Annex A

Analysis of the wholesale market for access and call origination on public mobile telephone networks

(Market 15)

24 August 2006

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Table of Contents SUMMARY AND CONCLUSIONS.....................................................................................................4 1 INTRODUCTION.........................................................................................................................9

1.1 GENERAL ...............................................................................................................................9 1.2 NEW ELECTRONIC COMMUNICATIONS LEGISLATION...............................................................9 1.3 PTA’S IMPLEMENTATION OF ITS MARKET ANALYSIS ............................................................11 1.4 GENERAL — MARKET DEFINITION........................................................................................12

1.4.1 The service market..........................................................................................................12 1.4.2 The geographical market................................................................................................13 1.4.3 Criteria for defining dissimilar service markets .............................................................14

2 DESCRIPTION AND DEFINITION OF THE RELEVANT SERVICE MARKET............14 2.1 GENERAL .............................................................................................................................14 2.2 PTA ASSESSMENT OF THE RELEVANT SERVICE MARKET DEFINITION....................................16

2.2.1 Introduction ....................................................................................................................16 2.2.2 Access and call origination on mobile networks ............................................................17 2.2.3 Access and call origination on fixed-line networks ........................................................19 2.2.4 Voice calls with IP technology (VoIP)............................................................................21 2.2.5 Distinction between companies and individuals.............................................................22 2.2.6 Phone cards and subscriptions .......................................................................................22 2.2.7 Short messaging services (SMS) .....................................................................................23 2.2.8 Other data services .........................................................................................................23 2.2.9 International roaming.....................................................................................................24 2.2.10 NMT 450 ....................................................................................................................25

2.3 CONCLUSIONS CONCERNING THE DEMARCATION OF THE RELEVANT SERVICE MARKET........28 3 GEOGRAPHIC DEMARCATION OF THE RELEVANT MARKET .................................29 4 THE STATUS OF THE MOBILE PHONE MARKET ..........................................................31

4.1 SUMMARY AND HISTORY......................................................................................................31 4.2 THE RETAIL MARKET............................................................................................................33 4.3 UNDERTAKINGS IN THE MOBILE PHONE MARKET.................................................................35

5 MARKET ANALYSIS ...............................................................................................................36 5.1 INTRODUCTION.....................................................................................................................36 5.2 THE MARKET FOR ACCESS AND CALL ORIGINATION ON PUBLIC GSM MOBILE NETWORKS ...37

5.2.1 Market share...................................................................................................................37 5.2.2 Control over facilities not easily duplicated...................................................................42 5.2.3 Overall size and experience of the undertaking..............................................................43 5.2.4 Entry barriers .................................................................................................................45

5.2.4.1 Sunk costs .......................................................................................................................... 46 5.2.4.2 Economy of scale ................................................................................................................ 46 5.2.4.3 Economy of scope............................................................................................................... 47 5.2.4.4 Access to capital ................................................................................................................. 49 5.2.5.5 Technological advantages ................................................................................................... 50 5.2.4.6 Barriers to expansion .......................................................................................................... 51 5.2.4.7 Access to distribution and sales systems............................................................................. 51 5.2.4.8 Vertical integration ............................................................................................................. 52 5.2.4.9 Purchasers’ freedom, access to information, and switching costs ....................................... 53 5.2.4.10 Product diversification / bundling ....................................................................................... 56 5.2.4.11 Conclusions on entry barriers.............................................................................................. 57

5.2.5 Price comparison and price trends on the retail market ................................................58 5.2.6 Competition in the relevant market ................................................................................61

5.3 THE MARKET FOR ACCESS AND CALL ORIGINATION ON THE NMT MOBILE NETWORKS ........65 5.3.1 Market share...................................................................................................................66 5.3.2 Entry barriers and potential competition .......................................................................66 5.3.3 Prices and price trends...................................................................................................67 5.3.4 Countervailing buying power .........................................................................................68

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5.3.5 Summary of the NMT market ..........................................................................................68 6 ASSESSMENT OF SIGNIFICANT MARKET POWER .......................................................69

6.1 GENERAL .............................................................................................................................69 6.2 PTA’S ASSESSMENT OF SIGNIFICANT MARKET POWER IN THE RELEVANT MARKETS.............70

6.2.1 The market for access and call origination on public GSM mobile networks ................70 6.2.1.1 Joint dominance .................................................................................................................. 71 6.2.1.2 Assessment of significant market power............................................................................ 81

6.2.2 The market for access and call origination on the NMT mobile network.......................82 7 IMPOSITION OF REMEDIES.................................................................................................83

7.1 REMEDIES — GENERAL ........................................................................................................83 7.2 REMEDIES IN EFFECT PURSUANT TO THE PREVIOUS TELECOMMUNICATIONS ACT................84 7.3 COMPETITION PROBLEMS .....................................................................................................85

7.3.1 General ...........................................................................................................................85 7.3.2 Competition problems — GSM mobile networks............................................................85 7.3.3 Competition problems — NMT mobile network .............................................................87

7.4 PROPOSED REMEDIES PURSUANT TO THE NEW ELECTRONIC COMMUNICATIONS ACT ..........88 7.4.1 Obligations in the market for access and call origination on GSM mobile networks ....88

7.4.1.1 Access to the GSM mobile network................................................................................... 89 7.4.1.2 Non-discrimination ............................................................................................................ 95 7.4.1.3 Transparency...................................................................................................................... 97 7.4.1.4 Accounting separation........................................................................................................ 99 7.4.1.5 Price controls ................................................................................................................... 100 7.4.1.6 Summary of obligations for the GSM mobile network .................................................... 107

7.4.2 Obligations in the market for access and call origination on the NMT mobile network 108

7.4.2.1 Granting of access to the NMT mobile network .............................................................. 108 7.4.2.2 Non-discrimination .......................................................................................................... 109 7.4.2.3 Transparency.................................................................................................................... 109 7.4.2.4 Price controls ................................................................................................................... 110 7.4.2.6 Summary of obligations for the NMT mobile network .................................................... 110

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Summary and conclusions This document contains the Post and Telecom Administration (PTA) analysis of the wholesale market for access and call origination on public mobile telephone networks on Iceland (Market 15). The market analysis is the foundation for the imposition of sector-specific obligations on mobile network operators (MNO) that are designated as having significant market power (SMP). This document is based on a draft that was presented for consultation with a letter dated 8 July 2005, wherein electronic communications operators and other interested parties were invited to submit comments on the market analysis of market 15 and the conclusions drawn from that analysis. The following parties submitted comments on the preliminary draft: Og fjarskipti hf. (Og Vodafone), The Competition Authority, and Síminn. A summary of comments and of PTA’s position can be found in Annex C to the draft decision on Market 15. This document contains PTA’s analysis and conclusions concerning the relevant market. These have now been updated to reflect both the comments submitted and the most recent figures from the mobile network operators currently operating. Section 1 expounds on the regulatory framework to which the market analysis adheres, as well as a general description of the implementation of the market analysis and the market definition. In Section 2, the service market for access and call origination on public mobile networks at the wholesale level is examined and defined in accordance with the Recommendation and the Guidelines issued by the EFTA Surveillance Authority (ESA). A clear distinction is made between wholesale and retail markets on the basis of the business carried out there; however, it is necessary to consider possible connections between these two markets, which could exert competitive restraint on one another. Furthermore, there is no actual wholesale market for access and call origination on mobile networks in this country; therefore, substitutability at the wholesale level must be assessed based on the possible conditions for business activity centring on access and call origination on mobile networks. In view of this, PTA also examined the situation at the retail level. It is PTA’s conclusion that the relevant service market at the wholesale level consists of two markets: the market for access and call origination on public GSM1 mobile networks, and the market for access and call origination on the NMT2 450 mobile network. The wholesale service market for access and call origination on public GSM mobile phone networks consists of:

• all services for access and call origination on GSM mobile networks that are provided, or that can be provided

• access to GSM via pre-paid cards and monthly subscriptions • access for both individuals/residences and corporations

1 Abbreviation for the English: Global System for Mobile Communications 2 Abbreviation for the English: Nordic Mobile Telephone.

