File reference 08-3300 Report number PTS-ER-2008:9 Date 18 June 2008 Dark fibre - market and state of competition
Dark fibre - market and state of competition Authors Jenny Bohman and Thorbjörn Blomdahl (PTS) 2
Foreword The National Post and Telecom Agency (PTS) has an overall responsibility within the area of electronic communications. PTS is working to ensure that consumers, enterprises, organisations and public authorities in Sweden shall have access to secure and efficient electronic communications and the greatest possible benefit regarding the range of electronic communications services and their price and quality. The principal means of achieving this is to establish conditions for effective competition without any distortions or limitations. As part of the Agency's work to promote competition, PTS has conducted a study of the dark fibre market with a particular focus on the state of competition. The focus of the study was to ascertain whether this market should be included among the markets where particular obligations under the Electronic Communications Act (2003:389) (LEK) are imposed with the aim of achieving effective competition. Stockholm, June 2008 Katarina Kämpe, Acting Director-General 3
Foreword 3 Sammanfattning 10 Abstract 13 1. Introduction 16 1.1. Purpose 16 1.2. Description of methods 17 2. Description of the dark fibre service 18 2.1. Optical fibre 18 2.2. Dark fibre 20 3. Market description 22 3.1. Suppliers of dark fibre 22 3.1.1. TeliaSonera is the largest owner of optical fibre 22 3.1.2. Municipal networks are most common, but they have limited fibre coverage 23 3.1.3. New stakeholders are attempting to roll out optical fibre and become established in the market 23 3.1.4. Large operators have their own resources in the form of optical fibre 24 3.2. Purchasers of dark fibre 24 3.2.1. What do customers buy if dark fibre is not available? 25 3.3. Related retail markets 25 3.3.1. Future development of higher bandwidth and optical fibre 28 3.4. Price trends 29 3.5. Relevant regulation 30 3.5.1. The IT policy objective 30 3.5.2. The rules promoting competition 31 3.6. Problem indicators 32 3.6.1. Customers' needs and their demand have little impact on the range of products and services 32 3.6.2. A new approach by TeliaSonera 33 3.6.3. Consequences of TeliaSonera's change to the dark fibre service 35 3.6.4. Difficulties in rolling out infrastructure 36 3.6.5. Summary of problem indicators in the dark fibre market 39 3.7. International perspective 40 4. Market definition 42 4.1. Characteristics of dark fibre 42 4.2. Potential substitutes for the dark fibre service 43 4.2.1. Substitution assessment and market definition 43 4.2.2. Alternatives to dark fibre 44 4.2.3. Rolling out own optical fibre 45 4.2.4. Other passive infrastructure 45 4.2.5. Wireless technologies 46 4.2.6. Active infrastructure - wavelengths and leased lines 47 4.2.7. Summary of the product market for dark fibre 48 4.3. Definition of the geographical market for dark fibre in Sweden 48 4
4.3.1. Conclusions 50 4.4. Summary of the market 50 5. Identification of a relevant market that justifies ex ante regulation 51 5.1. The first criterion: Impediments to establishment 51 5.2. The second criterion: Market dynamics 53 5.3. The third criterion: The relative effectiveness of competition law and additional ex ante regulation 55 5.4. Conclusion 56 6. Analysis of the state of competition in the dark fibre market 57 6.1. Distribution of market shares 57 6.2. The size of undertakings 59 6.3. Control of infrastructure that is difficult to copy and replicate 59 6.4. Technical advantages or technical superiority 60 6.5. Lack of or low level of countervailing market power 61 6.6. Easily accessible capital markets and financial resources 61 6.7. Product and service diversification 61 6.8. Economies of scale 61 6.9. Advantages as a consequence of economies of scope 61 6.10. Vertical integration 62 6.11. Well-developed distribution and sales networks 62 6.12. Lack of potential competition 63 6.13. Barriers to expansion 63 6.14. Summary of assessment of significant power in the dark fibre market 64 7. Conclusions 66 7.1. Closing comments 69 5
List of Appendices Definitions and abbreviations used 7 Appendix 1 70 PTS's comments on the consultation response for dark fibre 70 Appendix 2 78 Extent of the Stockholm/Malmö region, the Gothenburg region and Malmö 78 Appendix 3 79 Relevant markets 79 Appendix 4 80 Letter from the Broadband 2013 Inquiry 80 Appendix 5 82 Utility easements 82 Appendix 6 85 Bibliography 85 Electronic sources 85 6
Definitions and abbreviations used 2G: Second generation mobile telephony, which uses digital technology unlike the first generation, which used analogue technology. Examples of standards for 2G include GSM and cdmaone. 3G: Third generation mobile telephony, which permits mobile telephony services with a more rapid transmission rate than 2G. Examples of standards for 3G include UMTS and CDMA2000. Access network: That part of the electronic communications network closest to the end user which runs from the end user's network termination point to a point where the traffic is transferred to a network with higher capacity that is intended to transmit large volumes of traffic. (Taken from Policy for Access Regulation of Last Mile Networks). Access technology: The technology used in the part of the electronic communications network that is closest to the end user. Backbone network: A network that links national nodes and main nodes in the various parts of the country. BWA: Broadband Wireless Access. CESAR: Central system for access lines, produced by the Swedish Urban Network Association in collaboration with Telenor, Tele2, Com Hem, the Swedish National Rail Administration and TDC Song. Dark fibre: This dark fibre service, which is produced using optical fibre and is provided as a wholesale service or retail service. Dark fibre is a cable that is not lit up; i.e., physical fibre cables without electronic equipment. Ducting: Pipes for rolling out optical fibre cables and manholes in which the fibre links are placed. EDGE: Enhanced Data GSM Environment, a data packet technology for GSM networks which increases the transmission rate. Ethernet: a family of technologies for communication in local area networks. Expropriation: A legal procedure in the public interest where someone is forced to waiver a legal right in the public interest or is subject to a limitation to a legal right. Fibre coverage: In this context, fibre coverage corresponds to the number of kilometres covered by optical fibre; i.e., if there are several fibre pairs/ducting within the same link, this link is only counted once. FWA: Fixed Wireless Access GSM: Global System for Mobile Communication. A digital mobile telephony system. Also called 2G (second generation mobile telephony). HSPA: High Speed Packet Access, technology for data transmission in the UMTS network. 7
