EUROPEAN COMMISSION. Dear Mr Gungl

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1 EUROPEAN COMMISSION Brussels, C(2014) 3966 final Telekom-Control-Kommission (TKK) bei der Rundfunk und Telekom Regulierungs-GmbH (RTR) Mariahilferstraße A-1060 Wien Austria For the attention of Mr Johannes Gungl Geschäftsführer Fax: Dear Mr Gungl Subject: Commission Decision concerning Case AT/2014/1599: Wholesale terminating segments of leased lines in Austria Comments pursuant to Article 7(3) of Directive 2002/21/EC I. PROCEDURE On 7 May 2014, the Commission registered a notification from the Austrian national regulatory authority, the Telekom-Control Kommission bei der Rundfunk und Telekom Regulierungs-GmbH (TKK/RTR) 1, concerning its market analysis of the markets for wholesale terminating segments of leased lines 2 in Austria. The national consultation 3 ran from 11 March to 8 April On 16 May 2014, a request for information (RFI) 4 was sent to TKK/RTR 5 and a response was received on 21 May Under Article 7 of 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 L 108, , p. 33, as amended by Directive 2009/140/EC, OJ L 337, , p. 37, and Regulation (EC) No 544/2009, OJ L 167, , p. 12. Corresponding to market 6 in Commission Recommendation 2007/879/EC 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 communications networks and services (Recommendation on Relevant Markets), OJ L 344, , p. 65. In accordance with Article 6 of the Framework Directive. In accordance with Article 5(2) of the Framework Directive. In Austria all regulatory decisions are formally adopted by Telekom-Control-Kommission (TKK), which is supported by the Rundfunk und Telekom Regulierungs-GmbH (RTR). RTR is responsible for Commission européenne/europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË - Tel

2 Pursuant to Article 7(3) of the Framework Directive, national regulatory authorities (NRAs), the Body of European Regulators for Electronic Communications (BEREC) and the Commission may make comments on notified draft measures to the NRA concerned. II. DESCRIPTION OF THE DRAFT MEASURE II.1. Background The previous full round of completed market analysis was undertaken in various steps. In 2008, the market definition 6 both of retail and the wholesale leased lines was notified to and assessed by the Commission under cases AT/2008/0838 and AT/2008/0836 7, respectively. With regard to wholesale terminating segments of leased lines, RTR distinguished between three segments (low, high and very high bandwidths) 8 and concluded that only the low and high capacity segments should be subject to ex ante regulation. For the high bandwidth RTR defined geographically sub-national markets and excluded 12 cities 9 from regulation. The Commission commented on the geographical delineation of the high bandwidth segment urging RTR to provide additional evidence with regard to the heterogeneity of competitive conditions in the different regions identified. In February , the SMP analysis and related obligations for the market for terminating segments of leased lines with low bandwidths (up to 2 Mbit/s) and those for high bandwidths in the non-competitive Area 2 (i.e. excluding the 12 cities as defined in 2008), were notified to and assessed by the Commission under cases AT/2010/1048 and AT/2010/ , respectively. While the latter notification was withdrawn during the Phase I investigation, RTR designated Telekom Austria as having SMP and proposed to impose a full set of remedies in the low bandwidth segment. In April 2013 RTR notified to the Commission new proposals concerning (i) the wholesale market for terminating segments of leased lines and (ii) the retail market for leased lines (up to and including 2 Mbit/s) in Austria, which were assessed by the Commission under case numbers AT/2013/ and AT/2013/ , respectively. For the carrying out the market definition, market analysis, national and EU consultations, and proposes the decisions for the adoption by TKK. RTR defined leased lines as facilities without on-demand switching functionality which provide transparent transmission capacity between two network termination points located in Austria in a symmetrical and a bidirectional manner. C(2008) Market for low bandwidth (up to and including 2Mbit/s), market for high bandwidth (greater than 2Mbit/s up to 155 Mbit/s), and market for very high bandwidth (greater than 155Mbit/s). Vienna, Linz, Graz, Salzburg, Innsbruck, Wels, Feldkirch, Steyr, Klagenfurt, Dornbirn, Bregenz and Hallein were grouped in the so-called 'Area 1' whereas the rest of Austria was referred to as 'Area 2'. In 2009 RTR also notified the withdrawal of the regulatory obligations imposed on Telekom Austria in the second round of market analysis under case number AT/2006/0508 in the wholesale market for terminating segments of leased lines for very high bandwidths and in the wholesale market for leased lines with high bandwidths in Area 1. At that time, the Commission invited RTR to closely monitor market developments and the evolution of the competitive conditions, and to assess in the next notification if the boundaries chosen for the two geographic markets should remain. C(2010) C(2013) C(2013)

