Wholesale Broadband Access Markets

Transcription

1 Wholesale Broadband Access Markets Public Consultation C02/16 30 th June 2016 Gibraltar Regulatory Authority Communications Division 2nd Floor, Eurotowers 4, 1 Europort Road Gibraltar Telephone: Fax communications@gra.gi Web:

2 Contents Executive Summary Introduction Scope of the review Previous Reviews Market Characteristics Structure of this document Regulatory Background European regulatory background Gibraltar regulatory background Market Definition Methodology Retail broadband market Wholesale broadband access markets Market Analysis Methodology Competiton assessment: retail broadband at a fixed location Competiton assessment: wholesale broadband access Preliminary conclusions and SMP designation if appropriate Proposed SMP Obligations Competition problems Principles in determining SMP obligations Retail broadband at a fixed location Wholesale local access provided at a fixed location Wholesale central access provided at a fixed location for mass-market products.. 35 Annex A: Consultation Questions... 40

3 Executive Summary The communications regulatory framework requires the Gibraltar Regulatory Authority (GRA or the GRA) to define relevant markets susceptible to ex-ante regulation, appropriate to national circumstances in accordance with the market definition procedure outlined in the Framework Directive 1. In addition, the GRA is required to conduct an analysis of the relevant markets to decide whether or not they are effectively competitive and, having identified competition problems, propose appropriate regulatory measures. In carrying out market definition and market analysis, the GRA must take the utmost account of the Relevant Markets Recommendation 2 (the Recommendation) and the Commission's Guidelines 3 (the Guidelines) on Market Analysis and Significant Market Power. According to the Guidelines, the purpose of imposing ex ante obligations on undertakings designated as having significant market power (SMP) is to ensure that undertakings cannot use their market power to restrict or distort competition in the relevant market, or to lever market power into an adjacent market. Where there is a finding of SMP in wholesale markets, the GRA is obliged to impose obligations to remedy competition problems. SMP obligations are outlined in Regulation 10 to 14 of the Communications (Access) Regulations Such obligations may include: Obligation of transparency Obligation of non-discrimination Obligation to meet reasonable requests for access Obligation of accounting separation Price controls and cost accounting. Where there is a finding of SMP in retail markets, the GRA is obliged to impose obligations to remedy competition problems. SMP obligations are outlined in Regulation 14 of the Communication (Universal Service and Users Rights) Regulations The GRA is consulting on its reviews of three separate markets: The Retail broadband market. 1 DIRECTIVE 2002/21/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on a common regulatory framework for electronic communications networks and services (Framework Directive) OJ [2002] L 108/33. 2 Commission Recommendation of 17 December 2007 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communication networks and services (2007/879/EC). 3 Commission Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services (2002/C 165/03) OJ [2002] C 165/6. 4 Communications (Access) Regulations 2006, Communications Act Communications (Universal Service and Users Rights) Regulations 2006, Communications Act

4 The Wholesale Local Access market (Market 3a in the Commission s Recommendation). The Wholesale Central Access market (Market 3b in the Commission s Recommendation). The review follows the methodology that is now well established across the EU, adapted to take account of the particular circumstances of Gibraltar. The market reviews included in this document are forward-looking and cover a period of three years from the date of the GRA s final decision. The GRA sets out in this document how, on a preliminary basis, it has found each of the three markets reviewed to be susceptible to ex-ante regulation and analysed those markets to see if there is evidence of market power. The analyses take into consideration a range of factors in the assessment of market power including high market shares; conduct which would indicate market power; countervailing buyer power; barriers to entry; potential competition and vertical integration. According to the GRA s register of authorised operators, there are currently four operators authorised to provide broadband services in Gibraltar. These are: Gibtelecom (GT) Sapphire Networks (SN) U-Mee Networks (U-mee) Gibfibrespeed (GFS). The GRA s preliminary view is that GT has SMP in the markets for wholesale broadband access and retail broadband. GT has approximately 80% in the retail broadband market in terms of subscriber numbers. At present the wholesale markets only consist of self-supply as no operator is currently contracting any wholesale services from another. SN, entered into an agreement with the incumbent operator GT in order to access its customers to supply these with internet services. This agreement was termed the port and pipe product and does not currently allow SN to differentiate its retail offering from those offered by GT to its fixed line customers and is therefore very limited in scope. For this reason, the GRA does not consider this relationship to be of a wholesale nature. The GRA has assessed prospective competition and has assessed factors which may qualify GTs ability to price independently of any competitors. The preliminary conclusion is that GT has SMP and will remain dominant in these markets for the lifetime of this review. For the retail broadband market, the GRA has defined the following obligations as being appropriate, proportionate and justified in light of the market failures identified: Transparency Non-discrimination Accounting separation 2

