BoR PC01 (15) 06 Vodafone s response to BEREC s Report on Oligopoly analysis and regulation questions to stakeholders 1 23 January 2015 1 For any further information on this submission, please contact Markus Reinisch, Group Public Policy Director, Vodafone Group, markus.reinisch[at]vodafone.com.
Opening statement Vodafone welcomes the opportunity to respond to BEREC s Report on Oligopoly analysis and regulation questions to stakeholders. Vodafone is a major operator in fixed and mobile markets in Europe with operations in twelve member states. One of the key comments that Vodafone wishes to make is the need to differentiate oligopoly as a market structure (which is driven mostly by the economic characteristics of the sector) from the outcomes that oligopolistic market structures give rise to. At the outset it should be made clear that an oligopoly can deliver competitive outcomes: it does not per se imply non-competitive outcomes. Similarly it does not per se justify regulatory intervention. Equally important is the need to adopt the right benchmark against which to assess market outcomes. Such benchmark should not be the model of perfect competition but should consider the various dimensions of sustainable competition that matter for consumers such as prices, quality of services, innovation and ability to invest. Page 2 of 8
Vodafone s responses to questions Question 1: In the electronic communications sector, do you consider that there are markets that were characterized by oligopolistic structures from the outset? In your view, which factors (scarcity of spectrum, high level of required investments, etc.) explain the existence of these market structures? Are wholesale markets more prone to oligopolies than retail markets? The economic characteristics of the telecommunications sector imply that there is limit to the number of competing networks that the market can sustain. As such telecommunications markets tend to be oligopolistic and differ from the textbook construct of perfect competition. An oligopoly refers to a market structure where a limited number of firms operate. It covers a wide range of configurations varying between a balanced duopoly to a small number of firms accounting for the bulk of the market with a number of smaller firms also operating in the market. It sits between the extremes of monopoly and perfect competition. Oligopolistic market structures are rather common feature in many industries and markets. At the outset it should be made clear that an oligopoly can deliver competitive outcomes: it does not per se imply non-competitive outcomes. Similarly it does not per se justify regulatory intervention. The relevant benchmark against which to assess the outcome of an oligopolistic market structure should not be the model of perfect competition which focusses solely on prices as the most important outcome for consumers. It also does not capture some of the defining features of telecommunications markets including sunk cost, investment levels and quality differentiation. What matters to consumers is not only price, but service availability and innovation, quality of services and speed. The main factors that give rise to an oligopolistic market structure in the telecommunications sector include investment requirements, sunk costs, economies of scale, spectrum and the historical development of the sector (e.g. state owned monopolies, investment in cable networks). Typically, mobile networks tend to be oligopolistic. This is mainly related to how spectrum is released for mobile communications services, the technical properties of spectrum, investment requirements and the need to reach a sufficient scale of production. Across the European Union, spectrum usage rights have been awarded to a minimum of two operators, but usually to three or four or even more operators. As spectrum is a scarce resource and spectrum fragmentation leads to inefficient spectrum use (and higher unit costs) it is expected that, at a network level, the number of players that the market can sustain is limited. The scope for infrastructure based competition amongst fixed networks (and more specifically access networks for residential and business customers as well as backhaul) is more limited given the high sunk cost involved in the roll- out of networks (e.g. civil engineering costs) and the demand over which those cost can be spread. The national coverage of fixed access networks was historically achieved under the public ownership of monopolies with subsidised investment. The magnitude of sunk cost involved is such that it is today non-economical to duplicate the incumbent s network reach. Wholesale markets tend to be more oligopolistic than retail markets where entry is easier because competitive conditions are different with lower structural barriers to entry. Page 3 of 8
In the case of mobile markets, while the wholesale market is oligopolistic, competitive pressures at both the wholesale and retail levels deliver competitive outcomes for consumers, in terms of prices, choice, quality, investment and innovation. For example, competitive wholesale access to MVNOs is granted by mobile operators on a commercial basis while OTTs are another source of competition at the retail level. This contrasts with fixed networks where market concentration tends to be greater and competitive conditions have traditionally been dependent on wholesale regulation (LLU, bitstream). Question 2: Do you consider that there has been an increase in oligopolistic market structures (including duopolies) in any of the electronic communications services markets or more generally in the sector? i. If so, please state in which electronic communications services markets you observe this evolution, making reference to specific retail and wholesale electronic communications services markets. Please state whether you observe this evolution at a subnational, national, or European level. ii. What do you consider to be the main drivers of this increase (if any) in oligopolistic situations (mergers, fixed-mobile convergence, bundled offers, roll-out of next generation or other networks, operators strategies, etc.)