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• access to SMS3 services • access to other data services, such as GPRS4 and EDGE5

The wholesale service market for access and call origination on the NMT 450 mobile phone networks consists of:

• all services for access and call origination on the NMT mobile networks that can be provided

• access to NMT via monthly subscription • access to NMT for both individuals/residences and corporations

In the opinion of PTA, the following do not fall within the relevant service markets:

• access and call origination in fixed-line networks • voice calls with IP technology (VoIP) • voice call termination in GSM and NMT mobile networks • SMS termination in GSM mobile networks • international roaming

In Section 3, the relevant service markets are demarcated geographically, and it is PTA’s conclusion that they extend to the entire country. Section 4 contains a review of the status of the mobile phone market and the trends in mobile phone services in Iceland. Account is given of the mobile operators that are currently operating on the mobile phone market. These are Síminn, Og fjarskipti ehf. (Og Vodafone), IMC Ísland ehf., and Ódýra símafélagið ehf. (SKO), which recently entered the market. The three companies mentioned first are all vertically integrated undertakings that also operate as service providers at the retail level. SKO is a resale agent that operates at the retail level and resells mobile services from Og Vodafone; both companies are owned by Dagsbrún hf. No independent service operators or virtual network operators are currently active on the Icelandic mobile phone market. Section 5 contains an analysis of the relevant markets and a discussion of the most important issues that affect the market position of current mobile operators. In light of the fact that no actual wholesale mobile market exists in Iceland and mobile network operators almost only provide services to their own retail arms, i.e. internal sales (self-supply), PTA needs to bases its analysis on the assumption that the structure of supply at the wholesale level is derived from supply at the retail level. Therefore, the relevant markets need to be analysed on the basis of the competitive conditions prevailing at the retail level. In view of the fact that there are two distinct service markets, they are analysed separately: first GSM, and then NMT. Market share is often used to assess companies’ power on a market. In general, an undertaking is considered to have a dominant market position if it possesses more than a 50% market share. In view of the fact that no real wholesale activities take place in the market for access and call origination in public mobile networks, with the exception of internal sales, national roaming, and resale of services to SKO, it is only possible to measure market share in the retail market. PTA is of the opinion that

3 Abbreviation for the English: Short Messaging Services. 4 Abbreviation for the English: General Packet Radio Service 5 Abbreviation for the English: Enhanced Data rates for GSM Evolution

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market share at the retail level gives an indication of the situation at the wholesale level; therefore, the Administration considers the companies’ market share at the retail level in its assessment of significant market power on the relevant market. There are only two undertakings with any sizable operations in the market for access and call origination in public GSM networks: Og Vodafone and Síminn. In the opinion of PTA, IMC Ísland’s market share is so small (0.002%) that there is no reason to assess the company as having any real market power, either alone or jointly with others; therefore, it was not considered necessary to carry out further analysis of the company’s position on the relevant market at this point in time. The company’s experience and its involvement on the relevant market are borne in mind, however, in the analysis. At the end of the year 2005, Og Vodafone had a 35% market share as measured in number of GSM customers, while Síminn’s market share was 65%. Síminn’s market share is therefore well over the limits that indicate a dominant market position. Og Vodafone and the companies that merged to form it increased their market share until the year 2002; however, since that time, the company’s market share has dropped by over 1%, and it has not reached levels that indicate that Og Vodafone has a dominant position on the market. The market share of the companies has remained static for the past four years, which indicates that certain stability has been achieved. It is PTA’s opinion that there are significant entry barriers for new undertakings wishing to enter the GSM market. There are considerably high sunk costs associated with the build-up of a GSM mobile network with acceptable distribution in this country. The market has reached a certain level of saturation, and growth in the number of customers has slowed. Both Síminn and Og Vodafone have economy of scale in the relevant market; however, it must be considered that Og Vodafone and IMC Ísland suffer for having entered the market significantly later than Síminn. Síminn has benefited from greater breadth and scope in its operations, which gives the company greater financial strength than its competitors. Síminn’s strong position on other markets — particularly the fixed-line market and the markets for local loops and leased lines — provide it with a unique position and make it both more difficult and more expensive for new operators to enter the mobile phone market. Greater distribution of Síminn’s GSM mobile network provides the company with a stronger position on the relevant market, and in the same vein, Og Vodafone is dependent on Síminn for national roaming in certain areas. Both Síminn and Og Vodafone are considered to possess solid, reliable experience on the mobile phone sector; however, Síminn’s size and longer experience indicate that the company enjoys a significant market power. Section 6 contains the conclusions of the market analysis and the designation of the operator with significant market power (SMP) on the particular markets under scrutiny. In view of the fact that, on the market for access and call origination in GSM mobile networks, competition is limited to two undertakings, PTA considered it appropriate to assess whether the requirements for joint dominance were met. Despite the fulfilment of various preconditions for determining that Síminn and Og Vodafone possessed collective dominance, it was PTA’s opinion that there were not

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sufficient grounds to reach such a conclusion at this time. In the opinion of PTA, Síminn and Og Vodafone do not occupy comparable positions on the relevant market. The results of the market analysis indicate that Síminn’s position on the mobile phone market is stronger. There is insufficient proof that the two companies behave in a comparable manner toward other electronic communications undertakings, customers, or consumers since few important criteria for joint dominance are not satisfied. No retaliatory mechanisms exist; the cost structure and market share of the companies are not comparable; and transparency in the market is not sufficient to conclude that the companies have a joint dominance. In the assessment of PTA, the results of the market analysis indicate that Og Vodafone does not possess significant market power on the market for access and call origination in the GSM mobile network; however, there are many factors that indicate that Síminn does have significant market power. Síminn’s large market share is a significant factor in this assessment. Figures from year-end 2005 indicate that Síminn has increased its market share, as measured in number of customers, by 1% since the year 2003. The disappearance of operators from the relevant market — that is, the companies that merged to form Og Vodafone and others that abandoned plans to offer mobile phone services, see Figure 7 — indicates strongly that Síminn has a significant market power in comparison with other undertakings. Furthermore, the fact that IMC Ísland was forced to conclude an international roaming agreement with Og Vodafone in order to offer mobile phone services in Iceland indicates that both Síminn and Og Vodafone are misusing their market power, as neither company has, so far, been willing to negotiate with IMC Ísland for national roaming. On the basis of the market analysis and other conclusions in this document, PTA came to the conclusion that Síminn has significant market power on the wholesale market for access and call origination in public GSM mobile networks. As regards the market for access and call origination in NMT mobile networks, Síminn is the only undertaking in Iceland that operates an NMT mobile network and offers NMT mobile services to end users. Thus Síminn has a 100% market share in NMT mobile phone services; this market share has remained unchanged since 1986, when the company began offering these services. It is PTA’s assessment that the market for access and call origination on the NMT mobile network is characterised by unequivocal entry barriers and a shortage of potential competition, and that it is not foreseeable that this situation will change, especially in view of the fact that the operation of the NMT network will probably cease at the end of the year 2008. The price for use of NMT mobile phones is high in comparison with the price for use of GSM phones and fixed-line phones. The number of users of the NMT network is diminishing, which means that the cost for network operation is distributed among fewer users; this makes it less likely that the price will drop. It is PTA’s opinion that countervailing buying power exists neither at the retail level nor at the wholesale level for NMT mobile phone services. In the opinion of PTA, the results of the market analysis indicate that Síminn possesses significant market power on the wholesale market for access and call origination on the NMT mobile network and can, to a large degree, operate without concern for customers and other electronic communications companies.