5 Cost accounting. For the wholesale broadband access markets (markets 3a and 3b), the GRA has defined the following obligations as being appropriate, proportionate and justified in light of the market failures identified: Transparency Non-discrimination Access Accounting separation Price controls and cost accounting. The GRA welcomes comments from all interested parties on the questions posed in this market review (full list of questions is set out in Annex A) and will accept written comments up until 3pm on Monday 1 st August Any questions relating to the clarification of issues will need to be sent within two weeks of the date of publication of this document. In order to promote further openness and transparency, the GRA will publish the consultation responses on its website. Please note that this is subject to confidentiality. Respondents are asked to clearly identify material which is to be treated as confidential. 3

6 1. Introduction 1.1 Scope of the review The main purpose of a market review is to identify the competitive conditions prevailing in a market by assessing systematically the competitive constraints that are faced by undertakings in the market. A market review commences by defining a market susceptible to ex-ante regulation, which is then analysed to assess the degree of effective competition. The competition assessment determines whether any undertaking is found to have SMP, which is held to be equivalent to the concept of dominance under competition law, and is defined as the ability to behave independently of competitors, suppliers and ultimately businesses and consumers in that market. If there is no SMP, the market is effectively competitive and does not require ex ante regulation 6. If there is SMP, then the market is not effectively competitive and ex ante regulation should be imposed, at either the wholesale or the retail level (or both), to counteract the potential negative effects of the competition problems that can be caused by the SMP operator. The European Commission has published a Recommendation on Relevant Markets. The Recommendation defines four relevant markets as being susceptible to ex ante regulation. These are: Market 1: Market 2: Market 3: Wholesale call termination on individual public telephone networks provided at a fixed location Wholesale voice call termination on individual mobile networks a) Wholesale local access provided at a fixed location b) Wholesale central access provided at a fixed location for mass market products Market 4: Wholesale high-quality access provided at a fixed location. This review takes into account two of the markets above in Gibraltar: Market 3(a) Wholesale local access provided at a fixed location (WLA). Market 3(b) Wholesale central access provided at a fixed location for mass-market products (WCA). This review considers Market 3(a) and Market 3(b) of the Recommendation and will collectively refer to these markets as the Wholesale Broadband Access Markets. It is the GRA s view that, whilst these markets are separate, the current market conditions in Gibraltar mean that conditions within these two markets are similar enough to be considered at the same time in this review. 6 Ex ante regulation is the application of regulation before an abuse of power has necessarily occurred. The reasoning behind its application is that finding that an operator has SMP means that the operator is likely to have the incentive and motivation to behave in a way which exploits its market power to the detriment of competitors and ultimately to consumers. Ex ante regulation can be contrasted with ex post regulation, which investigates an incident which has already happened. 4

7 In addition, the GRA is reviewing the retail broadband market, which is not included in the Commission s Recommendation. 1.2 Previous Reviews The Retail Broadband market in Gibraltar has not previously been reviewed. Both the WLA market and the WCA market were last reviewed in The GRA designated Gibtelecom with SMP in both markets and imposed obligations of transparency, non-discrimination, access, accounting separation, price control and cost accounting. Gibtelecom was the only player in the market at the time. 1.3 Market Characteristics This description is pertinent to all three markets considered in this review. Broadband is a technical term which describes a data communications technology that provides a permanent, high throughput connection. Typical speeds can vary from above 128 kilobits per second (kbit/s) up to several Megabits per second (Mbit/s). Broadband technologies are able to provide a mix of data, voice, and video services over one pipe. Broadband connections are typically asymmetric but can also support equal downstream and upstream rates. In this context, broadband is thus taken to mean any technology that uses a permanent connection, has the capability of providing bi-directional data transmission rates that are higher than achievable using a narrowband (e.g. dial-up/isdn modem) technology, but without resorting to the use of a dedicated end-to-end network resource (as leased lines). Local market structure In Gibraltar, there are currently four operators authorised to provide broadband services: Gibtelecom Sapphire Networks U-mee Gibfibrespeed. Gibtelecom Gibtelecom is the incumbent operator within Gibraltar. Gibtelecom owns and controls a fibre-to-the-node (FTTN) network across Gibraltar with 100% coverage. It currently offers 25, 50 and 100mbps SuperSwift products over its FTTN network priced between 28 and 54 per month. Gibtelecom also has customers on VDSL services at download speeds of 4, 8 and 20mbps priced between 24 and 84 per month but this service is no longer available to new customers. At present Gibtelecom is concentrating on migrating its VDSL customers to its new SuperSwift fibre products. 7 Wholesale fixed markets Decision Notice 04/08. 5