Interurban network: A network that connects large communities in a municipality or region. IP: Internet Protocol, a communication protocol that administers addresses and routing for data packets in the Internet and other IP-based networks. IT: information technology Joint laying: When ducting is utilised for several purpose, e.g., electronic communications services, power, water and sewerage. KKV: The Swedish Competition Authority. LAN: Local Area Network. LEK: The Electronic Communications Act (2003:389). LLU: Local Loop Unbundling; access to the nationwide metallic loop in accordance with the applicable obligation decision. LMV: National Land Survey. Local area network: Sub loop that links property networks in one community or a geographically delimited area to the interurban network. Local fibre network: A network based on optical fibre, which belongs to an operator that is active within a limited geographical area, such as a community or a region, and which does not provide services at a national level. Marginal cost: Economic term; expressed simply, a marginal cost is the increase in the total costs that occurs when one (1) additional unit of a product is produced. MDF: Main Distribution Frame. Municipal network: A municipal network is comparable with one or more continuous local area networks. A local area network is found within one area, such as a housing or industrial area within a community. Models for municipal networks vary. NGA: Next Generation Access collective term for connections in the future NGN: Next Generation Network collective term for IP-based networks in the future. ODF: Optical Distribution Frame. Optical cable: Refers to fibre optic cables; a number of optical fibres in a protective sheath. Optical fibre: Fibre-based infrastructure. Optical fibre is a thin glass line made from silicon dioxide (glass) that transfers data via light instead of via electronic signals as is the case in a copper line. May be found in the entire or parts of public or individual electronic communications networks. Passive infrastructure: Active and passive infrastructure are referred to in the chain of refinement in terms of optical fibre. Passive infrastructure is, for example, ducting, such as pipework for cables in addition to non-active cables such as dark fibre. See 2.1, figure in the report. PLC: Power Line Communication, data communications across power line networks. 8
PSTN: Public Switched Telephony Network, the traditional fixed telecommunications network. PTS: The National Post and Telecom Agency. Radio link: A 'radio link' refers to a fixed point-to-point connection using radio technology. SALAR: The Swedish Association of Local Authorities and Regions SMP: Significant Market Power. Means 'significant power' in a certain relevant market. SSNf: The Swedish Urban Network Association Total supply of fibre: Total number of kilometres of fibre optic links; i.e., if there are several fibre pairs within the same link, this link is totalled. Transmission fibre: Fibre that is used in the part of the network that is a transmission network UMTS: Universal Mobile Telecommunications System. Upstream/downstream markets: In a production chain, a market where input goods for a product market are produced are upstream in relation to the product market in question, which in its turn is located downstream in relation to the market where the input goods are produced. Utility easements: A utility easement entitles someone to install and use a utility within an area encompassed by someone else's property (including the devices necessary for the purpose of the utility). Regulated by the Utility Easements Act. VDSL: Very high data rate Digital Subscriber Line; see also xdsl. Vertically integrated operator: An operator that owns operations at different levels in a production chain; for example, both a retail and an wholesale operation. WAN: Wide Area Network. Wavelength: When the optical light in a fibre is divided into wavelengths and each wavelength functions as its own channel. Wi-Fi: A designation for wireless local area networks (LAN) based on a certain standard. WiMAX: Worldwide Interoperability for Microwave Access, radio-based broadband technology based on the IEEE802.16 standard. xdsl: Digital Subscriber Line, a collective term where x represents different technologies; e.g., ADSL, VDSL and UDSL. 9
Sammanfattning Post- och telestyrelsen (PTS) har under en tid fått indikationer på att det finns problem på grossistmarknaden för svart fiber som behöver åtgärdas. Mot den bakgrunden har PTS genomfört en studie av grossistmarknaden för svart fiber i Sverige, med syfte att beskriva marknaden, vilka problem som finns och hur dessa kan lösas. PTS har bedömt huruvida grossistmarknaden för svart fiber ska definieras som en relevant marknad och om det finns anledning att införa särskilda skyldigheter enligt lagen (2003:389) om elektronisk kommunikation (LEK). Även Konkurrensverket har handlagt ärenden om svart fiber och myndigheterna har därför samverkat kring inhämtandet av marknadsdata. Optisk fiber är ett medium med mycket hög överföringskapacitet som används som transmissionsteknik i elektroniska kommunikationsnät. Den minst förädlade tjänsten baserad på optisk fiber benämns svart fiber. Med detta avses s.k. oförädlad nätkapacitet, dvs. fysiska ledningar utan elektronisk utrustning. Svart fiber används som en insatsvara för att producera i princip alla elektroniska kommunikationstjänster och kan användas i hela eller delar av ett sammanhängande nät. Svart fiber kan användas för att ansluta t.ex. slutkunder för olika bredbandstjänster, samlokaliserad utrustning i telestationer, basstationer för mobiltelefoni och en rad andra syften. Främst efterfrågas svart fiber av operatörer som i sin tur förädlar tjänsten vidare till slutkundstjänster. Med beaktande av de allt högre kraven på kapacitetskrävande tjänster och utvecklingen av de framtida IP-baserade näten och NGN/NGA har betydelsen av optisk fiber, och därmed efterfrågan på tjänsten svart fiber, ökat. Enligt PTS bedömning kommer efterfrågan att fortsätta att öka. Att svart fiber är en insatsvara för