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Section 7 contains a discussion of obligations. It lists the current obligations, which were imposed on Síminn and Og Vodafone pursuant to the previous Telecommunications Act, no. 107/1999. It contains a review of the competition problems that PTA has identified in the relevant markets and presents suggestions for obligations that should pave the way for enhanced competition and that should be imposed on Síminn, which is designated as having significant market power on the market for access and call origination on both the GSM and the NMT mobile networks. The obligations that PTA intends to impose on Síminn as regards access and call origination on the GSM network are the following:

• Granting of access in response to reasonable requests for GSM mobile network access and services. This includes all types of wholesale access that is reasonable to grant, but it specifically includes access for national roaming, co-location, resale, and virtual networks.

• Non-discrimination. • Transparency and the publication of a reference offer. • Accounting separation. • Price controls.

In determining a price for resale and virtual network access, the retail minus method should be used, and the difference between retail and wholesale price shall be a minimum of 25% for resale and 35% for virtual networks. As regards national roaming, a cost analysis shall be carried out based on historical costs if voluntary agreements are not achieved. If PTA considers, on the other hand, that the imposed obligations do not yield satisfactory results, the Administration intends to impose on Síminn the obligation to carry out cost analysis of prices in accordance with either the LRIC method or another cost-analysis method that PTA considers most appropriate.

The obligations that PTA intends to impose on Síminn as regards access and call origination on the NMT network are the following:

• Granting of access in response to reasonable requests for purchase of NMT services for resale.

• Non-discrimination. • Transparency. • Price controls.

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1 Introduction 1.1 General 1. This document contains the Post and Telecom Administration (PTA) analysis of the wholesale market for access and call origination on public mobile telephone networks in Iceland (Market 15). It begins with a definition of the service and geographical markets and continues with a definition of the relevant market. If circumstances warrant it, one or more operators are designated as having significant market power (SMP),6 and appropriate remedies are imposed on them. The market analysis is the foundation for the imposition of sector-specific obligations on electronic communications undertakings that have been designated as having significant market power. 2. This document is based on a draft that was presented for consultation with a letter dated 8 July 2005, wherein electronic communications operators and other interested parties were invited to submit comments on the market analysis of market 15 and the conclusions drawn from that analysis. The following parties submitted comments on the preliminary draft: Og fjarskipti hf.7 (Og Vodafone), The Competition Authority, and Síminn. The analysis of the relevant market has been updated to reflect the comments that were considered, and all statistical data have been updated to coincide with the most recent figures. The comments are categorised according to content, sections, and paragraphs, and a response to them is contained in Annex C to the draft decision on Market 15. An attempt was made to analyse all of the comments that were meaningful and to respond to them. The comments that were received can be found on PTA’s Internet website.8 3. Markets and market analyses are subject to change and will be reviewed regularly. Markets that change constantly and considerably must be re-evaluated within a reasonable time limit. The markets are analysed with respect to immediate future development wherever possible. The time period that is used as a reference should reflect the characteristics of the relevant market and the estimated time until the next analysis of that market takes place.9 In most instances, it is reasonable to assume two to three years. 4. Iceland Telecom hf. (Síminn) and Og fjarskipti hf. were designated as possessing significant market power on the mobile phone network pursuant to the previous Telecommunications Act, no. 107/1999, and are further scrutinised in this document. 1.2 New electronic communications legislation 5. On 25 July 2003, new legislation on electronic communications entered into force in Iceland. The new Act, no. 81/2003, implements four EU directives on 6 In English: “significant market power (SMP)”. 7 Now Og fjarskipti ehf. 8 See http://www.pfs.is/ [English page] Telecom Affairs, Market Analysis, and Consultation with Interested Parties. 9 See Paragraph 20 in the ESA Guidelines.

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electronic communications10 and one directive on the protection of personal privacy in electronic communications11. The new electronic communications legislation is intended to create homogeneous operating conditions for electronic communications operators in Europe, limit entry barriers, and create conditions for sustainable competition for the benefit of users. 6. The new Electronic Communications Act assigns PTA the task of identifying relevant electronic communications markets according to product type, service type, and geographical area, in accordance with the principles of competition law and obligations according to the EEA Agreement. In addition, PTA is obligated to analyse these defined markets and determine whether effective competition exists within them. If PTA concludes that there is effective competition on the relevant market — that is, that no operator, individually or jointly, has SMP — then it has no authority to impose obligations on the operators in question. If PTA has previously imposed obligations on operators on the relevant market, these shall be withdrawn and no new obligations imposed. On the other hand, if PTA concludes that effective competition does not exist on the relevant market because one or more operators has SMP, the Administration must designate these operators has having SMP and must impose appropriate obligations on them. PTA is required to impose at least one obligation on operators that have been so designated. If an operator has previously been designated as having SMP pursuant to previous electronic communications legislation, PTA shall re-evaluate the obligations that were imposed and decide whether they should be maintained, amended, or withdrawn. 7. The European Commission has published guidelines and a recommendation concerning market analysis. First, there are guidelines for market analysis and the assessment of SMP,12 and second, there is a recommendation concerning the relevant markets.13 The EFTA Surveillance Authority (ESA) has issued comparable guidelines14 (hereinafter referred to as “Guidelines”) and a recommendation15

10 Directive of the European Parliament and of the Council, no. 2002/19/EC, of 7 March 2002, on access to, and interconnection of, electronic communications networks and associated facilities (the Access Directive). Directive of the European Parliament and of the Council, no. 2002/20/EC, of 7 March 2002, on the authorisation of electronic communications networks and services (Authorisation Directive). Directive of the European Parliament and of the Council, no. 2002/21/EC, of 7 March 2002, on a common regulatory framework for electronic communications networks and services (Framework Directive). Directive of the European Parliament and of the Council, no. 2002/22/EC, of 7 March 2002, on universal service and users’ rights relating to electronic communications networks and services (Universal Service Directive). 11 Directive of the European Parliament and of the Council, no. 2002/58/EC, of 12 July 2002, concerning the processing of personal data and the protection of privacy in the electronic communications sector (Directive on privacy and electronic communications). 12 Commission Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic networks and services, 2002/C 165/3. 13 Commission Recommendation and Explanatory Memorandum on Relevant Product or Service Markets within the Electronic Communications sector susceptible to ex ante regulation in accordance with directive 2002/21/EC, 11/02/2003, C(2003)497. 14 EFTA Surveillance Authority guidelines of 14 July 2004 on market analysis and the assessment of significant market power under the regulatory framework for electronic communications networks accordance with directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communication networks and services referred to in Annex XI of the Agreement on the European Economic Area OJ 27.4.2006, C 101/1.

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(hereinafter referred to as “Recommendation”), both of which PTA will take into consideration in carrying out its market analyses. In addition, the Administration will consider the ERG16 report concerning remedies that may be imposed on electronic communications undertakings with significant market power in order to promote competition.17 8. The ESA Recommendation on the relevant markets identifies 18 electronic communications markets that PTA is required to analyse pursuant to the new Electronic Communications Act and Iceland’s obligations according to the EEA Agreement. The Electronic Communications Act also requires that PTA define these markets in accordance with the conditions reigning in Iceland. In this respect, PTA’s market definition may differ from that assumed in the Recommendation. Furthermore, PTA is authorised to investigate all relevant electronic communications markets for the purpose of its market analysis, whether these are identified in the Recommendation or not. 1.3 PTA’s implementation of its market analysis 9. The implementation of the market analysis can be divided into three phases:18

1) Definition of the relevant service markets and geographical markets. 2) Analysis of each of the defined markets, assessment of whether there is

effective competition on those markets, and decision on whether one or more undertakings have significant market power.

3) Decision on whether it is necessary to impose, maintain, amend, or withdraw obligations on undertakings with significant market power.