8 Having been previously designated with SMP, Gibtelecom is currently subject to a number of SMP obligations, one of which includes the availability of a reference unbundling offer (RUO) for other operators to procure local loop unbundling services in the wholesale local access market. The GRA notes that since its introduction in 2009, no other operator has taken up the offer and used this service. Gibtelecom also has available a Reference Wholesale Broadband Access Offer (RWBAO) which allows operators to contract wholesale broadband services. To date, no operator has purchased any wholesale products from Gibtelecom. Gibtelecom also provides a product that supports resale of its legacy VDSL service (its Port and Pipe product) which is currently being used by Sapphire networks. Gibtelecom is currently estimated to have an 80% share of the retail broadband market in terms of subscriber numbers. Sapphire Networks At the time when Sapphire Networks was first deploying its network, it also agreed with Gibtelecom to resell its port and pipe product in order to access customers where it did not have a physical presence. Through their Port and Pipe agreement with Gibtelecom, Sapphire provides 25, 50 and 100mbps broadband products, priced between 28 and 54 per month. Sapphire also has customers on VDSL services at download speeds of 4, 8 and 20mbps priced between 24 and 84 per month but it is the GRA s understanding that these services are no longer available to new customers. Sapphire has, for a number of years, also provided direct internet services through its own, limited network, these are Sapphire Direct, Metro Internet and Business Metro Internet, with speeds ranging from 4 to 100Mbps. It continues to offer these services to existing customers today, however, the company is not currently offering these products to new customers. All new customers are directed towards another provider, U-mee, which is owned by Sapphire. Sapphire has therefore concentrated its efforts in its second company, U-mee, which is rolling out its own FTTH network across Gibraltar. Therefore for the purposes of this review, the GRA will not be considering Sapphire Networks impact on the relevant markets. U-mee U-mee is 100% owned by Sapphire Networks yet it has a separate authorisation to provide communications networks and services. U-mee was authorised in the second half of 2013 and has progressively rolled out a fibre-to-the-home (FTTH) network which currently covers around 50% of the population and has plans to achieve full coverage within the next few years. U-mee currently offers 100 and 300mbps packages priced at 39 and 59 a month respectively. This service includes a HDTV package ( U-mee TV ) which includes over 170 HD channels and an IP telephony service named ( U-mee talk ). When signing up to their service, U-mee currently offers a three month free service period and are currently increasing their customer base as their network expands throughout Gibraltar. The company also recently 6

9 launched their TV on the go service which allows you to watch online content on mobile devices through an app. In addition, as part of their U-mee family campaign, existing customers on the 100mbps package who refer a new subscriber to sign up are rewarded with an upgrade to 300Mbps package for the same price. If the new subscriber chooses the 100Mbps service, they will immediately be up-graded to a 200mbps download speed service for the price of the 100mbps package. U-mee are currently estimated to have a 10% share of retail broadband market in terms of subscriber numbers. Gibfibrespeed A.J Sheriff Electrical trading as Gibfibrespeed was authorised to provide communications networks and services in Gibraltar towards the end of Gibfibrespeed s FTTH network currently reaches 80% of Gibraltar s population. Gibfibrespeed currently offers 10, 20, 50, 100 and 200mbps packages priced between 10 and 65 per month for residential customers and 20, 50, 100 and 200mbps packages for small to medium sized businesses priced between 20 and 95 a month. Gibfibrespeed also offer other packages were they bundle broadband, cable TV and IPTV services. Gibfibrespeed s current market share in terms of subscriber members is estimated to be around 5%. 1.4 Structure of this document Section 2 sets out the regulatory and legislative background to the reviews. Section 3 outlines the market boundaries and describes the GRA s proposed market definitions. Section 4 analyses the different markets by conducting competition assessments and Section 5 proposes the SMP obligations on the dominant undertakings. Annex A summarises the consultation questions. 7