3 the retail market RTR concluded that the three-criteria test is no longer met and, consequently, proposed to withdraw regulation. The Commission did not have any comments. Concerning the wholesale market for terminating segments of leased lines, RTR concluded that the product market included terminating segments of leased lines with traditional interfaces for all bandwidths, terminating segments of Ethernet services 14 with guaranteed bandwidth for all bandwidths, and terminating segments for dark fibre. The market concerned also included self-supplied services 15. RTR further concluded that the relevant geographic market for wholesale terminating segments of leased lines was national 16 and proposed to designate A1 TA as the undertaking having SMP in the relevant market. With regards to the proposed inclusion of dark fibre into the relevant market the Commission asked RTR to verify whether dark fibre and leased lines services would evolve towards further substitutability or whether they turn out to be different, complementary services. More importantly, however, following and in-depth Phase II investigation the Commission vetoed the draft measure mainly on the basis that RTR did not provide sufficient evidence justifying (i) the alleged homogeneity of market conditions, which could justify the proposal to define a single wholesale product and geographic market for terminating segments of leased lines 17 and (ii) a finding of SMP of A1 TA at least in the high capacity segment of the market. II.2. The notified draft measure II.2.1 Market definition Following further assessment of the market conditions in Austria TKK/RTR now submitted a revised draft measure. Similar to the 2013 notification it proposes to include in the relevant product market in addition to terminating segments with traditional interfaces also (i) terminating segments of leased lines with Ethernet interfaces with guaranteed bandwidth and (ii) dark fibre ends 18. However, in addition, TKK/RTR now There are 25 providers of leased lines in Austria, 13 of which offer Ethernet with guaranteed bandwidth. The demand for Ethernet services, although lower than for leased lines, is showing strong growth. According to RTR, between 2008 and 2010 the demand for terminating segments of leased lines decreased by lines, while the demand for Ethernet services increased by lines. 10 out of 15 companies questioned regarded Ethernet as a viable alternative to traditional leased lines. According to RTR, self-supply must be included based on the assumption that the internal traffic would be made available on the merchant market in case of an increase or decrease of market prices. According to RTR, terminating segments are offered and requested nationwide in similar competitive conditions. Market shares although slightly different in some municipalities compared to the rest of Austria exceeds in any case 70% (including self-supply) and there are no sufficiently large differences in prices at geographic level to warrant different geographical markets. Based on the information and data available to the Commission at the time, the Commission came to the conclusion that competitive conditions are heterogeneous in the low and high capacity market segments (i.e. up to and including 2 Mbit/s and above 2 Mbit/s of bandwidth), and would justify a further delineation of markets according to bandwidth. According to TKK/RTR the provision of dark fibre is a sufficiently close substitute to traditional interface leased lines and Ethernet services to include it in the same product market. TKK/RTR bases this conclusion on responses to an interview it carried out with several alternative operators. These interviews suggest that many operators would like to replace leased lines with high bandwidths connections provided over dark fibre but face the problem that there is often no offer available. 3

4 proposes to split the product market according to bandwidth in a segment with speeds of up to and including 2 Mbit/s and a segment with speeds higher than 2 Mbit/s. For the lower speed segment TKK/RTR concluded that competitive conditions are homogeneous across the national territory of Austria. With regards to the higher speed segment, however, TKK/RTR now conducted an improved geographic market analysis assessing the competitive conditions in approximately 2350 local communes ("Gemeinden") 19. In doing so TKK/RTR applied the following criteria when aggregating individual communes together for its geographic market definition (for bandwidths above 2 Mbit/s): (i) At least 2 terminating segments/ends (based on own infrastructure) are leased 20 ; (ii) At least two operators (incl. A1 Telekom Austria) offer Ethernet services and leased lines based on their own infrastructure 21 ; and (iii) the market share of A1 Telekom Austria (based on the number of ends in the