många slutkundsprodukter gör att konkurrensförhållandena på denna grossistmarknad är av stor betydelse för konkurrensen på en rad slutkundsmarknader. En otillräcklig konkurrens på grossistmarknaden för svart fiber kommer att medföra negativa effekter för konsumenter av i princip alla elektroniska kommunikationstjänster. Det är därför av stor vikt att denna marknad fungerar väl. Tjänsten svart fiber ser likadan ut var än i nätet den tillhandahålls och för vilket syfte den köps. Det är köparen av svart fiber som kopplar på den aktiva utrustningen och därmed bestämmer hur den ska användas, vilket också skapar ett nödvändigt utrymme för differentiering mellan köparna och utökad möjlighet till konkurrens i nästa led. Att köparen själv ansluter den aktiva utrustningen ger även ökad kontroll vad gäller teknik (förändringar vad gäller kapacitet, typer av tjänster, lösningar för tjänster), affärsmässig kontroll (priset för att producera tjänster och möjligheter till förändrad paketering av tjänster till kunder) och servicenivå samt kvalitetskontroll (genom att vara mindre beroende av t.ex. den servicenivå och kundtjänst som någon tjänstetillhandahållare av mer förädlade tjänster erbjuder). Detta kombinerat med fiberns höga överföringskapacitet gör att de alternativ till att köpa svart fiber som finns, såsom våglängdstjänster, hyrda förbindelser, radiolänk och kopparförbindelser, inte kan fungera som substitut för en operatör som efterfrågar svart fiber. 10
Grossisttjänsten svart fiber efterfrågas på alla nivåer i elektroniska kommunikationsnät och över hela landet på ett likartat sätt. Svart fiber tillhandahålls på ett likartat sätt över hela landet, vilket är en respons på hur efterfrågan ser ut. Sammantaget får grossistmarknaden därför anses vara nationell, även om tillgången delvis varierar över landet och i olika delar av nätet. Marknadens utveckling medför att såväl produktavgränsning och geografisk avgränsning kommer att vara en väsentlig fråga i samband med fortsatta bedömningar av marknadssituationen. Idag finns det olika ägare till optisk fiberinfrastruktur. TeliaSonera är den i särklass största enskilda ägaren av optisk fiberinfrastruktur och kontrollerar ca 50 procent av all fiber i Sverige. Andra större ägare är vissa lokala stadsnät, nätägare som Banverket, Vattenfall och Svenska Kraftnät samt i mindre utsträckning andra traditionella operatörer såsom Telenor, TDC och Tele2. Det finns även mindre aktörer som t.ex. IP- Only som innehar viss fiber. Endast en liten del av den optiska fibern tillhandahålls dock till andra operatörer i form av svart fiber. För närvarande finns det ett efterfrågeöverskott på svart fiber, vilket är en konsekvens av dels bristande tillgång till den optiska fiber som finns, dels bristande marknadsförutsättningar för etablering och tillgång till ny infrastruktur. TeliaSonera har under de senaste två åren ändrat strategi och begränsat sin försäljning av svart fiber till grossistkunder, samtidigt som efterfrågan ökar, vilket är en orsak till bristande tillgång till befintlig fiber. TeliaSoneras stora andel av den fiber som finns etablerad i Sverige pekar på att bolaget har ett betydande inflytande på grossistmarknaden för svart fiber. Andra faktorer som stöder den bedömningen är att TeliaSonera är den enda aktör som har såväl nationellt stamnät och ortssammanbindande nät som områdesnät i samtliga delar av landet, att TeliaSonera har fördelar i form av tillgång till kanalisation, befintliga avtal m.m. som underlättar nyetablering samt att TeliaSonera har fördelar genom sin storlek och sin egenskap av vertikalt integrerad operatör. Sammantaget får TeliaSonera anses ha en sådan ställning på grossistmarknaden för svart fiber att bolaget vid en fråga om förhandsreglering skulle anses ha ett betydande inflytande. Förutom TeliaSoneras optiska fiber har det byggts ut en hel del fiber de senaste åren främst genom etableringen av stadsnäten. Utbyggnaden av dessa beräknas fortsätta om än i lägre takt. Det förefaller också som att stadsnäten har en alltmer positiv inställning till att erbjuda svart fiber som grossisttjänst i större utsträckning än tidigare. Stadsnäten arbetar för att bli allt mer likformiga i sina erbjudanden. Numera finns t.ex. ett webbaserat förfrågningssystem till vilket flera stadsnät är anslutna, vilket underlättar för operatörer som ofta köper fiber från flera olika stadsnät. Dessa infrastrukturägare kan dock, än så länge, endast ses som komplement till TeliaSonera och ej på egen hand tillgodose det behov som marknadens aktörer har. Alternativet för en operatör som inte får köpa svart fiber i den utsträckning som behövs är, att anlägga egen fiber. Detta är förenat med en rad svårigheter av såväl strukturellt som regleringsmässigt slag. Att anlägga fiberinfrastruktur innebär stora investeringar och hög ekonomisk risk som vissa aktörer dock visat sig villiga att ta i vissa 11
områden. Förutom dessa hinder av ekonomisk och strukturell art tillkommer också regelmässiga hinder, såsom svårigheter att få nödvändiga tillstånd och avtal. För att lösa de problem som finns på grossistmarknaden för svart fiber anser PTS att det är viktigt att ge bättre tillträde till den infrastruktur som finns samt att det skapas bättre förutsättningar för att etablera den infrastruktur som krävs, och att etableringshindren på marknaden minimeras för att marknaden ska kunna sköta utvecklingen på egen hand. Vad gäller befintliga etableringshinder anser PTS att de skulle kunna sänkas genom att kommuner uppmuntrar samförläggning, har en god IT-infrastrukturplanering och ett etableringsvänligt förhållningssätt till såväl fiberutbyggnad som till konkurrens av densamma. En utgångspunkt i regelverket kring elektroniska kommunikationer är att konkurrensen bör ske så långt ned i produktionskedjan som möjligt. Om möjligt ska konkurrensen ske redan på infrastrukturnivå. Det är således av betydelse för samtliga marknader inom området elektronisk kommunikation att parallell infrastrukturanläggning sker där sådan är möjlig. PTS gör bedömningen att även om grossistmarknaden för svart fiber är behäftad med konkurrensproblem som sammanhänger med TeliaSoneras ställning på marknaden och att marknaden präglas av höga etableringshinder finns det faktorer som tyder på att ytterligare optisk fiberinfrastruktur kan komma att anläggas i vissa områden och därmed också ett större utbud av tjänsten svart fiber. Mot bakgrund av denna marknads- och konkurrensanalys anser PTS att det inte kan uteslutas att grossistmarknaden för svart fiber kan komma att