10 2. Regulatory Background 2.1 European regulatory background The European regulatory framework for electronic communications networks and services is a set of five Directives 8 : Directive 2002/21/EC on a common regulatory framework for electronic communications networks and services (the Framework Directive) 9 Directive 2002/19/EC on access to, and interconnection of, electronic communications networks and associated facilities (the Access Directive) 10 Directive 2002/20/EC on the authorisation of electronic communications networks and services (the Authorisation Directive) 11 Directive 2002/22/EC on universal service and users' rights relating to electronic communications networks and services (the Universal Service Directive) 12 Directive 2002/58/EC concerning the processing of personal data and the protection of privacy in the electronic communications sector (the Privacy Directive) Gibraltar regulatory background These five European Directives were implemented as part of the Communications Act (the Act). The legislation enables the GRA to carry out reviews of competition in relevant electronic communications markets to ensure that regulation remains appropriate in the light of changing market conditions, otherwise known as market reviews. In conducting a market review the GRA must take account of the SMP procedures in the Act, sections 38-41, (the SMP procedures) as well as the provisions dealing with co-operation with the European Commission, BEREC 15 and the regulatory authorities in the Member States, sections As Amended in DIRECTIVE 2009/140/EC. 9 See footnote 1 above. 10 DIRECTIVE 2002/19/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on access to, and interconnection of, electronic communications networks and associated facilities (Access Directive) OJ [2002] L 108/7. 11 DIRECTIVE 2002/20/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on the authorisation of electronic communications networks and services (Authorisation Directive) OJ [2002] L 108/ DIRECTIVE 2002/22/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 7 March 2002 on universal service and users' rights relating to electronic communications networks and services (Universal Service Directive) OJ [2002] L 108/ DIRECTIVE 2002/58/EC OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 12 July 2002 concerning the processing of personal data and the protection of privacy in the electronic communications sector (Directive on privacy and electronic communications) OJ [2002] L 201/ Communications Act 2006, Act No. 15, Please note this legislation implemented the latest regulatory reform package of Body of European Regulators of Electronic Communications. 8

11 Section 39 of the Act requires the GRA to take due account of all applicable guidelines and recommendations which have been issued or made by the European Commission in pursuance of the provisions of a European Community instrument. Therefore, the GRA should take due account of the Commission Recommendation of 9th October 2014 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC (the Recommendation). Once the GRA has defined relevant markets, it shall analyse the state of competition within these markets to determine whether they are effectively competitive or not. Where markets are deemed to be effectively competitive or will become effectively competitive within the lifetime of the review, any existing regulation must be withdrawn 16. Where markets are deemed to be uncompetitive, the GRA must consider appropriate regulatory obligations on any undertaking which has SMP. The main purpose of a market review is to identify the competitive conditions prevailing in a market by assessing systematically the competitive constraints which are faced by undertakings in the market. A market review commences by defining a market, which is then analysed to assess the degree of effective competition. In accordance with European Commission Guidelines, the market analysis procedure is prospective that is, it must be forward-looking. The period covered by this review is three years from the date of the GRA s final decision. The GRA may initiate a new review at any time during this period, should significant market changes occur which are not in line with the analysis set out in this review. A market review has three main components: Definition of the relevant market(s) susceptible to ex-ante regulation Assessment of competition in each market, in order to identify competitive constraints and assess whether any undertaking(s) has SMP Where market power is identified, consideration of the appropriate SMP obligations in relation to that market. The GRA is following the approach recommended by the European Commission, and has taken account of the various guidelines and recommendations published by the European Commission, as well as the experience of other European National Regulatory Authorities (NRAs). The Recommendation has been taken into account when deciding which markets will be reviewed. It is important to recognise that the wholesale markets in this review are already subject to regulation. In order to take this into account, the European Commission recommends the use of a modified greenfield approach, where markets are analysed absent regulation 17, except when that regulation is not in relation to an SMP obligation, or is related to another market. 16 Please note that regulation at retail level may depend on regulation at the wholesale level. 17 At the retail level, any existing regulation at the wholesale level will be included in the analysis. 9

12 The European Commission s Recommendation defines four relevant markets as being susceptible to ex ante regulation. These are: Market 1: Market 2: Market 3: Wholesale call termination on individual public telephone networks provided at a fixed location Wholesale voice call termination on individual mobile networks a) Wholesale local access provided at a fixed location b) Wholesale central access provided at a fixed location for mass market products Market 4: Wholesale high-quality access provided at a fixed location. This review takes into account two of the markets above in Gibraltar: Market 3(a) Wholesale local access provided at a fixed location (WLA). Market 3(b) Wholesale central access provided at a fixed location for mass-market products (WCA). This review considers Market 3(a) and Market 3(b) of the Recommendation and will collectively refer to these markets as the Wholesale Broadband Access Markets. It is the GRA s view that, whilst these markets are separate, the current market conditions in Gibraltar mean that conditions within these two markets are similar enough to be considered at the same time in this review. Additionally, this review covers the retail broadband market. 10