10. This document contains PTA’s conclusions for all three phases. These conclusions are based on PTA’s draft analysis of the relevant markets, which were presented for consultation with a letter dated 8 July 2005. Comments have been summarised and are answered in Annex C accompanying the draft decision concerning market 15. The analysis of the relevant market for access and call origination on public mobile networks has been updated to reflect the comments that were considered, and all statistical data have been updated to coincide with the most recent figures. 11. In preparing its analysis of the relevant market, PTA compiled data on the mobile phone market from the undertakings operating on that market. PTA sent all listed electronic communications operators questions concerning the mobile phone market. All undertakings operating on the relevant market were required to send in answers, and other electronic communications operators were offered the option of 15 Recommendation of the EFTA Surveillance Authority of 14 July 2004 on relevant product or service markets within the electronic communications sector susceptible to ex ante regulation in accordance with directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communication networks and services, as incorporated into the Agreement on the European Economic Area, OJ 27.4.2006, L 113/18. 16 Abbreviation for “European Regulatory Group of National Regulatory Authorities”. 17 ERG Common Position on the approach to appropriate remedies in the new regulatory framework. 18 See discussion in the introductory document on market analysis, prepared by PTA, first published in October 2003 and updated in August 2005. See www.pfs.is, and then select Telecom Affairs and Market Analysis.

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answering if they chose to do so. The Administration has also gathered information through independent consumer surveys19 on transparency, price awareness, and consumer mobility in the electronic communications market and has used the Teligen database20 to carry out domestic and international price comparisons on the retail market. 1.4 General — market definition 12. Pursuant to Article 16 of the Electronic Communications Act, no. 81/2003, with subsequent amendments, the Post and Telecom Administration must define product and service markets21 and geographical markets in accordance with the principles of competition law and obligations under the EEA Agreement. As has emerged, it is necessary that PTA assess whether the markets as they have been defined in the Recommendation reflect conditions in Iceland. It is necessary to define both the product market and the geographical market before it is possible to determine whether market conditions warrant imposing obligations on the relevant market. 1.4.1 The service market 13. In Article 4 of the Competition Act, no. 8/1993, a market is defined as the sales area for a product and substitute product and/or the sales area for a service and substitute service. Substitutable products and services are defined as products or services that can, wholly or to a significant extent, take the place of other products or services, not only on the basis of the objective characteristics of the product in question, the purchaser’s intended use of it, and its price, but also with respect to competition requirements and/or conditions relating to supply and demand. Products that can compete with one another are therefore called substitutable products, and each market consists of products that are mutually substitutable. Products that can substitute for one another only to a limited extent are not considered part of the same market. 14. Substitutability is assessed from two points of view: first, how readily customers believe that one product can substitute for another (demand-side substitutability), and second, how easily a competitor of a given undertaking can adapt his production so that his product falls within the market to which a product of the given undertaking belongs (supply-side substitutability). If competitors can change their products on short notice and without significant expense, this indicates that their products belong to the same market as the products of the given undertaking (supply-side substitutability).22 15. Demand-side substitutability is considered the foundation of the market definition, while supply-side substitutability is considered less meaningful and is often related instead to an assessment of potential competition. Potential competition

19 Telephone surveys conducted by IMG Gallup for PTA, 26 February – 10 March 2004 and 6 – 18 April 2005. The sample for both survey included 1,350 people from all over the country. Participants were chosen at random from the National Registry. 20 Teligen is a British analysis and consultancy firm. 21 Hereafter, the terms product and service will be used interchangeably. 22 See also Paragraph 39 in the Guidelines and Explanatory Memorandum accompanying the Commission Recommendation, Section 3.1.

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is the third competition factor that affects undertakings’ behaviour, the other two factors being demand- and supply-side substitutability. The difference between potential competition and supply-side substitutability is that supply-side substitutability takes place on shorter notice than does potential competition. In addition, supply-side substitutability does not involve as much investment as new undertakings must generally engage in when they enter a market. An assessment of potential competition is made with the aim of determining whether there are entry barriers that limit normal competition on the market. 16. The SSNIP test23 has been used to measure potential substitutability. According to the SSNIP test, there is substitutability between products or services A and B if a small (5-10%) but significant non-transitory price increase in product A results in customers’ beginning, to a considerable degree, to purchase product B instead, so that the increase in the price of A proves unprofitable. If such a price increase for product A does not generate increased demand for product B, it can be considered that there is not substitutability between A and B. 17. The above method requires a great deal of data compilation, which is often difficult to carry out. However, it is not required that the SSNIP test be used to define markets. Other methods can be used as well. In addition to the SSNIP test, it is possible to use econometrics of supply and demand on the market if such research is available. In assessing demand, it is also necessary to consider end users’ access to information, as well as hindrances to switching service providers (lock-in effect). If an end user must incur significant switching costs should he wish to switch from service A to service B, the two services should not belong to the same service market. In assessing supply, it is also necessary to consider sellers’ actual options in adapting their production, as well as possible regulatory conditions that could delay or hinder the entry of competitors into the market. 1.4.2 The geographical market 18. When the relevant service market has been defined, the geographical market must be demarcated. This demarcation is generally based on the extent of the electronic communications network and the legislative jurisdiction of the regulatory framework that applies to it. The definition of the geographical market is also based on an assessment of substitutability of the product and service in question, on the supply side and on the demand side, in case of a small but significant non-transitory price increase, as is described above. 19. The geographical market is the land area where products and services are available on sufficiently homogeneous competitive terms, and where it is possible to distinguish the area from other nearby areas where different competitive conditions prevail. In assessing demand-side substitutability, it is appropriate to consider customers’ taste and geographical purchasing patterns. On the basis of this, it is possible to define markets as local, regional, national, or transnational; that is, more than one country. PTA does not have the authority, however, to define transnational markets on its own. 23 SSNIP is the abbreviation of the English phrase „small but significant non-transitory increase in price.” The SSNIP test is also called “the hypothetical monopolist test.” See Paragraph 41 in the Guidelines, where this is explained in greater detail.

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20. Two factors are important in defining geographical markets: price and network distribution. If an electronic communications network reaches the entire country, this indicates that the geographical scope should be national. If the distribution of the network is regional and there is no overlapping of regions, this is an indication that the geographical scope should be regional. If prices are the same for the entire country, this indicates that the geographical scope should be national. If prices differ according to region, this is a strong indication that supply- and demand-side substitutability do not exist and that the regions in question are distinct geographical markets. 1.4.3 Criteria for defining dissimilar service markets 21. It could prove necessary to define markets that are unlike those that have been pre-defined in the Recommendation. In such instances, it is necessary to consult with ESA. When such markets are to be defined, the following criteria must be met in order for it to be possible to impose obligations:

1. There are barriers restricting entry into the relevant market. 2. The characteristics of the market are such that it will not tend sufficiently

towards effective competition. 3. The general principles of competition do not suffice to eliminate barriers

or to promote competition on the relevant market. 22. In the opinion of the European Commission and ESA, the above criteria exist in the market under scrutiny here. 2 Description and definition of the relevant service market 2.1 General 23. The service market under scrutiny here corresponds to market 15 in the Recommendation: “Access and call origination on public mobile phone networks.”24 It is a wholesale market, as has previously been stated, but the Commission has distinguished between the wholesale market and the retail market. 25. The end user market (the retail market) for mobile services extends primarily to access to mobile networks with voice call services; that is, the possibility of placing a call from a mobile phone and receiving a call on a mobile phone. Both subscribers and mobile phone users with pre-paid cards fall within this definition. Mobile phone users also request these services when they are abroad; in such instances, mobile network operators provide services on the basis of international roaming agreements that they have made with undertakings operating in the country where the user is located. Though it is possible to divide retail-level mobile services into numerous subsidiary markets, they are, in the eyes of the mobile phone user, one package: purchase of access to a mobile network for the purpose of placing and receiving voice

24 Page 9 in the Recommendation:“Access and call origination on public mobile telephone networks”.

15

calls and, in the case of GSM networks, access to SMS, MMS,25 and data services via GPRS or EDGE. 26. On the basis of mobile phone services at the retail level, the Commission has defined three wholesale markets. These are access and call origination on public mobile networks, voice call termination in individual mobile networks, and the domestic market for international roaming. The market for access and call origination on public mobile phone networks is the market under scrutiny here. 27. The wholesale services under examination here extend to various types of services that mobile network operators (MNO)26 can provide to other undertakings and/or to themselves. The following is a list of the most common forms of wholesale-level access:

• Voice call origination with indirect access – provides mobile network operators with the possibility of providing voice call services with, for example, carrier selection or pre-selection. Indirect access provides mobile phone users with the possibility of using other mobile network operators than those with which they have a subscription. This service is limited to specific voice calls or voice call categories (e.g., international calls). The company Lína.Net has offered carrier selection for international voice calls from mobile phones, but the use of this service seems to be disappearing. Síminn now offers carrier selection for its GSM mobile users, wherein a number between 1000 and 1100 is entered prior to the phone number the user is calling.