? Do you expect this trend to continue? The sector is facing one of its most challenging moments. The technological developments (such as LTE and Next Generation Networks) in the context of difficult economic times and the increasing importance that consumers attribute to broadband, demanding innovative services, always on and at affordable prices, set a challenging environment for operators who must undertake significant investments to meet demand while having the opportunity to earn the necessary returns. Additionally, the revenue pool of the industry is facing downward pressures from competition at the retail level with the presence of players with disruptive business models (OTTs) who do not contribute to network infrastructure investment. In the mobile market, there has been a trend towards consolidation at the network level in order to benefit from economies of scale and scope and to foster investment. This followed a period in the 90 s and early 00 s during which the number of operators increased from one to three to four or even five in some markets. However, previous consolidations have not resulted in less competitive retail or wholesale markets, which remain highly competitive. Nonetheless, anti-trust authorities appear to be hostile to either further consolidation in mobile markets or feel compelled to reverse the effects of consolidation by introducing more competition via MVNO obligations.. In recent years, the historical monopolistic market structure of fixed access networks has evolved towards a more oligopolistic market structure thanks mainly to investment by alternative players, although competition still has a very long way to go to reach the levels achieved in the mobile market. This is evidenced by the still very high (and growing) retail market shares of former monopolists and more worryingly their disproportionately high profit share. This change in market structure has been the result of a combination of technological changes (e.g. upgrade of cable networks enabling the provision of broadband services), access regulation (uptake of LLU) and competitive roll-out of FTTx networks (generally based on access to civil infrastructure to avoid the inefficient duplication of fixed costs). Competition is now starting to take place deeper in the value chain Page 4 of 8
and increased competition is resulting in the deregulation of certain wholesale markets where competition has been deemed effective with regulatory remedies focussing on outstanding bottlenecks. It is worth emphasizing that these developments have tended to be uneven within national boundaries and across countries. At best, one would expect the geographic reach of alternative networks to increase over time. However, a single (or two in limited geographic areas) fixed infrastructures remain the norm with the retail market structure still largely dependent on the effectiveness of wholesale access regulation. While convergence between mobile and fixed is likely to have been one of the main considerations behind the roll-out of alternative fixed infrastructures, convergence between mobile and fixed does not have a direct effect on the number of operators and market structure. However, it may lead to competition problems where mobile operators are unable to obtain access to dominant fixed networks and hence may have a dampening effect on competition in the convergence market. Despite massive improvement in mobile networks capabilities and considering the ever-changing and increasingly demand for mobile and fixed services, Vodafone does not consider that fixed and mobile are effective substitutes and that they fall within the same market for the foreseeable future. Question 3: What are the main threats to competition and to the interests of end-users, which might result from the oligopolistic market structures referred to above? A lack of effective and sustainable competition gives rise to sub-optimal outcomes for consumers in terms of productive efficiency (cost may not be minimised), allocative efficiency (too high prices leading to output restrictions and a deadweight loss) and dynamic efficiency (lack of innovation and limited incentives to invest). However, oligopolistic market structures do not necessarily lead to inefficient outcomes. Each case must be assessed on its own merits by looking at the available evidence of market dynamics and focusing not only on price competition but quality of services, investment and innovation. One must strike a balance between prices, investment and the level of quality of service / availability. It is worth reiterating the point made above that the theoretical construct of perfect competition is not the relevant benchmark against which to assess market outcomes. The model of perfect competition relies on a number of restrictive and unrealistic assumptions such as homogenous product which neither apply nor are desirable as an objective. A well-functioning market is one that delivers competitive pricing, innovative and high quality services while incentivising and adequately rewarding investment. If a market has too many operators, this can lead to low prices in the short term but this may come at the expense of poor quality and may undermine the ability of the market to sustain investment and deliver dynamic efficiency. By contrast, a monopoly has poor incentives to invest, to be efficient and to be responsive to consumer demand. At the wholesale level, the tendency has been for mobile markets to function better than fixed markets with wholesale access to MVNOs on a commercial basis being the norm. This contrast with fixed access networks where barriers to entry and the monopolistic or duopolistic market structure observed in most countries has not been conducive to the emergence of wholesale access to third parties on a voluntary Page 5 of 8