13 3. Market Definition 3.1 Methodology The market definition procedures are designed to identify in a systematic way the competitive constraints encountered by providers of electronic communications networks and services. Market definition is not an end in itself it is concerned with identifying the boundaries of a market so that the competitive conditions can be assessed, and, if appropriate, ex ante regulation can be put in place, or maintained. According to the European Court of Justice 18, a relevant product market comprises all products or services that are sufficiently interchangeable or substitutable with its products, not only in terms of the objective characteristic of those products, their prices or their intended use, but also in terms of the conditions of competition and/or the structure of supply and demand for the product in question. In essence, this leads to a definition of the market s boundaries. The process involves considering constraints arising on both the demand and supply sides of a market (and their interaction). The constraints are those which would apply to a so-called hypothetical monopolist 19, such that the hypothetical monopolist would be constrained in price setting behaviour. Hence, critical to the market definition process is the degree of substitution identified on the demand and supply-sides of the market. The Act requires the GRA to take due account of all applicable guidelines and recommendations which have been issued by the European Commission relating to market identification and analysis 20. As per the Commission s guidelines on market analysis and the assessment of SMP, demand-side substitutability is used to measure the extent to which consumers are prepared to substitute other services or products for the service or product under investigation, whereas supply-side substitutability indicates whether suppliers other than those offering the product or service in question would switch in the immediate to short term their line of production to offer the relevant products or services without incurring considerable additional costs. The Commission s guidelines also require the geographic coverage of markets to be considered. A relevant geographic market comprises the area in which the undertakings concerned are involved in the supply and demand of products and/or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbouring areas because the conditions of competition are appreciably different in those areas. The GRA s proposed definitions for the WLA and WCA are set out in Section See, for example, Case 322/81, Michelin v. Commission [1983] ECR 3461, as well as the Commission Notice on the definition of relevant markets for the purposes of Community competition law ( the Commission Notice on Market Definition ) OJ 1997 C 372/3, and the SMP Guidelines. 19 A method for identifying market boundaries is known as the hypothetical monopolist test (also known as the SSNIP test, small but significant non-transitory increase in price test). This test assesses whether a hypothetical monopolist is able to increase price profitably for a product or service. 20 Section 39(1). 11

14 3.2 Retail broadband market The retail market definition exercise identifies the set of products that could potentially form part of the market or markets under investigation. In order to define the boundaries of products and services in the RB market, the GRA has considered the following: Are residential and corporate broadband services in the same market? Are retail broadband products provided over DSL and fibre in the same market? Are retail broadband products of differing speeds in the same market? Are fixed-line retail broadband products in the same market as mobile broadband products? Are residential and corporate broadband services in the same market? NRAs should specifically analyse whether two retail products which would significantly differ in terms of quality of service levels, features and product characteristics such as (dedicated) capacity, availability, contention and the guaranteed repair times, could be regarded as substitutes from an end-user perspective. The NRAs should also conduct a supply-side analysis to determine whether providers of mass-market services are capable of offering bespoke highquality services within a short time period and without incurring significant additional costs. It seems likely that, based on such differences in demand and where mass-market providers are unable to easily switch to offering tailored business products, NRAs will find that there is no substitutability between these products. In such cases, NRAs should define two separate retail markets, as described below. The Commission usually identifies two separate markets for residential and corporate services, considering that contractual details and services offered in these markets may differ significantly. Residential services are in most cases restricted to non-professional usage. Residential and non-residential services usually differ significantly in terms of characteristics (virtual private network, security options, etc.), usage (quality of service, availability and data rate) and tariffs (residential services are generally cheaper than business services). In Gibraltar, small to medium sized businesses can purchase packages that are fairly similar to those of residential customers, with minor additions such as multiple addresses and web hosting facilities. These connections are asymmetric in nature and are provided at similar speeds to residential packages. However, larger corporations purchase significantly different products (leased lines) that provide much higher bandwidth and quality of service. Such products are usually superior to standard broadband packages and priced significantly more expensively than residential products. The GRA considers that, in line with the Commission, the business broadband options available to small and medium size businesses in Gibraltar do not fall into the same market as the leased line products available to larger entities. The two are not substitutes for each other, given the huge difference in level of service and price. 12