utvecklas mot effektiv konkurrens utan att PTS inför särskilda skyldigheter på marknaden. För närvarande anser PTS att det således saknas förutsättningar att definiera en marknad specifikt för svart fiber. PTS kommer dock att följa marknadens fortsatta utveckling och om inte en tydlig förändring av marknadsförhållandena blir synliga inom ett år anser PTS att det finns anledning att på nytt analysera om särskilda skyldigheter är nödvändiga. PTS kommer därför att följa upp den nuvarande analysen och ha ett resultat klart att redovisa externt under andra kvartalet år 2009, dvs. ett år från färdigställandet av denna rapport. PTS kommer under året även att genomföra analyser av andra närliggande marknader, såsom marknaden för nätinfrastruktur (marknad 4), marknaden för bredbandstillträde (marknad 5) och marknaderna för hyrda förbindelser. Detta innebär att reglering som rör svart fiber eller på annat sätt är av betydelse för dessa närliggande marknader kan komma att införas under det närmaste året och ha betydelse för resultatet av den framtida analysen av marknaden för svart fiber. 12
Abstract For some time now, the National Post and Telecom Agency (PTS) has received indications that there are problems in the dark fibre market that need to be attended to. In light of this, PTS has conducted a study of the dark fibre market in Sweden, with the aim of describing this market, the problems that exist and how these may be resolved. PTS has assessed whether the dark fibre market should be defined as a relevant market and whether there is reason to impose special obligations under the Electronic Communications Act (2003:389). The Swedish Competition Authority (KKV) has also dealt with matters concerning dark fibre and for this reason the authorities have collaborated when compiling market data. Optical fibre is a medium that has a very high transmission capacity and which is used as a transmission technology in electronic communications networks. Dark fibre is the least refined service based on optical fibre. It refers to what is known as 'raw network capacity'; that is, physical cables without electronic equipment. Dark fibre is used as an input good for basically all electronic communications services and can be used in parts of or an entire interconnected network. For example, dark fibre can be used to connect end users to various broadband services, collocated equipment in local exchanges, base stations for mobile telephony and for a number of other purposes. Dark fibre is primarily in demand by operators, which in turn further refine the service for end-user services. Taking into account the increasingly high demands being placed on services that require capacity and the development of future IP-based networks and NGN/NGA, the significance of optical fibre, and thereby the demand for the dark fibre service, have risen, and in the assessment of PTS such demand will continue to rise. The fact that dark fibre is an input good for many retail products means that the competitive conditions in this market are crucial for competition in a number of retail markets. Insufficient competition in the dark fibre market will entail a negative impact for consumers as regards basically all electronic communications services. Consequently, it is extremely important for this market to function well. The dark fibre service looks similar wherever it is provided in the network and for whatever purpose it is purchased. Dark fibre is connected to active equipment by purchasers and they are consequently the ones that decide how it should be used, which also creates the necessary scope for differentiation between the purchasers and a greater potential for competition at the next level. Combined with the high transmission capacity of this fibre, this means that the alternatives to purchasing dark fibre, such as wavelength services, leased lines, radio links and copper connections, cannot serve as a substitute for an operator that has requested dark fibre. Dark fibre is similarly in demand at all network levels and throughout the country. Dark fibre is being provided in a similar way throughout the country, which is a response that reflects this demand. Overall, the wholesale market is therefore deemed to be national, even though access to it varies somewhat across the country and in various parts of the network. Market development means that definitions in terms of 13
both products and geography will be an essential area in conjunction with continuing assessments of the market situation. There are currently various owners of optical fibre infrastructure. TeliaSonera is by far the largest single owner of optical fibre infrastructure, controlling approximately 50 per cent of all fibre in Sweden. Other major owners include certain local municipal networks and, to a lesser extent, other traditional operators such as Telenor, TDC and Tele2. There are also smaller stakeholders such as IP-Only, which owns some fibre. However, other operators are only provided with a small proportion of optical fibre in the form of dark fibre. There is currently excess demand for dark fibre, which is partly a consequence of a lack of access to the optical fibre available and partly due to insufficient market prerequisites for establishment and access to new infrastructure. Over the past two years, TeliaSonera has changed its strategy and limited its sales of dark fibre to wholesale customers at the same time as demand has increased; this is why there is a lack of access to existing fibre. TeliaSonera's large share of the fibre established in Sweden indicates that the company has significant power in the dark fibre market. Other factors supporting this assessment include the fact that TeliaSonera is the only stakeholder with a national backbone network as well as interurban and local area networks in all parts of the country, the fact that TeliaSonera has advantages in the form of access to ducting, existing agreements, etc., which facilitate new establishment, and the fact that TeliaSonera has advantages due to its size and its capacity as a vertically integrated operator. Overall, TeliaSonera is regarded as having such a position in the dark fibre market that the company should be deemed to have significant power in connection with ex ante regulation. Besides TeliaSonera's optical fibre, a great deal of fibre has been rolled out over the past few years, mainly through the establishment of municipal networks. This rollout is expected to continue, albeit at a slower rate. It also appears