• Call origination with access – provides virtual network operators (MVNO)27 with the option of offering mobile phone services at the retail level. Virtual network access can be divided into several levels based on how much access to the electronic communications network infrastructure is provided at the wholesale level. Thus the highest level can be called “pure MVNO,” and its technological implementation is substantially similar to, or the same as, that for national roaming, with the exception that the virtual party does not operate a distribution system. Such a virtual network operator can negotiate himself for roaming and interconnection. Other levels of virtual network operations involve the service provider’s operating his own service system, which gives him the possibility of better separating his services from those of the “parent provider;” that is, maintaining his own pricing system and even his own voice mailbox, SMS/MMS, and other specialty services for the purpose of further differentiation. Such a service provider does not negotiate for roaming but can, in some instances, negotiate for interconnection. No virtual network provider, or virtual network level, exists in the Icelandic mobile phone market today.

• Resale with access – provides a service provider with the possibility of reselling mobile phone services. He purchases either minutes or data transmission capacity from the mobile network operator, at a discount that provides him with the possibility of generating revenue. Such a service provider has limited potential to offer prices other than those charged by the mobile network operator, as his prices are based on the latter’s price lists. In cases involving pure resale under an independent brand name, the service

25 Abbreviation for the English: Multimedia Messaging System. 26 Abbreviation for the English: Mobile Network Operators. 27 Abbreviation for the English: Mobile Virtual Network Operators.

16

provider does not have any independent system infrastructure but sells services under his own independent brand name and purchases nearly all support services at the wholesale level. The mobile phone company SKO recently commenced operations as a resale agent that purchases all its services from Og Vodafone. In addition, it is worth mentioning that the collaboration agreement between BT (Tæknival) and Íslandssími, which was later terminated by Og Vodafone, was a simple resale agreement.28

• National roaming – is the type of wholesale service that is best known among GSM network services in this country. This involves mobile network operator A’s defining a centre (MSC)29 where the users of mobile network operator B in the same country shall receive access to specific, specially labelled transmitters in A’s mobile phone system. Access is then permitted for IMSI30 number series in B’s mobile phone system, but only in certain areas. When users of system B travel within these areas belonging to system A, their entry into the area is permitted, and information concerning their connection to the area is sent to system B. Upon fulfilment of these requirements, all phone traffic, either to or from user B within distribution system A, is sent to/from centre B through special roaming-interconnection routes between A and B, and the settlement between the companies for these transactions is based on those routes.

• Internal sales – sale of access and call origination from wholesale level to retail level within the same undertaking.

2.2 PTA assessment of the relevant service market definition 2.2.1 Introduction 28. In this section, PTA defines the market for access and call origination on mobile networks in accordance with the ESA Recommendation. The market is defined with consideration given to conditions reigning in Iceland. 29. In accordance with the Recommendation and conclusions of the Commission, the relevant market is defined as a wholesale market. Three undertakings operate networks in this market; that is, Síminn, Og fjarskipti ehf. (Og Vodafone), and IMC Ísland ehf. All of these companies are vertically integrated undertakings; that is, they operate their own mobile networks and provide services at the retail level. Because of this, the relevant market also includes the companies’ internal sales; e.g., sales from their wholesale and retail departments. Ódýra símafélagið ehf. (SKO) is service provider at retail level, reselling mobile services from Og Vodafone, and purchaser at wholesale level. 30. Though a clear distinction is made between wholesale and retail markets on the basis of the business occurring there, it is necessary to consider possible connections between these two markets, which could exert competitive restraint on one another. Because of this, it is important also to examine the competitive

28 BT sold regular Íslandssími subscriptions and pre-paid cards for mobile phones with the BT brand name. 29 Abbreviation for the English: Mobile Switching Centre. 30 Abbreviation for the English: International Mobile Subscriber Identity.

17

conditions at the retail level when defining a wholesale market where demand at the wholesale level can be traced to demand at the retail level. PTA will therefore examine the situation on the retail market before defining the wholesale market for access and call origination on mobile networks. Because no actual wholesale market exists in Iceland, it is necessary to assess substitutability at the wholesale level on the basis of possible conditions for business relating to access and call origination on mobile networks. It could be said that the entry of SKO into the mobile phone market represents an indication of a wholesale market. On the other hand, because SKO is owned by Dagsbrún hf., which also owns Og Vodafone, PTA believes it is not possible to view SKO as an independent service provider. 2.2.2 Access and call origination on mobile networks 31. From the consumer’s standpoint, access to mobile phone networks can be viewed as the possibility of placing and receiving voice calls through a mobile phone, as well as sending and receiving SMS and MMS messages and, in the case of GSM networks, having access to GPRS. Therefore, it can be deemed likely that consumers do not consider that there is substitutability between access and call origination on mobile networks, but rather that these services supplement one another without being independent. At the wholesale level, it can be considered as established that potential service providers would choose public access to mobile networks together with the possibility of voice call origination in order to offer consumers both services together. Thus it can be considered that there is consistency in demand at the retail and wholesale levels. Access and call origination are usually offered together as a package, whether at the wholesale or at the retail level. In view of this, it can be assumed that the limitations in pricing of access and call origination are the same at both the wholesale and the retail levels. 32. Nonetheless, PTA conducted an examination to determine whether there was a foundation for defining access to mobile networks at the retail level as a separate market. Access to the network is generally included in the retail price. If users have post-paid subscriptions, their monthly invoices are itemised to show the monthly fee and the cost for each call. Both Síminn and Og Vodafone have different offers and discounts to selected phone numbers, as is shown in Table 1. IMC Ísland has a simple price list and offers lower minute charges for on-net calls between two mobile phones with subscription from IMC.31 SKO has also a simple price list and offers free calls to numbers from SKO.32 Table 1 Package offers for post-paid subscriptions; price including Icelandic VAT.

Mobile network operator

Offer Monthly charge

Services included

31 IMC Ísland is marketed in Iceland under the name Wiking Wireless, see www.wikingwireless.is. 32 See www.sko.is

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General GSM

subscription

600 Included: use to one GSM number from Síminn for up to 1,000 minutes and up to 500 SMS per month; one fixed-line number for up to 1,000 minutes, and 60 minutes per month of international calls to fixed-line phone in the countries that Icelanders call most often

Síminn33

GSM Ace 1,290 Lower per-minute price than in general subscription. Included: use to one GSM number from Síminn for up to 1,000 minutes and up to 500 SMS per month; one fixed-line number for up to 1,000 minutes, and 60 minutes per month of international calls to fixed-line phone in the countries that Icelanders call most often

GSM Friends

650 Included: use to one Og Vodafone GSM number for up to 60 minutes per day and 30 SMS per 24-hour period free of charge. Excess use according to price list.

Og Vodafone

GSM Friends

1,040 Included: use to two Og Vodafone GSM numbers for up to 60 minutes per day and 30 SMS per 24-hour period free of charge. Excess use according to price list.