15 The GRA considers that, given the similar characteristics and price points, residential broadband and business broadband available to SMEs do fall within the same market. Given that networks already provide coverage throughout Gibraltar, the GRA considers that it would be relatively easy for an existing provider to start offering residential or business services following a non-transitory 5% to 10% price increase in price. Preliminary conclusion Following the analysis above, the GRA concludes that residential and business broadband services fall within the same relevant product market. Are retail broadband products provided over DSL and fibre in the same market? The GRA observes that Gibtelecom, Gibfibrespeed and U-mee all compete directly with each other despite their networks being physically different: Gibtelecom uses fibre-to-the-node and VDSL Gibfibrespeed uses fibre-to-the-home and coaxial U-mee uses fibre-to-the-home. In terms of functional characteristics, fibre and DSL broadband are perceived by customers as being the same regardless of technology used, they both exhibit similar quality of service and similar additional services such as VoIP and IPTV can be provided. Preliminary conclusion It is the GRA s view that the retail broadband market includes both DSL and fibre and therefore they fall in the same relevant market. Are retail broadband products of differing speeds in the same market? Broadband products in Gibraltar are available in an incremental range of speeds. The GRA does not consider there are any speeds available in the range of available products that do not classify as substitutes for other products. Given the increase in the speed of the lowest available packages over the years, the vast majority of day-to-day uses for broadband internet can be accomplished on the lowest speed packages available 21 and therefore the GRA does not believe that any products fall into different markets based on what they can be used for. Additionally, the range of available speeds are priced incrementally, meaning that a small increase in price in one speed would lead some customers to adjust their choice of speed. Preliminary conclusion It is the GRA s opinion, given the incremental nature of the speeds and the prices for broadband products, that they are substitute products and therefore fall within the same market mbps offered by GibFibreSpeed is sufficient for streaming video-on-demand content. 13

16 Are fixed-line retail broadband products in the same market as mobile broadband products? Mobile products in Gibraltar are currently set at 3G and 4G+ speeds. Whilst these mobile services will have theoretical bandwidths similar to some fixed-line broadband services, mobile services are designed with the mobility aspect in mind and would therefore not usually allow comparable performance under real-world conditions. Service reliability, resilience and availability are generally lower than with fixed-line products and most consumers will therefore not see mobile products as a viable substitute for fixed-line alternatives. Preliminary Conclusion The GRA considers that the characteristics of mobile broadband services in terms of real-world speed, availability and reliability mean that these products fall within a separate market to fixed-line broadband products. Geographical market According to established case law, the relevant geographic market comprises an area in which the conditions of competition are similar across the area, and which can be distinguished from neighbouring areas where the conditions of competition are different. The GRA believes that the geographic market for all retail broadband is Gibraltar. There are no significant differences in the conditions of demand or supply within Gibraltar, and similar services are offered on the same terms and conditions throughout. Proposal: the geographical boundary for the retail broadband market defined above is all of Gibraltar Summary of retail broadband market definition According to the analysis above and the evidence available to the GRA, the following preliminary conclusions are set out below: Residential broadband and corporate broadband are in the same relevant market, with leased line products for business constituting a separate market. Retail broadband products provided over DSL and fibre are in the same relevant market. Separate speeds of retail broadband do not constitute separate relevant markets. The geographical scope of all markets is Gibraltar Three-criteria test In addition to identifying the boundaries of markets, the European Commission s guidelines require that NRA s apply a specific test, known as the three criteria test. The European Commission guidelines require that the answer to each of the three criteria questions should be yes. If one is answered no then the market does not qualify as a market susceptible to ex ante regulation. The three criteria are: 14

17 Is there the presence of high and non-transitory barriers to entry? Does the market structure not tend towards effective competition within the relevant time horizon? and Is competition law alone insufficient to adequately address the market failure(s) concerned? High and non-transitory barriers to entry Barriers to entry may be structural, legal or regulatory. Structural barriers exist when the market is characterised by absolute cost advantages, substantial economies of scale/scope, capacity constraints and high sunk costs. These characteristics create asymmetric conditions between operators, preventing market entry or expansion of competitors. Historically, Gibraltar has been characterised by the existence of a single infrastructure capable of offering local access products on a national scale. The high sunk costs and time needed for potential entrants to replicate the infrastructure of such a ubiquitous access network meant that the barriers in this market were considered high and non-transitory. As a result, this market was deemed susceptible to ex-ante regulation and, as a result of an SMP finding on Gibtelecom, regulations were further upstream, in wholesale markets. The situation in Gibraltar has since changed significantly. Whilst the network of Gibtelecom is in the process of being replicated, it is still at great cost to the alternative providers. Entering the retail market with their own fibre services has required substantial investment by the alternative providers 22 and it remains to be seen if the competitors can reach the required economies of scale to successfully compete with Gibtelecom in the longer term. Given the existence of the ubiquitous network of Gibtelecom, along with its associated sunk costs 23, it will require the new providers to reach significant shares in the customer base to be able to obtain the same economies of scale and thus compete at the same cost level as the incumbent. Tendency towards effective competition within relevant time horizon Whilst Gibfibrespeed and U-mee are deploying fibre networks, it remains uncertain whether this will result in effective competition over the period of this review. There have been instances in the past 24 whereby alternative providers have entered the market on the back of large infrastructure investments and have subsequently exited the market. As discussed in the prior section, in order to successfully compete with the incumbent, new alternative providers will have to attain significant market share to compete with both the economies of scale of the incumbent and make up for the fact that the incumbent has already covered many of its sunk costs in the past, whilst new providers will have to cover this cost. 22 Sapphire Networks spent an estimated 15m on their fibre network: 23 That the costs for will already have been recovered new providers will still have to cover these costs. 24 CTS Gibraltar Limited launched a WiMax service in 2008 that subsequently went out of business. 15