commune) is below 40%. If all three criteria above are met, a commune will be in Market 1. All other communes will be part of Market 2. TKK/RTR concluded that for a set of 359 communes the competitive conditions were sufficiently heterogeneous from the rest of the country to justify the definition of a distinct geographic market 22. As a result, TKK/RTR proposes to define the following two distinct markets: However, it does not provide the Commission with a fully substantiated economic substitutability analysis. In response to the Commission's request for information TKK/RTR stated that it considered a commune ("Gemeinde") to be the most appropriate relevant geographic unit for its analysis as it is sufficiently small so that competitive conditions are likely to be homogeneous within one commune and, yet, large enough so that supply and demand can be analysed sensibly. In addition, many local leased lines are provided by utilities often owned by a commune and many are active only on commune level. According to TKK/RTR only those leased lines where both ends are sold in the same commune can be attributed to Market 1. Should the ends fall in two separate communes the leased line will be attributed to Market 2. In response to the Commission's request for information TKK/RTR set out that based on a survey it conducted in mid-2013 it considered the presence of one alternative infrastructure operator sufficient to offer competitive alternatives. The heterogeneity of competitive conditions for within and outside the 359 communes grouped in Market 1 is exemplified by a comparison of market shares of A1 Telekom Austria for the various bandwidth categories in the higher bandwidth segment: Bandwidth category Market share (Market 1) Market share (Market 2) > 2 34 Mbit/s 26.3 % 71.7 % > Mbit/s 17.6 % 44.7 % > 155 Mbit/s 3.3 % 40.1 % > 2 Mbit/s - total 16.3 % 64.5 % 4

5 1) Market 1: the wholesale market for terminating segments of leased lines with speeds higher than 2 Mbit/s (including dark fibre ends) within the 359 communes set out in Annex 1 of its notification; and 2) Market 2: the wholesale market for terminating segments of leased lines with speeds higher than 2 Mbit/s (including dark fibre ends) outside these 359 communes and with speeds of up to and including 2 Mbit/s (excluding dark fibre ends) in the entire territory of Austria. II.2.2 Three-criteria test and SMP analysis With regard to competitive conditions in Market 1, TKK/RTR observed that whilst there remain sufficiently high and non-transitory barrier to entry, this market is characterised with a tendency towards effective competition 23, which led it to conclude that ex ante regulation is no longer warranted for this market. Concerning Market 2, in contrast, TKK/RTR observed that not only the three criteria test is met but that market conditions are such, that A1 Telekom Austria should be designated as having SMP in the relevant market. The main criteria considered by TKK/RTR when reaching its conclusion are (i) high market shares 24 (ii) presence of high and nontransitory barriers to market entry 25, (iii) vertical integration and incentives to leverage its market power both horizontally and vertically, (iv) control of infrastructure not easily duplicated 26, (v) absence of countervailing buyer power, (vi) product differentiation, (vii) pricing behaviour 27, and (viii) denial of access (dark fibre). II.2.3 Regulatory Remedies TKK/RTR proposes to impose the following set of regulatory remedies on A1 Telekom Austria in Market 2: An obligation to provide access to terminating segments of leased lines, Ethernet services and dark fibre 28 (with specific limitations 29 ), including access to colocation and ancillary services; The market share of A1 Telekom Austria is below 20% in total (and in no single commune assessed above 40%). As a result, TKK/RTR concluded that the second criterion is no longer met and that it should, consequently, remove from this market any ex ante regulatory intervention. Even for the more dynamic bandwidth categories above 2 Mbit/s, the market share of A1 Telekom Austria outside the 359 communes is above 60% in total (and above 40% even for the highest bandwidth category, i.e. of higher than 155 Mbit/s). Economies of scale and sunk costs caused mainly by digging cost and economies of scope due to the variety of products offered by the SMP operator are structural barriers. Line rights over third-party land and digging-up prohibitions imposed by territorial entities are legal barriers to market entry. Availability of frequencies, restrictions on maximum bandwidths and dependence on weather and topographical restrictions constitute technical barriers. A1 TA has a crucial advantage over other suppliers, which mostly only have their own infrastructure in a particular region or city but have no nationwide fibre optic infrastructure. On average A1 TA consistently charges higher fees and still enjoys the largest market share. In response to the Commission's request for information TKK/RTR states that there will be no formal restrictions on the use of dark fibre access. However, given the pricing structure TKK/RTR considers it unlikely dark fibre access mandated under the proposed draft measure will be used for the provision of residential broadband access. 5