that municipal networks have an increasingly positive attitude towards offering dark fibre as a wholesale service to a greater extent than previously. The municipal networks are striving to make their offerings more uniform. There is now, for example, a web-based system for inquiries, to which several municipal networks are connected, which facilitates the work of operators that often purchase fibre from several different municipal networks. However, until now, these owners of infrastructure have only been viewed as complements to TeliaSonera and cannot meet the needs of market stakeholders on their own. The alternative for an operator that cannot purchase dark fibre to the extent required is to roll out its own fibre. A number of difficulties are associated with this in terms of both structure and regulation. Rolling out fibre infrastructure entails considerable investments and a high level of financial risk, which some stakeholders have nevertheless been willing to bear in certain areas. Besides these financial and structural barriers, there are also regulatory barriers, such as difficulties in obtaining the necessary licences, permits and contracts. 14
In order to resolve the problems present in the dark fibre market, PTS is of the view that it is important to foster better conditions for establishing the infrastructure required and that the barriers to entry in the market are minimised so that the market can deal with its development on its own. As regards the existing barriers to entry, PTS is of the view that these could be reduced by municipal authorities encouraging joint laying, having satisfactory IT infrastructure planning and an approach that encourages the establishment of both fibre rollout and competition for the same, if this is financially feasible. PTS also assesses that, even if the dark fibre market is encumbered with competition problems related to TeliaSonera's position in the market and the market is characterised by considerable barriers to entry, there are factors suggesting that additional optical fibre infrastructure can be rolled out in certain areas and thereby also a wider range of the dark fibre service. In light of this market and competition analysis, PTS considers that it is possible that the dark fibre market can start to move towards efficient competition without PTS having to introduce special obligations in the market. PTS consequently considers that the conditions for defining a market for dark fibre are not met at the present time. However, PTS will monitor the continuing development of this market and, if a clear change in market conditions is not visible within one year, PTS considers that there will be justification to reanalyse whether special obligations are necessary. For this reason, PTS will follow up the present analysis and have the results ready for publication in the second quarter of 2009, that is, one year from the completion of this report. During the year, PTS will also conduct analyses of other adjacent markets, such as the market for wholesale (physical) network infrastructure access (Market 4), the market for wholesale broadband access (Market 4) and the markets for leased lines. This means that regulation pertaining to dark fibre or which in some other way is of importance to these adjacent markets may be introduced in the next twelve months and have bearing on the results of the future analysis of the dark fibre market. 15
1. Introduction 1.1. Purpose The markets within the field of electronic communications have long been viewed as having certain characteristic features, which means that they have a particular need for special regulation to promote competition. Part of the background to this are the monopoly conditions that previously prevailed within the field of telecommunications. This is in addition to certain special conditions, which make it difficult for new stakeholders to enter and operate in the market. Access to extensive electronic communications networks is crucial for the majority of electronic communications services to be able to offer these services to undertakings, organisations and consumers. At the same time, rolling out the infrastructure for electronic communications services is often very costly. This means that the stakeholders that already own networks may, for example, exclude others from their networks or set the price for using their networks at such a high level that other stakeholders find it difficult to compete. In order to rectify these problems, a special regulatory framework to promote competition has been drawn up within the European Union. It has been designed so that the national regulatory authorities, in consultation with the European Commission, define the markets that have such characteristic features that they are in need of ex ante regulation. In Sweden, the regulatory framework has been implemented through the Electronic Communications Act (2003:389) (LEK). According to Chapter 8, Section 5 of LEK, PTS shall continuously determine which product and service markets have such characteristic features that it may be justified to introduce special obligations under this Act. In this connection, PTS shall comply with the Commission's Recommendation on relevant markets. The Recommendation lists a number of markets that typically have such characteristic features that there is reason to impose rules to promote competition. PTS must examine whether these markets are in need of such regulation in Sweden as well. However, the list contained in the Recommendation is not intended to be exhaustive and PTS may deviate from the Recommendation and identify a market that has not been mentioned if there is reason to do so on the basis of national circumstances. However, as stated in Chapter 8, Section 10 of LEK, the Commission is required to approve PTS's decision. The wholesale market for dark fibre is not included in those markets specified as relevant by the Commission in its Recommendation (see the list in Appendix 3). In late 2006 and early 2007, PTS received quite a number of complaints from various operators concerning the opportunities for gaining access to dark fibre. The background was mainly that TeliaSonera had changed its range of products in such a way that other market stakeholders found it considerably more difficult to purchase dark fibre. After having met with TeliaSonera, several other operators and the Swedish Competition Authority, PTS decided to initiate a market analysis according to the rules contained in LEK, as the information received by PTS suggested that competition was not working in a satisfactory manner. The purpose of this report is to describe the wholesale market for dark fibre in Sweden, to identify the problems that are present in the market and also whether these should be viewed as competition problems. Furthermore, there is a description of the causes and consequences of the problems in addition to the areas that may need further investigation in order to resolve these problems. The starting point of this work was to assess whether such competition problems exist to justify defining a special market for dark fibre and 16
