishes (subject to being accessible from with the patch) may appear on this list". ART takes note of this undertaking and stresses that France Telecom must provide equal Autorité de régulation des télécommunications 9/15

10 information to subscribers in relation to all the accessible ISPs. All customers requesting information on the France Telecom ADSL services from a France Telecom outlet must be informed that they have a free choice of ISP, and they must be offered a copy of the list referred to above. ART notes that, while these conditions are essential, they are not sufficient to guarantee equal treatment of all ISPs, as the opportunity for cross selling while a customer is placing an order for Netissimo with a France Telecom outlet, and the positioning of Wanadoo point of sale materials within the same outlet, will provide Wanadoo with a considerable advantage over other ISPs. ART considers that it is desirable for ISPs to be able to offer a complete ADSL service, including both Netissimo and their own Internet access service. This would enable ISPs to retain full control of their relations with their customers and would overcome the difficulties that would arise were the Netissimo service to be marketed exclusively by France Telecom. This form of indirect distribution of Netissimo by ISPs has already been considered by France Telecom in the case of Netissimo 2, by means of an addition to the Turbo IP contract proposed by France Telecom, but not yet submitted formally. It must be possible to extend this form of marketing to those ISPs who wish to avail themselves of it in relation to Netissimo 1. It must be possible for an ISP to negotiate such an arrangement as part of their Turbo IP contract (see Point a) above). Finally, ART notes that access to Netissimo requires the customer to be an existing subscriber to the telephone service provided by France Telecom. ART considers that this linkage, which risks being considered anti competitive, is not justified The ability of third party operators to offer a competing service As shown in the diagram in section 1.2, the system proposed by France Telecom consists of three functional layers; the ADSL telephone line, the ATM data transmission layer, overlapping the ADSL telephone line at one end, and the IP services carried by the ATM transmission layer. The end user receives services in the IP services layer. Netissimo, supplied by France Telecom to the end users, Turbo IP, supplied by France Telecom to the ISPs, and the services provided by the ISPs to the end users, are all IP services. The ATM transmission layer is used by France Telecom is providing its own IP services and is also made available, on a trial basis, to customers using the Turbo LL service. France Telecom is not offering operators any alternative to Turbo IP. In particular, an operator cannot obtain ADSL lines from France Telecom, or even access to transmit ATM data over ADSL. The operator must purchase the Turbo IP service from France Telecom, which includes access to ADSL lines, the transmission of ATM data and IP services. In effect, this means that the quality of the IP services provided by the various operators or ISPs connected to the France Telecom system is determined exclusively by France Telecom. In addition to the obvious parameters such as the maximum bit rates (500 kbit/s and 1 Mbits/s) and the actual bit rates, France Telecom retains control of access (authentication of subscribers) and the allocation of IP addresses (via the France Telecom company, Radius). In addition, France Telecom decides the geographical locations and sizes of the patches, together with the locations of the connection points. This tight control by France Telecom severely limits the technical and operational freedom of the operators and ISPs in their supply of ADSL services. When France Telecom supplies an ADSL telephone line, it also supplies IP data transmission services and other commercial services, which could have been supplied by competing operators. In the analyses carried out by ART, the value of these services corresponds to around half the total cost of Netissimo and Turbo IP. Autorité de régulation des télécommunications 10/15