18 Whilst efficiency gains from having newly designed network topologies taking into account the latest technological considerations will mean that they may be able to compete with slightly lower market shares than the incumbent, they will still need to take a large share of the market. Given that U-mee and Gibfibrespeed only control approximately 15% of the market, the GRA cannot conclude with any level of certainty that the market will tend towards being competitive within the period of this review. Competition law There is no competition legislation in Gibraltar and so, by default, competition law in Gibraltar is inadequate to address market failure. The market therefore passes this test. This market satisfies the three criteria test and the GRA considers this market to be susceptible to ex ante regulation. Question 1: Do you agree with the definition of the retail broadband market and that it satisfies the three criteria test? Please provides reasons for your answer. 3.3 Wholesale broadband access markets The wholesale market definition exercise identifies the set of products that could potentially form part of the market or markets under investigation. In each market, products are only utilised for self-supply; that is, each retail operator currently uses its own network infrastructure to provide its own vertically integrated end-to-end service. However, whilst there is not an active market for wholesale products, the wholesale services do exist in principle, as parts of each operator s vertically integrated business. As a result, the characteristics that define the market structure for both the WLA and WCA markets are dictated by the characteristics of the downstream retail market. In order to define the boundaries of products and services in the WLA and WCA markets, the GRA has considered the following: Should self-supply be included in the WLA and WCA markets? Are wholesale access products provided over DSL and fibre in the same market? Are residential and business broadband access services in the same market? Are wholesale broadband access products of differing speeds in the same market? Is fixed-line broadband infrastructure access in the same market as mobile broadband infrastructure access? Are there separate geographic markets within Gibraltar? Should self-supply be included in the WLA and WCA markets? A network operator of a broadband infrastructure usually supplies services internally to its retail arm (which may be a wholly-owned subsidiary ISP of the same entity). The downstream ISP can develop very close links with the upstream provider and can tailor the end-user service offerings as it wishes, since in effect it has a significant degree of upstream control over the service parameters. 16

19 In Gibraltar all three retail providers use their own networks to provide services to customers they all self-supply broadband access to their own downstream ISPs. As self-supply forms the only existing supply of Wholesale Broadband Access Services in Gibraltar, the GRA considers it important that self-supply is included in the market definition. Further as the inclusion of self-supply is in-line with international best practice by NRAs, the GRA concludes that self-supply should be included within the markets for WLA and WCA. Preliminary Conclusion The GRA concludes that self-supply should be included in the WLA and WCA markets Are wholesale broadband access products provided over DSL and fibre in the same market? In the Next Generation Access Networks (NGA) Recommendation, the Commission highlights that the review of the broadband markets (markets 3(a) and 3(b) of the 2007 Recommendation) should take account of NGA networks. The deployment of NGA networks is likely to lead to important changes in the economics of service provision and the competitive situation. This is because the demand and supply conditions are expected to change significantly at both wholesale and retail level and therefore new remedies may need to be imposed. The GRA notes that the following networks are currently used by each provider: Gibtelecom uses fibre-to-the-node and VDSL U-mee uses fibre-to-the-home Gibfibrespeed uses fibre-to-the-home. Wholesale local access over DSL refers to the situation where the incumbent installs a high-speed access link to the customer premises (e.g. by installing its preferred ADSL/VDSL equipment and configuration in its local access network) and then makes this access link available to third parties, to enable them to provide high-speed services to customers. Gibtelecom currently offers wholesale local access services over its copper/fibre network in the form of local loop unbundling, available to other operators. However, since 2009, when the reference offer was first published, there has been no interest from alternative operators in taking up wholesale local access services in this form. As Gibtelecom deploys its fibre network as a replacement for its copper network, the wholesale local access service it provides is very similar to the existing copper based wholesale access service but with higher speeds also available. In terms of the supply side, substitutability exists as evidenced by the roll-out of competing network infrastructures. Despite the availability of a local loop unbundling reference offer and efforts by Sapphire to negotiate an agreement for use of an active wholesale product provided by Gibtelecom, no wholesale agreements were reached. Two alternative operators have subsequently begun building their own fibre-to-the-home networks, showing supply-side substitutability between Gibtelecom s VDSL-based wholesale offer and their own, self-supplied fibre networks. 17