6 Price-cap regulation concerning access to terminating segments of leased lines and Ethernet services as well as cost-oriented tariffs for access to dark fibre ends; A non-discrimination obligation, including (i) the obligation to publish detailed 30 reference offers concerning the provision of terminating segments of leased lines, Ethernet services and of dark fibre and (ii) the obligation to ensure that alternative operators can technically replicate new retail offers of A1 Telekom Austria with the available wholesale inputs; A transparency obligation concerning the location of available dark fibre infrastructure differentiated by the geographical area of the request; An obligation to publish quarterly certain Key Performance Indicators; Accounting separation III. COMMENTS The Commission has examined the notification and the additional information provided by RTR and has the following comments: 31 Inclusion of dark fibre in the product market definition The distinguishing product characteristics of leased lines are their ability to provide dedicated and uncontended connections and symmetrical upload and download speeds. With a view to delineating the boundaries of the market for leased lines and other high-quality access products, several factors should be taken into account (i.e. different product functionalities and intended use, price evolution over time, cross-price elasticity). Other products can be regarded by access seekers as substitute to traditional leased lines when they display certain advanced quality characteristics at the wholesale level, such as (i) guaranteed availability and high quality of service in all circumstances (including SLAs uninterrupted customer support, short repair times and redundancy), (ii) highquality network management resulting in upload speeds appropriate for business use and in very low contention and (iii) the possibility to access the network at points, which have been defined according to the geographic density and distribution of business rather than mass-market users. TKK/RTR proposes to include dark fibre access lines in the market for terminating segments of leased lines. Whereas recognising that dark fibre based connections may also be capable of providing dedicated capacity, the Commission believes that from a functional viewpoint, access to dark fibre tends to be only partially substitutable with terminating segments of leased lines. In view of the Commission, customers would not normally switch from a complete These access requirements only apply with respect to dark fibre to infrastructure that already exists at the time of demand for which A1 TA still retains a technical operational reserve of two fibres (one fibre pair). In response to the Commission's request for information TKK/RTR confirmed that there will be no register certifying the use of dark fibre but that the correctness of A1 Telekom Austria's assertions with regards to the use of dark fibre will have to be verified on a case by case basis. The draft measures contain a detailed list of information, which needs to be provided in the reference offer, including minimum contractual periods, conditions regarding termination of contracts, SLAs, information regarding charges, migration conditions and potential penalty payments. In accordance with Article 7(3) of the Framework Directive. 6

7 active connection which immediately ensures dedicated, guaranteed capacity to a dark fibre connection, as the latter would still need to be activated by additional equipment. Moreover, the functional differences tend to be reflected in additional cost related to the activation of dark fibre lines. In its notification TKK/RTR provides some analysis based predominantly on interviews conducted with alternative operators, which led it to conclude that dark fibre is a sufficiently close substitute for traditional leased lines to justify a broad market definition, which includes dark fibre. In addition, TKK/RTR continues to rely on the analysis presented in 2013, where TKK/RTR compared only prices for access to Ethernet-based leased lines and dark fibre lines without taking into account equipment costs. On the basis of its analysis TKK/RTR concludes that the prices for Ethernet based leased lines are several times higher than access to dark fibre (without equipment). The Commission would like to emphasise that in order to verify whether customers purchasing terminating segments of leased lines would switch to dark fibre (bearing in mind total costs related to the usage of this infrastructure) in case of a small but significant (5 to 10%) increase of prices for terminating segments of leased lines by the hypothetical monopolist, RTR should have analysed total costs of both services. The