11 Overall, the proposed scheme imposes technical and geographical limitations on the services that may be provided by third party operators. The technical diversity of possible services is reduced, particularly in terms of bit rates and quality of service, and price competition is restricted to ISP services only. This situation gives rise to problems with competition law, as France Telecom is using its monopoly of the local loop to impose IP transmission services on third party operators and ISPs to the detriment of both the technical and commercial diversity available to the end customer, and to price competition as a whole. ART believes that it is essential for operators to be able to offer services equivalent to the combination of Netissimo and Turbo IP without having to buy the IP services layer from France Telecom. Opening up the market in this way is equivalent to an IP carrier being able to access to the Internet by buying an indirect interconnection service from France Telecom. At the present time, ART has no knowledge of any intention on the part of France Telecom to offer services enabling such open access to the Internet via ADSL. ART notes that, from a technical architecture point of view, the Turbo LL service proposed by France Telecom is equivalent to the ATM transport function over ADSL underlying Netissimo and Turbo IP. Any operator buying a similar ATM transport service over ADSL should be able to provide their own end to end IP service and hence compete with Netissimo and Turbo IP. However, in practice Netissimo and Turbo IP are commercial services while Turbo LL is still at the trial stage and the characteristics of the two systems are different. In particular: The bit rate offered by Turbo LL is 2 Mbits/s, against 500 kbit/s or 1 Mbits/s in the case of Netissimo and Turbo IP. The quality of service provided by the ATM transport layer is not the same. The bit rates offered by Turbo LL are either guaranteed (CBR Constant Bit Rate) or variable (VBR Variable Bit Rate), while the ATM transport layer supporting Netissimo and Turbo IP offers no guaranteed bit rates (UBR Unspecified Bit Rate). These differences in technical specification are reflected in the pricing, with the result that an operator buying the Turbo LL service would find it impossible to offer end customers a service to compete with the combination of Netissimo and Turbo IP. 5. Analysis of the new pricing structures 5.1. Comparison with other operators In addition to the price of Internet access via the PSTN given in section 2.3 above, the pricing structures of the various ADSL services proposed by France Telecom may also be compared with Internet access services offered by cable operators in France and existing ADSL services in other countries. The French cable operators offer a combined service, including both the access network and an Internet service. Their prices (including the installation costs written off over three years) are between FF300 and FF320 (incl. VAT) per month for equivalent bit rates to Netissimo 1. ART is aware of ADSL services in Germany, Spain and the USA, with prices for a service equivalent to Netissimo 1 ranging from FF330 to FF440 per month, including the installation costs written off over three years, but excluding the subscription to an ISP. The price for Netissimo 1 lies towards the lower end of this range. However, ART also notes that a number of operators in the USA offer ADSL services at higher bit rates (equivalent to at least Netissimo 2) at prices around FF340 per month. Autorité de régulation des télécommunications 11/15

12 The overall price for Netissimo 1 (FF330 per month including rental of the modem, the amortized installation charge, and the subscription to a ISP) is higher than that charged by French cable operators, but similar to the prices for ADSL services in the countries mentioned above The pricing of Netissimo and Turbo IP ART has sought to estimate the economic situation of France Telecom and the ISPs offering high bit rate services via the France Telecom system. France Telecom obtains part of its income from the end customers, through the charge for Netissimo 1 and 2, and part of its income from the ISPs and operators using Turbo IP. ART has estimated this income from the predicted customer numbers supplied by France Telecom and, in the absence of data from France Telecom, has attempted to establish a model to evaluate the costs of providing these services. ART believes that these services will begin to generate a profit for France Telecom from 2001 onwards, with a considerable return on investment after five years. Insofar as the ISPs are concerned, ART has attempted to estimate their costs in order to arrive at a pricing level that would enable them to offer a profitable service. This estimate includes the costs of purchasing the Turbo IP service, sufficient national and international Internet bandwidth, suitable hardware and marketing. ART has concluded that for an ISP to be profitable within the time period given above in relation to France Telecom, the monthly subscription charge cannot be less than around FF165 (incl. VAT) for subscribers to Netissimo 1. ART notes that, should Wanadoo offer its service at a price less than this figure, France Telecom may be suspected of anti competitive practices or of cross subsidizing its subsidiary France Telecom Interactive. Any such practices, with would have the effect of excluding from the market all ISPs competing with Wanadoo, would be considered to be anti competitive. One way of overcoming any objections to the link between the prices of Turbo IP and Wanadoo would be to reduce the prices for Turbo IP. Such a reduction in price would enable ISPs to charge users less that FF165 per month, without adversely affecting the profitability to France Telecom of the combination of Netissimo and Turbo IP The pricing of Turbo LL In spite of requests to France Telecom, ART has not received sufficient information to comment of the proposed pricing structure for Turbo LL. 6. Conclusions The ADSL services proposed by France Telecom affect not only end users, but also ISPs and third party operators. The technical, commercial and pricing decisions taken by France Telecom will determine the future of the market for high speed Internet access in France. The analysis carried out by ART has shown that the proposed ADSL services give rise to a number of problems, especially in relation to the way in which they are to be marketed, the access of third party operators to the market, and the pricing. However, this analysis was carried out over a short time scale with incomplete information, and definitive conclusions were not possible in all areas. In view of the innovative nature of these services, ART considers that it is preferable to permit a market launch now under strictly controlled conditions, rather than to wait until a complete regulatory framework has been established. Autorité de régulation des télécommunications 12/15