20 The European Commission notes that NRAs analyses to date has not shown significant breaks in the chain of substitution between copper-based access services and fibre-based services and it is the GRA s view that this is also the case in Gibraltar. Preliminary conclusion The GRA concludes that wholesale broadband access over both DSL and fibre fall within the same relevant product markets for the WLA and WCA markets Are residential and business broadband services in the same market? As the wholesale broadband markets in Gibraltar only exist in the form of self-supply, the characteristics of the products in the retail market must be analysed in order to determine if residential and business services form part of the same market (the characteristics of which must then be catered for by wholesale self-supply by operators). The Commission often identifies two separate markets for residential and corporate services, considering that contractual details and services offered in these markets may differ significantly. Residential and corporate services usually differ significantly in terms of characteristics (virtual private network, security options, etc.), usage (quality of service, availability and data rate) and tariffs (residential services are generally cheaper than business services). The Commission usually considers these corporate services in market 4: wholesale high-quality access provided at a fixed location. In Gibraltar, small to medium sized businesses can purchase packages that are fairly similar to those of residential customers, with minor additions such as multiple addresses and web hosting facilities. These connections are asymmetric in nature and are provided at similar speeds to residential packages, with some extra options (e.g. static IP addresses and extra security features). However, larger corporations purchase significantly different products (leased lines) that provide much higher bandwidth and quality of service. Such products are usually superior to standard broadband packages and priced significantly more expensive than residential products. The GRA considers that, in line with the Commission, the residential broadband options available in Gibraltar do not fall into the same market as the leased line products available to larger corporate entities. The two are not substitutes for each other, given the huge difference in level of service and price. The GRA considers that, given the similar characteristics and price points, residential broadband and business broadband available to SMEs do fall within the same market. Given that networks already provide coverage throughout Gibraltar, the GRA considers that it would be relatively easy for an existing provider to start offering residential or SME business services following a 5% to 10% price increase above the competitive level. Given the self-supply of wholesale broadband products by operators in Gibraltar, the end-to-end service received by customers from each operator includes the relevant wholesale elements from each market. As such, the wholesale provision must cater for the particulars of the final retail products. Similarly to retail, the wholesale inputs required for residential and SME business broadband are significantly different to those for large corporate leased lines. This is applicable for both WLA and WCA markets. 18

21 Preliminary conclusion Following the analysis above, the GRA concludes that residential and SME business broadband services fall within the same relevant product markets. High-quality leased line services used by large corporate customers do not fall within these markets and therefore within the scope of this review Are wholesale broadband access products of differing speeds in the same market? Broadband products in Gibraltar are available in an incremental range of speeds. As the wholesale broadband market in Gibraltar only exists in the form of self-supply, the characteristics of the products in the retail market must be analysed in order to determine if products of different speeds form part of the same market (the characteristics of which must then be catered for by self-supply by operators). There are a wide range of speeds available to customers, all of which are incrementally priced: Gibfibrespeed currently offers 10, 20, 50, 100 and 200mbps packages priced between 10 and 65 per month, as well as small to medium sized business broadband packages of 20, 50, 100 and 200mbps priced between 20 and 95 per month. (Other packages include cable TV and IPTV). Gibtelecom currently offers 4, 8, 20, 25, 50 and 100mbps packages priced between 24 and 84 per month. U-mee currently offers 100 and 300mbps packages at 39 and 59 per month (including HDTV and IP telephony). The range of available speeds are priced incrementally through the range of speeds. A small increase or decrease in price in one speed would likely lead some customers to adjust their choice of speed to the next speed available in the chain. The GRA also does not consider there are any speeds available in the range of available products that do not classify as substitutes for other products based on their required purpose. Given the speed of the slowest available package is 10mbps, the vast majority of day-to-day uses for broadband internet can be accomplished on all the available speeds 25. The GRA does not believe there are any breaks in the chain of demand-side substitution based on the required purpose of broadband products. Given the incremental pricing and speeds and the lowest available speed being able to support the vast majority of internet applications and usage, the GRA sees the range of available speeds as a chain of demand-side substitutes. Given the self-supply of wholesale broadband products by operators in Gibraltar, the end-to-end service received by customers from each operator includes the relevant wholesale elements from each market. As such, the wholesale provision must cater for the particulars of the final retail products. Similarly to the retail market, the GRA finds that there is a chain of substitution between the wholesale inputs required for wholesale central broadband services provided at differing 25 10mbps offered by Gibfibrespeed is sufficient for streaming video-on-demand content, one of the most bandwidth intensive residential uses of broadband. 19