NMT— Duo

100 Two mobile numbers with the same call-in number. Duo can be viewed as a subscription with an extra number. A single fee of ISK 2,490 is paid for NMT— Duo.

Síminn

Other NMT subscription

options

532, 221 or 1,313;

according to subscription

option

Three subscription options offered: general subscription, vacation subscription, and heavy-user subscription. The per-minute charge is lower if the subscription charge is higher. The base price for each subscription is ISK 1,200.

Source: Internet websites of electronic communications undertakings, 1 April 2006. 33. Considering Table 1 above, it is PTA’s opinion that access to mobile phone networks is not well enough separated from other mobile phone services at the retail level to make it possible to define it as a separate product market.

33 According to Síminn’s webpage the company does not accept any new subscribers to these subscription offers since 1 July 2006. Síminn is now offering new subscription offers, so-called “Betri leið”, which has simpler price list and higher monthly charges which can be used to make free domestic voice calls.

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34. As is stated in Section 2.1, there are various types of supply for access and call origination at the wholesale level, but as things stand in Iceland, national roaming is the best-known type and the only one available until recently, when the mobile phone company SKO began reselling services from Og Vodafone. It must be kept in mind, however, that SKO is owned by Dagsbrún hf., which also owns Og Vodafone, and it is not clear whether this kind of a resale agreement is available to other parties. On the other hand, it is clear that access and call origination on mobile networks is a necessary element for service providers that do not own their own network but wish to offer mobile phone services to the general user. 35. It does not matter to mobile phone users whether the provider of mobile phone services is a mobile network operator or another service provider that does not own its own network. Mobile phone services at the retail level are therefore independent of the type of access upon which wholesale-level call origination is based. It can be assumed that users distinguish among mobile phone companies on the basis of factors such as price, quality, supplementary services, subsidy of mobile phones, and the like. 36. The needs of purchasers (service providers) at the wholesale level vary, depending primarily on whether they own a system and how extensive it is. Despite this, PTA does not consider it necessary to define the market according to various access services at the wholesale level, cf. Section 2.1, where it can be considered that supply-side substitutability exists among these services. Any mobile network operator offering services for call origination to service providers with indirect access can, if the conditions exist, switch without much difficulty to and from offering access to virtual network operators (MVNO). Therefore, PTA is of the opinion that the relevant service market should contain all types of wholesale service for access and call origination that it is possible to offer in a mobile phone network, and all companies that operate mobile networks and/or purchase access to mobile networks. 37. There are in existence providers of both information and materials that request access to mobile networks in order to provide specific services to end users. These could include, for example, 900 services or services that send specific information via SMS messaging. Such services rendered to end users do not take the place of retail call origination on mobile networks, and there is no substitutability at the wholesale level. Access for such service providers therefore falls outside the market under scrutiny here. 38. In view of the foregoing, it must be considered that the relevant market includes access and call origination on mobile networks, all forms of wholesale-level access to mobile networks, and all undertakings that operate mobile networks and/or purchase access to mobile networks at the wholesale level. 2.2.3 Access and call origination on fixed-line networks 39. Given the conclusions drawn by the Commission, it must be considered as established that there is limited demand-side substitutability between mobile phone use and fixed-line phone use. The chief reasons for this are dissimilar characteristics and dissimilar pricing. Even though, from a technological point of view, fixed-line and mobile systems offer comparable services, fixed phone systems do not offer the mobility that mobile phones offer. Furthermore, fixed-line phone calls are still less

20

expensive than calls placed from mobile phones. These two factors indicate that mobile and fixed-phone services do not belong to the same service market. 40. On the other hand, it is worthwhile to examine whether an increase in prices for calls placed from mobile phones could results in users’ switching to fixed-line phones. The following is a comparison of prices for mobile phone use and fixed-phone use, and it is carried out in order to examine whether these two services could possibly belong to the same market. Figure 1 shows the price for a one-minute voice call at Síminn’s day, night, and evening rates, whether the call is placed from a mobile or fixed line to a phone in the same mobile or fixed network, or to another network. It can be seen that the price of a voice call from one fixed phone to another is substantially lower than the price of a voice call from one mobile phone to another. There is a smaller difference in the price of a voice call from a fixed phone to a mobile phone and from a mobile phone to a fixed phone. The price for a one-minute mobile-to-mobile call ranges from just over twice as high to almost four times as high as that for a one-minute call from one fixed phone to another, which is another indication that these are two distinct markets. Figure 1 Síminn’s prices for use of mobile phones and fixed-line phones.

Verð hjá Símanum fyrir mínútu símtal

05

101520253035

SíminnGSM

OgVodafone

GSM

SíminnNMT

SíminnPSTN

OgVod afone

PSTN

SíminnGSM

OgVod afone

GSM

SíminnNMT

SíminnPSTN

OgVod afo ne

PSTN

Hringt úr GSM í Hringt úr PSTN í

Kró

nur

Dagur Kvöld og helgar

Source: Data taken from Síminn price lists as shown on the company’s Internet website: www.siminn.is. Price list as of 3 May 2006 for origination fee and per-minute rate, including VAT. GSM prices are based on general subscription rates. Within Síminn’s GSM system, a fee is charged for the first minute and then for each succeeding 10 seconds. For calls to other systems, a fee is charged for the first 20 seconds and then for each succeeding 10 seconds. Prices for voice calls from PSTN are based on base subscription. Voice calls from fixed-line phones are measured in seconds.

41. A comparison of Og Vodafone’s day, evening, and weekend rates for a one-minute voice call from mobile phones and fixed phones yields similar results. It can be seen in Figure 2 that the price of a voice call from one fixed phone to another is substantially lower than the price of a mobile-to-mobile voice call. Figure 2 Og Vodafone’s prices for use of mobile phones and fixed-line phones.

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Verð hjá Og fjarskiptum fyrir mínútu símtal

05

1015

2025

3035

SíminnGSM

OgVo dafo ne

GSM

SíminnNMT

SíminnP STN

OgVo dafo ne

P STN

SíminnGSM

OgVo dafo ne

GSM

SíminnNMT

SíminnP STN

OgVo dafo ne

P STN

Hringt úr GSM í Hringt úr PSTN í

Kró

nur

Dagur Kvöld og helgar

Source: Data taken from Og Vodafone’s price lists as shown on the company’s Internet website: www.ogvodafone.is. Price list as of 3 May 2006 for origination fee and per-minute rate, including VAT. The subscription is a “friends” subscription. Prices for voice calls from PSTN are based on general subscription. There is no charge to subscription users for GSM voice calls of less than 3 seconds. For calls that are at least 3 seconds long, the minimum charge is ISK 10; the origination fee is charged, and then a fee is charged for each succeeding 10 seconds. For GSM Freedom, there is no charge for voice calls of up to 3 seconds’ duration; thereafter, a fee is charged for 3 – 20 seconds and for each succeeding 10 seconds. The minimum charge is ISK 10 for calls between Og Vodafone GSM phones but does not apply to Freedom. 42. There is little possibility of supply-side substitutability at the wholesale level because fixed-line network operators cannot switch to offering mobile phone services without investing significant capital and time. Thus the initial costs involved in building up a mobile phone network represent a considerable barrier to entry. 43. It is PTA’s opinion that both the difference in the price for use of mobile phones and fixed phones and the limited possibilities for fixed-line network operators to begin offering mobile phone services indicate that access and call origination on fixed-line networks is not a part of the market under scrutiny here. This conclusion is consistent with that of the Commission. The fixed-line market will be analysed separately when markets 1-6 (retail) and 8-10 (wholesale) are examined. 2.2.4 Voice calls with IP technology (VoIP) 44. The use of VoIP services on the Internet has increased to a great degree recently, especially for international calls. Calls with IP technology are carried out such that the call is placed over the Internet, either from one computer to another or from a computer to a fixed-line or mobile phone. In addition, wireless Internet phones are now on the market, and they give users the option of connecting to the Internet wirelessly and then placing a call. 45. When a call is placed from one computer to another, both the caller and the called party must be connected to the Internet and have computers with corresponding software, headphones, and microphone in order to be able to talk together. The benefit of calling from one computer to another is that the cost includes only Internet