basis. This disparity of incentives at the wholesale level has, in some sorts, conditioned the market dynamics at the retail level, where retail mobile markets are typically more competitive than the fixed ones. Question 4: Do you consider that there are any benefits or opportunities (for instance related to the roll-out of NGA networks in the context of broadband access) that could arise from oligopolistic situations? Please explain your reasoning. Oligopolistic competition leads to better outcomes than monopolistic competition. Also, in markets where economies of scale/density matter and technological or market innovation are decisive for mid-long term competition, a highly fragmented market structure gives poorer results in term of market outcomes (price, quality, innovation) than an oligopolistic market structure. In the context of fixed NGA networks, in markets with cable operators, incumbents and, to a certain extent, alternative operators have been incentivised to invest in NGA in response to competition from cable networks although the footprint of cable networks is generally much smaller than the footprint of incumbent networks. Due to its economics fixed infrastructure competition will only be viable in more densely populated areas. Therefore the objective has to be to create access-based competition on a single network where infrastructure competition will remain impossible. Further initiatives such as co-investment and infrastructure sharing will yield better outcomes for the industry and consumers than the status quo, including greater reach and a more rationalised cost base. In the mobile market, the current market structure and trend towards greater consolidation should provide better investment incentives while delivering competitive outcome for consumers, in terms of reach of services, data throughput and quality of service notably. Question 5: In your view, are there any electronic communications services where oligopolistic markets are more susceptible than others to uncompetitive outcomes? Please, explain your view. This very much depends on the economic characteristics of fixed and mobile networks. As explained above, the scope for sustainable infrastructure-based competition is greater in mobile networks than in fixed access networks. Further competitive dynamics differ at the wholesale level between fixed and mobile networks with the incentive to (and practice of) offering wholesale access on a commercial basis being weak in fixed market dominated by an incumbent operator and also limited cases of network or investment sharing on fixed, which could be (where feasible) a potential alternative. As an indication, fixed markets with only one or two access networks that do not offer appropriate wholesale access would be expected to lead to uncompetitive outcomes. By contrast, mobile markets are very unlikely to lead to uncompetitive outcomes as they tend to be characterised by multiple infrastructure players with spare capacity; this provides incentives to offer wholesale access to third parties. Page 6 of 8
Question 6: In your view, are there any areas of concern in relation to oligopolistic outcomes which are not adequately addressed by the current regulatory framework (i.e. both the European Union relevant texts and NRAs policies)? In particular, what is your appreciation of the concept of collective dominance? What do you consider to be the most effective regulation of anti-competitive oligopolistic situations?) Vodafone is of the view that the current framework is able to address concerns of joint dominance that may arise in the context of oligopolies. Where a National Regulatory Authority (NRA) finds strong evidence that there is a risk of joint dominance in the absence of regulation, the current framework provides the basis for NRAs to designate the concerned operators with SMP and to impose appropriate obligations to address the competition problems identified. However, in order to ensure a consistent application of the concept of joint dominance across member states, there would be merit in BEREC providing more guidance with regards to the criteria that should be met and the burden of proof in order to consider the risk of joint dominance as sufficiently significant and demonstrated. This being said, a potential concern arises in the context of tight fixed duopolies which could lead to the premature deregulation of the fixed incumbent on a national or sub-national level. The risk consists of the potential rolling back of access regulation where there is no wholesale access to third parties which would lead to a deterioration of competition at the downstream level. In the context of tight fixed duopolies one needs to go beyond the mere counting of infrastructures and review of market shares. A careful analysis of competition, and particularly at the wholesale level, is necessary, looking in particular at the incentives and ability of operators to offer wholesale services to third parties and the extent to which they effectively constrain each other and, thus, give rise to competitive outcomes at the retail level. Question 7: In your view, what are the main ex ante remedies (which are currently present or could be introduced in the European ex ante regulatory framework) that could be applied to electronic communications services markets exhibiting oligopolistic market structures? (similar or differentiated remedies, symmetric regulation, etc.)? As previously stated Vodafone believes that an oligopolistic market structure does not per se imply anticompetitive outcome nor does it justify ex ante regulation. Where a robust and evidenced-based market analysis leads to a conclusion of joint SMP, remedies similar to single SMP would be relevant with access remedies likely to play an important role. In case where it is not considered proportionate, effective and/or feasible to impose access to both infrastructures it should be possible to impose access to just one of the infrastructures, provided that this sufficiently addresses the competition problems identified. In relation to fixed markets and in light of the specific economic characteristics of fixed networks, consideration could be given to measures that avoid the inefficient duplication of infrastructure and encourage its efficient use (such as duct or verticals) and promote competition deeper into the network. Those measures could be applied symmetrically where appropriate. Page 7 of 8
Question 8: Please, provide any other insight or opinion regarding oligopoly analysis and regulation. In Vodafone s view, the debate around oligopolies in the telecommunications should also take into account broader market trends that have a profound impact on the sector. Vodafone has actively advocated that OTTs should be considered as important players within the value chain, as the services they provide and, particularly, how they provide them (mostly for free) and the business models that support them (advertised based), have a significant effect on the industry, the revenue pool and on the financing of investment. A more detailed assessment of the OTTs market structure and how it affects and spill over to telecommunications sector would be welcome. - END - Page 8 of 8