introducing regulation in this market. This work has also involved discussions about areas affecting the electronic communications market, but which are not directly governed by LEK. It should be noted that this analysis is being carried out alongside the analyses conducted by PTS of the markets included in the Commission's Recommendation and does not in any way replace these or anticipate their result. On the contrary, the question posed in the analysis was to determine whether there are any reasons to define a special market for dark fibre in addition to the markets contained in the Recommendation. 1.2. Description of methods As a basis for this study, PTS conducted a regular dialogue with the various market stakeholders such as operators and interest groups in addition to other authorities such as the National Land Survey (LMV) and the Swedish Competition Authority (KKV). As KKV has also had cases encompassing dark fibre, the authorities consulted regularly during this work. Together with KKV, PTS also conducted a quantitative market study about dark fibre in addition to related areas such as ducting, wavelengths and leased lines. This study was conducted during the period October to December 2007 and PTS obtained information for the whole of 2005 and 2006 in addition to the first six months of 2007. The result of this study was used in calculations, including the extent of different services, access to infrastructure, the stakeholders' market share of different services and markets in addition to information about coverage. The report was published on 25 March 2008 as a draft report and the market stakeholders were given the opportunity to submit their views on the draft over a period of one month. A total of nine consultation responses were received. These views have resulted in the report being clarified in some respects. Appendix 1 contains a list of these clarifications in addition to the views that gave rise to them. 17
2. Description of the dark fibre service 2.1. Optical fibre Optical fibre is a medium that has a very high transmission capacity and which is used as a transmission technology in electronic communications networks. Fibre cables are usually buried underground and this generally requires ducting; that is, pipes in which the optical fibre is laid. The cables can be rolled out underground, either by excavation/ploughing or by drilling. Excavation ruins the ground and this must be rectified, which means that stakeholders sometimes choose to drill into the ground. Drilling is mainly used in major towns where digging would otherwise entail considerable damage at road junctions, paving stones and where there are complicated road and excavation conditions. Rolling out the ducting for optical fibre, regardless of whether this involves excavation or drilling, is in its turn associated with high costs, far exceeding the cost of the fibre cable itself, which only constitutes between five and fifteen per cent of the total rollout cost. This also means that this type of investment entails high costs. It is a long-term investment where the return on the capital invested should be viewed over a long period of time, often 20 years. Fibre cables are sometimes placed above the ground by being installed in existing overhead power lines and by using existing ducting within and between buildings. Fibre in overhead lines generally has a shorter lifespan than fibre buried underground. Optical fibre is compatible with other technologies and can be used in the entire or parts of a continuous electronic communications network. This means that a continuous network may, for example, comprise optical fibre in the national backbone network to be connected later to optical fibre or wireless technology in interurban networks and finally to copper in local area networks. Connections to other technologies can take place at different locations in the network. The occurrence of optical fibre varies. Generally, fibre is mainly used where large quantities of electronic communications services are to be transmitted. Consequently, fibre is used in major national transmission routes, but is also increasingly being used as transmission network capacity for connection to the networks of other operators and for end-user access. Access to optical fibre varies depending on the geographical area; this is due to the various investments of stakeholders when rolling out optical fibre in relation to other transmission technologies and customer bases. The operators' backbone network is largely based on fixed infrastructure in the form of optical fibre, but optical fibre is also increasingly being used to connect individual business users in addition to connecting access nodes in both fixed and mobile networks. Virtually all major operators, fixed network operators and mobile network operators use optical fibre when producing electronic communications services for end users. Taking into account the increasingly high demand for services that require high capacity and the development of future IP 1 -based networks and NGN/NGA, 2 the significance of access to fibre-based infrastructure has increased and will continue to increase. The new technology networks assume that several different types of service are to be transmitted in a common logical network where IP carries all of these services. For example, this means that optical fibre is required closer to the end user and to some extent also in the 1 Internet Protocol 2 NGN: Next Generation Networks; NGA: Next Generation Access 18