22

connection and download, if appropriate; there is no charge for the voice call itself. When a call is placed over the Internet to a fixed-line phone or a mobile phone, the charge for the call is assessed according to a special price list that is based on a fixed rate per minute. 46. It is normal to consider whether VoIP calls are part of the relevant market and could substitute for calls placed from mobile phones if prices for the latter should rise. The chief argument against this is the mobility afforded by mobile phones, especially if the call is placed from a computer, but also if a call is placed with an Internet phone, as it must be connected to a wireless network in order for it to be possible to place the call. This premise could change, however, with further development and promulgation of wireless Internet phones and connections. As things stand today, PTA is of the opinion that substitutability does not exist between VoIP and voice calls placed from mobile phones, either at the retail level or at the wholesale level. The primary reason for this is that VoIP has not achieved any significant distribution and is still in the developmental stage. In Iceland, VoIP services are used primarily for international calls, chiefly those placed from one computer to another, which requires that both parties be online when the call is placed. Thus there are still many barriers to real substitutability in this form. 47. Given the foregoing, it is PTA’s assessment that it is not timely to include VoIP calls in the relevant market. However, PTA will follow closely the development of this matter and whether these services have competitive impact on the general mobile services. 2.2.5 Distinction between companies and individuals 48. It is normal to consider whether individuals/residences and companies belong to the same market for mobile phone services. Mobile phone companies approach these two groups with different types of offers (e.g., different subscription options) and different prices. The competitive conditions differ for these two groups. On the other hand, there is the potential for substitutability on the supply side, which indicates that it is actually one market. A mobile phone undertaking that has always directed its business toward corporate customers can easily begin targeting residential users, and vice versa. Furthermore, it is worth pointing out that, in most instances, the products and services that are available to corporate customers are also available to individuals, and vice versa. There is no distinction made between individuals and companies with regard to wholesale access to mobile networks. 49. Given these considerations, PTA has come to the conclusion that both individuals/residences and companies belong to the relevant market. 2.2.6 Phone cards and subscriptions 50. PTA is of the opinion that mobile phone services, whether they are pre-paid or post-paid, fall within the same service market. At the retail level, substitutability seems relatively easy on both supply side and demand side, especially when switching from pre-paid card use to subscription. Subscribers may be bound by contractual agreement for a specific period of time, however, and termination of the subscription before the end of the term of the contract could involve some expense.

23

2.2.7 Short messaging services (SMS) 51. The Commission and ESA have made a distinction between voice calls and other data services. In the ESA Recommendation, no special market is defined for SMS and other data services. This is the case at both wholesale and retail levels. It is therefore unclear whether SMS should be considered to belong to the market for access and call origination on public mobile networks. 52. PTA is of the opinion that, in some instances, SMS could substitute for calls. This is especially the case with shorter calls that do not necessarily have to take place at a specific time. Counterbalancing this are the possibility of delayed delivery, limitations on the number of symbols that can be typed in each message, and indications that the market considers SMS an auxiliary service rather than a substitute for voice calls. The results of PTA’s April 2005 consumer survey support this conclusion. In that survey, users were asked how often they sent SMS, and it was revealed that 25% never sent SMS and 30.3% sent SMS less than once a week. Around 25% said they sent 1-6 SMS each week and the rest sends SMS every day. This indicates that, for certain users, SMS can substitute for voice calls to some degree.34 In the opinion of PTA, this group is still in minority and most users consider SMS as an auxiliary service. Still SMS services are always sold together with other mobile phone services and never by themselves. In view of this, it is appropriate to include SMS in the relevant market for access and call origination on mobile networks. 53. Given that access to GSM mobile networks, either through subscription or through pre-paid card use, and services for voice calls and SMS messaging are generally sold together as a package, it is PTA’s assessment that the relevant market also includes access and origination for SMS messages. SMS services are billed on the same invoice as that used to charge for subscriptions and voice calls. The same applies at the wholesale level. The competitive conditions are the same, and these services are always sold together. It is not possible to purchase SMS services without also purchasing access and call origination. 54. In PTA’s opinion, SMS termination falls outside the relevant market. Neither substitutability nor other criteria, such as general price conditions, give cause to include SMS termination in the relevant market. 2.2.8 Other data services 55. In addition to voice calls and SMS, it is possible to use mobile network access to gain access to other data services via GPRS or EDGE. PTA has not specifically examined whether there is, for the end user, substitutability between voice calls and SMS, on the one hand, and other data services, on the other. However, PTA doubts that this is the case and believes that users consider this service as an auxiliary service rather than a substitute for voice calls. This could change, however, if new services are launched. As was stated previously, the Commission and ESA have decided not to 34 See the results of the consumer survey conducted by IMG Gallup for PTA in April 2005, which revealed that it is younger users who send SMS. Roughly half said they sent SMS rather than calling because it was quicker and more convenient.

24

define a separate market for other data services using mobile phones. The use of such services is still rather limited and is, in a sense, still in the early stages of development, which makes it more difficult to define those services properly. In the opinion of PTA, these are supplementary services that accompany mobile network access through subscription or pre-paid cards in Iceland. 56. In the preliminary draft of the analysis of the relevant market, PTA came to the conclusion that because data services via mobile phone is relatively new in this country, the Administration would separate it from the relevant market. The Administration emphasised, however, that it takes the view that this service is not separated from wholesale access to mobile networks unless this is specially requested. In its comments on the preliminary draft, Síminn stated that it was difficult to determine from the draft whether other data services could be considered a part of the service market for mobile phones. PTA has reviewed its position as described above and is now of the opinion that it is appropriate to include other data services via mobile phone in the relevant market. Despite the fact that PTA believes that such data services do not substitute voice calls, they are, in the same manner as SMS services, always sold together with other mobile phone services and are never sold individually. 57. Access to GSM mobile networks, either through subscription or through pre-paid card use, and voice call, SMS, and other data services are generally sold together as a package to mobile phone users. Generally data services are made active as the user receives the setting for the mobile phone from the mobile operator since there are various settings depending on the type of mobile phone. Mobile users use the mobile phone for different purposes, e.g. to make a voice call or to send SMS or to access the Internet. Rather than using many service providers, users want to buy a package or “conglomeration” of services from one mobile operator. In this case the mobile operators benefit from economics of scale and the users benefit from smaller switching cost since they do not have to, constantly, go between providers. In the opinion of PTA, today’s mobile phone users assume that, in purchasing access to the GSM network, they gain access to all mobile phone services, voice calls, SMS, and other data services. All of these services are billed on the same invoice. 58. The same applies at the wholesale level. All of these services are considered part of the same wholesale market and therefore, it is PTA’s assessment that the relevant market also includes other data services. The competitive conditions are the same, and these services are always sold together. It is not possible to purchase other data services via mobile phone without also purchasing access to voice call services. In this connection, it could be mentioned that in the agreement between Síminn and Og Vodafone on national roaming there is a provision on access to GPRS service. 59. In view of this, PTA considers it appropriate to include other data services via GPRS or EDGE in the relevant market for access and call origination on mobile networks. 2.2.9 International roaming 60. International roaming at the retail level entails the possibility of using a mobile phone, for example, to place and receive voice calls and SMS when the customer is