Commission however takes note of the national circumstances in Austria, where according to RTR (i) mobile broadband services play a significant role and (ii) dark fibre-based services are already used as one of the key products (in particular by mobile operators) in a similar way as terminating segments of leased lines. Against this background, the Commission does not in principal object to RTR's proposal to include dark fibre in the product market definition. However the Commission urges RTR to support in its final measure its assertion that dark fibre is a substitute for traditional leased lines by presenting additional evidence, which also takes account of equipment costs when switching between the relevant products. Geographic market definition With regards to previous proposals by other NRAs to define sub-national markets for terminating segments of leased lines 32, the Commission had indicated that a geographic delineation which is primarily based on the number of operators present in a given area is not by itself sufficiently detailed or robust to identify real differences in competitive conditions for the purposes of market definition. In assessing whether conditions of competition within a geographic area are similar or sufficiently homogeneous, additional structural and behavioural evidence is necessary. Relevant evidence would include information on the distribution of market shares and the evolution of shares over time. In addition, evidence of differentiated retail or wholesale pricing which might apply could indicate different regional or local competitive pressure. Additional supply and demand characteristics which might give an initial indication of different competitive pressures in different areas should be appropriately examined. If necessary, a further check on supply factors can be carried out to ensure that companies located in different areas do not face impediments to developing their sales on competitive terms throughout the whole geographic market, such as a consideration of the entry conditions in a given area. 32 For example regarding case UK/2008/

8 With regard to TKK/RTR's market delineation and distinction between Market 1 and Market 2, the Commission points out that the presence of one alternative operator that is in a position to provide services to business customers in a given commune ("Gemeinde") is not in itself sufficient to conclude on the existence of differences in the competitive conditions. However, the Commission acknowledges that TKK/RTR has also assessed the service share distribution in the different areas, i.e. whether A1 Telekom Austria's service share is below or above 40%. Nevertheless, the Commission takes note that the analysis presented by TKK/RTR does not assess in any detail other factors, which may determine the competitive conditions in a given geography, such as, for example, differentiated pricing applied by the incumbent or the possibilities for alternative operators to interconnect their networks. In addition, evidence on the possibilities as well as likelihood of customers switching in this market could also be strengthened. Whilst the Commission acknowledges that TKK/RTR has supplied improved information which provides insight into the competitive conditions across Austria and suggests that there are different demand and supply conditions in different geographic areas, revealing appreciably different conditions in the higher bandwidth segment for certain communes, on the basis of the above the Commission invites TKK/RTR to strengthen its geographic market analysis in its final measure. Pursuant to Article 7(7) of the Framework Directive, TKK/RTR shall take the utmost account of the comments of other NRAs, BEREC and the Commission and may adopt the resulting draft measure; where it does so, shall communicate it to the Commission. The Commission s position on this particular notification is without prejudice to any position it may take vis-à-vis other notified draft measures. Pursuant to Point 15 of Recommendation 2008/850/EC 33 the Commission will publish this document on its website. The Commission does not consider the information contained herein to be confidential. You are invited to inform the Commission 34 within three working days following receipt whether you consider that, in accordance with EU and national rules on business confidentiality, this document contains confidential information which you wish to have deleted prior to such publication. 35 You should give reasons for any such request. Yours sincerely, For the Commission, Robert Madelin Director-General Commission Recommendation 2008/850/EC of 15 October 2008 on notifications, time limits and consultations provided for in Article 7 of Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communications networks and services, OJ L 301, , p. 23. Your request should be sent either by CNECT-ARTICLE7@ec.europa.eu or by fax: The Commission may inform the public of the result of its assessment before the end of this three-day period. 8