access network. Optical fibre will become essential between the backbone networks and access networks, and fibre is increasingly being used for access in connection with the construction of new buildings. PTS has already observed that optical fibre is increasingly required to connect access nodes (for example, to connect LLU and for base stations in mobile networks) and end users demanding high capacity. The further out in the network (i.e. the closer to the end user), the more alternatives there are to optical fibre. This is because: other technologies are being used for end-user access lines; optical fibre has not become established; optical fibre is available, but access to this fibre has not been granted; it is too expensive to roll out optical fibre. The reason for this is that other technologies, such as copper (xdsl), coaxial and wireless (WiMAX, FWA, 2G/3G) technologies, can also be used for some of the electronic communications services that are currently being used by end users. The closer one gets to the end user in an electronic communications network, the fewer users will share the fibre capacity and for this reason the income base will shrink, making it more difficult to achieve a positive financial cost estimate for an infrastructure which requires as much investment as optical fibre. In 2006, a certain amount of optical fibre was rolled out in Sweden (two per cent). However, this rate of growth has halved since the two years prior to this. The main reason behind this was that fibre was established earlier owing to municipal authorities and Svenska Kraftnät being granted central government broadband support. This has now been reduced. Municipal authorities and municipal companies represent the highest rate of growth, but, of the other stakeholders, TeliaSonera is by far the largest stakeholder rolling out fibre. 3 From an end-user perspective, the services that can be obtained through fibre optic links are virtually all of the electronic communications services, such as the distribution of television channels, telephony, video services, video communications, interactive tools, games, payment services, etc. As a fibre optic infrastructure is also used to some extent as a component of the mobile networks in the form of transmission between the base stations, optical fibre also represents an input good when producing electronic communications services in the mobile networks. However, far from all operators that use optical fibre have their own fibre. Instead, it is very common for operators to purchase access to fibre from someone else. This access may take place in several ways and at a large number of different levels of refinement, as shown in the figure below. 3 Broadband in Sweden 2007, PTS-ER: 2007:17 19
Slutkundsprodukter ex. Internetaccess, TVkanaler, telefoni. Slutkundsanslutning - ex. hyrda förbindelser, bitströmsaccesser. Transmission aktiverade kablar, ex. upplyst fiber, våglängder. Kabel ej aktiverade kablar, ex. svart fiber. Kanalisation ex. rör för kabel. [Text for figure: End-user products e.g. Internet access, television channels, telephony End-user connections e.g. leased lines, bitstream access lines Transmission activated cables, e.g. lit up fibre, wavelengths Cables non-activated cables, e.g. dark fibre Ducting e.g. pipes for cables] Figure 1 Chain of refinement for optical fibre In the figure above, the two lower levels (cables and ducting) represent passive infrastructure while those higher up the chain of refinement represent active infrastructure. 2.2. Dark fibre Dark fibre is the least refined electronic communications service based on optical fibre. It refers to what is known as 'raw network capacity'; that is, physical cables without electronic equipment. Even if optical fibre is used as a technology in the existing infrastructure for electronic communications services, only a small proportion of the optical fibre is sold on in the form of the dark fibre service. Dark fibre is usually sold as a wholesale service, but is also sold as an end-user service. The demand for dark fibre comes mainly from operators using dark fibre in their own businesses (that is, as an input good for producing electronic communications services) and it is normally leased in pairs (one or more fibre pairs). The extent of the service varies, but encompasses one or more points of interconnection (nodes) in the network owner's network. In most cases, the offering often extends no further than up to what is known as an 'optical distribution frame' (ODF), which is the 'destination station'. No active equipment is included; on the other hand, supplementary services are often offered in the form of reinforcement of 20
lines that extend over a long distance, space in a cabinet or space for a cabinet, in addition to electric power. The dark fibre service looks similar regardless of where it is provided in the network and how the operator will use it. The fact that dark fibre is sold without electronic equipment means that the stakeholder purchasing dark fibre must itself connect the active equipment required in order to have the fibre lit up. The more control a stakeholder has over the active equipment, the greater freedom the stakeholder has to develop new offerings and to further develop existing ones for its customers. This means that the stakeholder can differentiate itself from other stakeholders to a greater extent, which enables greater scope for competition. The stakeholder will not have a corresponding capacity if it can only lease more refined wholesale services, such as leased lines and wavelengths, as it will then become more of a distributor of capacity. In the event of changes such as upgrades, changes in quality and changes in capacity, the stakeholder leasing the more refined wholesale service usually has to place an order with its supplier first before the stakeholder in its turn can supply its customers with a changed service. A more refined wholesale service does not result in corresponding benefits in the form of control and flexibility. PTS has observed that the greater control a stakeholder has over the active equipment, the greater the scope for competition. 21