13 A limited, but effective, launch of these services is the best way for all the players involved France Telecom, third party operators, ISPs, and end users to obtain all the technical, economic and commercial information they need in order to fully appreciate the implications of the various questions raised, and ultimately to permit the establishment of a regulatory framework under which ADSL services can develop in a stable and durable competitive environment Turbo LL France Telecom pricing decision No E refers to the supply of the Turbo LL service on a trial basis to "around fifty customers, half of whom are data carriers" for a limited period up to 31 December In spite of the fact that is unable to comment on the proposed pricing structure, given the limited time period for the trials, ART is of the opinion that this proposal may be approved on condition that the choice of operators and ISPs to take part in the trials is carried out transparently and without discrimination. France Telecom is to submit a report to ART at the end of the trial period giving the number and type of customers involved, the types of connection provided, and the turnover generated. ART requires both France Telecom and the other participants in the trial to submit details of the main technical and commercial conclusions obtained from the trial Netissimo and Turbo IP a) The requirement for equal treatment of all ISPs (see section 4.1) Subject to the comments in sections 4.1 and 5.2 concerning the pricing structure for Turbo IP, ART is prepared to approve pricing decision No E provided that France Telecom complies with the following conditions: In accordance with the decision of the Competition Council referred to above, and in order to ensure that all ISPs are treated equally in respect of the timing of launching their services, France Telecom must provide information to each ISP who requests it, at least 15 weeks before the launch of any ADSL services in a given patch. This information must be sufficient to allow each ISP to prepare their ADSL Internet access service, and must include a description of the patches and patch "cores", together with full technical and pricing documentation. In the case of the initial Paris patches, this information must be provided within the time limits set by the Competition Council. ART requires that these time scales are also observed in respect of any geographical extensions, as any such extensions may result in new ISPs regional service providers, for example wishing to offer ADSL services. France Telecom must market the Netissimo service and any Internet access services (including, but not limited to Wanadoo) separately, and France Telecom must provide its actual or prospective customers with equal information on all the ISPs that can be accessed via ADSL. France Telecom must not require subscribers to Netissimo to be also subscribers to its telephone service. Finally, France Telecom must offer ISPs, as part of their contract for Turbo IP, the right to market Netissimo indirectly (including Netissimo 1). ART wishes to stress that, as Turbo IP is also an access service as defined in Article L II of the Posts and Telecommunications Code, any inequality of treatment in the conclusion or execution of a contract for Turbo IP may result in action being taken by ART under the provisions of Article L of the legislation. b) The ability of third party operators to offer comparable services (see section 4.2) Autorité de régulation des télécommunications 13/15

14 It is essential under telecommunications and competition law, and also in responding to the demands of users, that France Telecom makes it possible for third party operators to provide equivalent services to Netissimo and Turbo IP while retaining control of the main technical and commercial aspects of these services (in particular, geographical coverage, quality of service, and the IP services layer). ART notes that the provision by France Telecom of an amended Turbo LL service would allow operators to supply services equivalent to the combination of Netissimo and Turbo IP. It would appear that the only amendments required would be to the bit rates (500 kbit/s or 1 Mbits/s in place of 2 Mbits/s), ATM transport mode (UBR in place of CBR or VBR), and the consequent pricing structure. These questions have not been considered in sufficient detail to arrive at a precise specification of the services that France Telecom would have to offer in order for third party operators to enter the market. However, the provision of such a service is a necessary condition for the development of high speed data services. c) The geographical extension of services In view of this analysis, especially item b) above, ART considers it essential that the approval of pricing decision No E is restricted solely to the provision of ADSL services by France Telecom in the geographical areas defined in the pricing decision. In the case of Netissimo, this is restricted to the patches covering the Paris arrondissements 1 to 6 and the towns of Issy les Moulineaux, Neuilly sur Seine and Vanves in the Hauts de Seine département. In the case of Turbo IP, the area includes all the Paris and Hauts de Seine patches. Any geographical extension must be covered by a new pricing decision and approved in the normal way. As part of the approval process, ART will verify and report on the following points: France Telecom must comply with the conditions specified in this Notice in relation to the equality of treatment of ISPs (see section a) above). France Telecom must provide a service that enables third party operators to offer similar services to Netissimo and Turbo IP (see section b) above). Prior to any request for a geographical extension, and in any event by 31 March 2000, France Telecom must submit a detailed report on the first few months marketing of ADSL services to ART. This report must include the Turbo IP contracts that have been signed, the degree to which these contracts have been implemented including the number of Turbo IP connections in place and the bit rates of these connections, the marketing methods used to promote the Netissimo services (by France Telecom or by the ISPs), and the number of subscribers to Netissimo 1 and 2. ART will request reports from the operators and ISPs involved at this stage on their experiences in relation to contractual, technical, economic and commercial matters. During this period, ART will report on the conclusions it has arrived at as a result of the consultation process in relation to methods of unbundling, an essential factor in the development of effective competition in the local loop. Copies of this Notice will be forwarded to the Minister for the Economy, Finance and Industry, and to the Secretary of State for Industry. A copy will be made available to France Telecom for information, and it will appear in the Official Journal of the French Republic. Delivered at Paris on 7 July The Chairman Autorité de régulation des télécommunications 14/15

15 Jean Michel Hubert Autorité de régulation des télécommunications 15/15