3. Market description The optical fibre currently being used in electronic communications networks has become established for various purposes: to be used for one's own purposes or to be sold on as a product/service in a raw or refined form. The raw wholesale dark fibre service is a small proportion of all of the fibre infrastructure that is available. According to market data compiled by PTS for this market analysis, sales of dark fibre amounted to SEK 720m in the first six months of 2007. This would correspond to SEK 1.44bn for a full year, which may be compared with SEK 1.37bn for the whole of 2006 and SEK 1.25bn for the whole of 2005. In other words, growth was approximately six per cent in the past year and nine per cent in the year before. Sales of dark fibre as a wholesale service constitute 83 per cent of the total value, with the remaining 17 per cent constituting revenues from end users. Most wholesale customers are large and small operators in addition to other infrastructure owners. 4 3.1. Suppliers of dark fibre Potential suppliers of dark fibre could be any of the stakeholders that own optical fibre infrastructure. These include operators with their own optical fibre, municipal networks, network owners with access to their own infrastructure for a reason other than for the production of electronic communications services (such as, for instance, the Swedish National Rail Administration and Vattenfall) in addition to stakeholders whose only business concept is to establish and sell infrastructure based on dark fibre. However, it cannot be assumed that there will be a supply of the dark fibre service where optical fibre infrastructure is present, as far from all owners of fibre infrastructure offer dark fibre to others. According to PTS's latest survey, approximately 100 stakeholders offer dark fibre as a service in Sweden, and just over 80 per cent of these offer dark fibre as a wholesale service. However, with the exception of major stakeholders, such as TeliaSonera, TDC, Telenor, Tele2, Stokab, Vattenfall and some of the larger municipal networks, only a few stakeholders have offered dark fibre to a considerable extent up to now, and only a dozen or so municipal networks have annual revenues of more than SEK 4-5m. The average is approximately SEK 2m per year with a median of less than SEK 1m per year. The extent of a network owner's range varies depending on where it is physically possible to offer dark fibre; that is, where fibre is present and where capacity is available. Only a limited proportion of existing operators have their own fibre infrastructure. Instead, most lease from existing fibre owners. 3.1.1. TeliaSonera is the largest owner of optical fibre TeliaSonera is the only stakeholder with access to a national and comprehensive infrastructure; that is, both ducting and fibre in backbone networks, interurban networks and local area networks. TeliaSonera accounts for 53 per cent of the total supply of optical fibre in Sweden 5 and approximately 47 per cent of the coverage of all optical fibre. TeliaSonera does offer fibre links to a certain extent, but this range has reduced owing to TeliaSonera having changed its strategy for its wholesale operation in February 2006; see also Section 3.6.2. TeliaSonera's market share in terms of sales of dark fibre amounted to 26 per cent for the first six months of 2007. TeliaSonera also has access to widespread ducting, which is a consequence of the company's status as a former monopolist and its ownership of the national metallic loop. This gives TeliaSonera considerable advantages 4 PTS has conducted evaluations for the full years of 2005, 2006 and the first six months of 2007 5 Broadband in Sweden 2007, PTS-ER-2007:7 22
in terms of the further establishment of high-capacity infrastructure as well as an advantage from established land-lease agreements with land owners; for example with municipal authorities. It should be noted that new technology is being developed so that copper cables can be replaced by fibre cables in a relatively straightforward way. If this technology has an impact, the advantages of access to ducting will be further reinforced. 3.1.2. Municipal networks are most common, but they have limited fibre coverage Local municipal networks that are geographically limited offer a certain amount of dark fibre. The largest municipal network is Stokab in Stockholm. Stokab has a unique position among municipal networks, not only because it is the largest, but primarily because its main aim is not to own infrastructure, but rather to ensure that infrastructure is available. Stokab currently offers dark fibre almost exclusively. Stokab is also the only company, besides TeliaSonera, to have been covered by the previous dark fibre regulation under the Telecommunications Act up to and including 2003; see Section 3.5.2. Local stakeholders currently manage approximately 150 municipal networks and these differ from one another in terms of quality, level of service, business models and access to infrastructure. This means that, even if the ambition of the municipal networks is to sell to anyone, this might not be in the form of dark fibre, but is more likely to be in the form of refined services. Nor do municipal networks always offer raw services, such as dark fibre. In the opinion of PTS, it is desirable from a competition perspective for stakeholders with their own infrastructure to provide access to their infrastructure as far down the value chain as possible. The way in which municipal networks grant access to their networks currently varies and PTS previously discussed this issue in its report 'Proposed Broadband Strategy for Sweden'. 6 From the perspective of a national operator, these municipal networks are currently mainly viewed as local alternatives to TeliaSonera, as they only provide fibre locally. Consequently, a party wanting a connection that extends over a large geographical area has to conclude agreements with several municipal networks. As mentioned previously, these currently differ as regards products, pricing and quality. However, municipal networks are attempting to make things easier for purchasers by means of greater coordination. For example, a web-based system for dealing with queries was recently set up and several municipal networks are now connected to it; this is called CESAR (an abbreviation for 'Centralt system för accesser' [Central system for access lines]). Municipal networks account for 20 to 25 per cent of the fibre coverage in Sweden. The overall market share of municipal networks for sales of dark fibre amounted to approximately 55 per cent for the first six months of 2007, of which Stokab accounted for more than half of this share. 3.1.3. New stakeholders are attempting to roll out optical fibre and become established in the market Some stakeholders are investing in rolling out their own optical fibre with a view to serving as wholesale suppliers and offering to lease dark fibre to others. Sales are not only aimed at other stakeholders, but also at end users. Their business concept is primarily to establish infrastructure for a customer and attempt to secure more customers on the link 6 Proposed Broadband Strategy for Sweden, PTS-ER-2007:7 23