25

abroad; that is, when he is not in the country where he has his mobile phone subscription. International roaming at the wholesale level takes place when mobile phone companies in each country conclude reciprocal agreements in order to provide one another’s users with access to their own distribution system. This provides the technological conditions for data transmission between companies, which makes it possible for their centres to exchange information on the entry of the other company’s customers into the distribution system and to provide them with contractually agreed reciprocal services. Settlement for phone use takes place through special companies that receive and process use information for the mobile phone companies. 61. At the retail level, access to international roaming is generally sold together with a subscription to voice call services. Demand for international roaming at the wholesale level is in the hands of foreign mobile network operators. Substitutability on the demand side, however, is little, as the business takes place abroad, and the possibility of affecting that business is limited. The fact that international roaming agreements are only made between network operators, and not with virtual network operators (MVNO) or resale agents, limits substitutability at the wholesale level, both on the supply side and on the demand side. Neither can access to a fixed-line network substitute for international roaming, in part because such access cannot guarantee the mobility provided by a mobile network. Given these considerations, and in accordance with the ESA Recommendation, it is PTA’s conclusion that international roaming is a distinct market at the wholesale level that will be analysed separately (market 17 according to the ESA Recommendation). 2.2.10 NMT 450 62. Today the NMT 450 network is the only analogue mobile network in Iceland. It has been operated by Síminn since 1986. The NMT network reaches all Icelanders, and it is accessible in the highlands and in offshore waters, cf. Figure 6. Access to the NMT mobile network is sold only by subscription from Síminn. Wholesale access to the NMT mobile network has not been granted heretofore, neither national roaming nor other forms of wholesale access; cf. Section 2.1. 63. As is the case with access to GSM mobile networks, access to the NMT mobile network enables the user to place and receive voice calls using NMT mobile phones. Both GSM and NMT mobile networks also offer the mobility that distinguishes these systems from fixed-line systems. NMT, however, does not offer the same range of services as does GSM. For example, it should be pointed out that the NMT network does not offer the possibility of sending and receiving SMS and MMS messages, nor does it include GPRS. In addition, roaming between GSM and NMT networks is not possible. The usage options in the NMT mobile network are therefore more limited than those in GSM networks. 64. The foregoing description makes it clear that NMT service is not entirely comparable to GSM service, and in PTA’s assessment, it is possible to argue the question, both for and against, of whether the two belong to the same market. The ESA Guidelines do not address this except in passing in Paragraph 67, where it is stated that the criteria compiled by the Commission indicate that the market for mobile phone services extends to both GSM 900 and GSM 1800, and possibly to

26

analogue mobile networks as well.35 Neither PTA nor the Competition Authority has addressed this in Iceland in their decisions on the mobile phone market; therefore, the question of whether GSM and NMT belong to the same market remains unanswered.36 Furthermore, it is worth pointing out that electronic communications legislation does not make a distinction between NMT and GSM. Despite this, PTA is of the opinion that there is more to support the argument that GSM and NMT do not belong to the same service market, as is described below. 65. From the year 1986, when Síminn began offering NMT mobile phone services, until the year 2000, the number of NMT subscriptions increased steadily until it reached 27,268 at year-end 2000. Since that time, the number of NMT subscriptions has dropped each year. At year-end 2005, NMT subscriptions totalled 19,480. The number of customers with subscriptions (based on national ID number) was 14,667 at year-end 2005, which indicates clearly that some customers have more than one subscription. As can be seen in Figure 8, the entry of the GSM mobile network in the year 1994 seems not to have made an impact on the number of NMT subscriptions, contrary to what might have been expected. Despite the steady growth in the number of GSM users since 1994, the number of NMT subscriptions has remained rather stable over the same period, which, in PTA’s opinion, would appear to indicate that substitutability does not exist between these two networks and that they do not belong to the same service market. 66. The range of the NMT network in this country is many times greater than the range of the GSM networks, as can be seen in the comparison in Figures 4, 5, and 6, which reflects the usefulness of NMT mobile phones for travellers and seafarers in areas not reached by GSM networks. In many instances, NMT phones are the only viable option for these users. It is therefore PTA’s assessment that substitutability is limited, or virtually non-existent, between these two systems in certain areas, which would indicate that they do not belong to the same service market. 67. There is a considerable difference in the price of voice calls placed from GSM and NMT mobile phones. Figure 3 shows the price for a one-minute voice call from an NMT phone at Síminn’s day, evening, and weekend rates. It can be seen that the price of a voice call from one NMT phone to another is some 64% higher than that of a voice call from one GSM phone to another in the same network. Furthermore, it is almost 76% more expensive, at Síminn’s day rate, to call from a GSM phone to an NMT phone than it is to call another GSM phone; and it is roughly 46% more expensive to place a call from an NMT phone to a GSM phone than it is to call another NMT phone. Figure 3 Síminn’s prices for use of GSM and NMT mobile phones.

35 The Commission has, in numerous merger cases, discussed whether digital and analogue mobile phone services belong to the same market, but it has not made a decision on the matter; therefore, this question remains unanswered. See, for example, the cases of the Second Spanish GSM operator of 18 Dec 1996 (OJ 1997, L76/20); JV.4 Orange/Viag of 11 Aug 1998; and Vodafone/Airtouch IV/M.1430 of 21 May 1999. 36 See, for example, the PTA decision of 15 July 2003 (www.pfs.is): Request by Iceland Telecom hf. on Og fjarskipti hf.’s market share.

27

Verð hjá Símanum fyrir mínútu símtal

05

10152025303540

SíminnGSM

OgVo dafo ne

GSM

SíminnNMT

SíminnP STN

OgVo dafo ne

P STN

SíminnGSM

OgVo dafo ne

GSM

SíminnNMT

SíminnP STN

OgVo dafo ne

P STN

Hringt úr GSM í Hringt úr NMT íK

rónu

r

Dagur Kvöld og helgar

Source: Data taken from Síminn price lists as shown on the company’s Internet website: www.siminn.is. Price list effective 3 May 2006 for origination fee and per-minute charge, including VAT; voice calls are measured in seconds. Prices are based on general subscription rates. 68. PTA has not conducted a special survey of the conditions under which NMT phones are most often used, but the Administration infers that, given the range of the NMT network and the price difference between NMT and other networks, NMT phones are used primarily under conditions that do not allow for the use of GSM phones. In this context, it can be considered likely that the largest user groups are sailors and those who travel in the highland areas of Iceland. PTA carried out a survey of the number Síminn customers who had both NMT and GSM subscriptions. The survey revealed that, of the 14,667 customers with NMT subscriptions, X,xxx also had GSM subscriptions, which PTA believes to support the argument that these are two separate markets. In the year 2005, new NMT customers totalled 634 (or 743 subscriptions), and the number of customers who terminated their NMT subscriptions during the same period was 2,207 (or 2,643 subscriptions). Despite the obvious drop in the number of NMT customers, it is PTA’s assessment that there is still a demand for subscriptions to the NMT network. 69. It can be assumed that a small but significant non-transitory increase in the price of calls placed from GSM phones would not generate an increase in NMT mobile phone use, both because the difference in the price of calls placed from the two networks is already significant (see Figure 3) and because the NMT mobile network appears to be intended to meet a specialised need for a specific group of customers, and that need cannot be met by the GSM network. 70. The operation of NMT mobile networks has been discontinued in most countries in recent years. Síminn’s operating licence for the 450 MHz frequency range expires on 31 December 2007. Síminn has announced that the company plans to cease operation of the network effective 1 January 2007. The terms in the licence for the frequency range are such that PTA may require that the company continue to provide NMT service for up to two years thereafter, or until 31 December 2008. In a letter dated 31 December 2005, PTA notified Síminn that it intended to exercise its authority to delay the closing of the NMT network until 31 December 2008. Most factors indicate that NMT services will be discontinued and that digital mobile phone services will take their place within a few years. It is quite costly to maintain such a

28

mobile network for such a small group of subscribers. The supply of NMT phones is also limited in comparison with that of GSM phones, and most new GSM phones are less expensive than new NMT phones, which are sold at approximately ISK 40-50,000. According to the information that PTA has compiled, it would appear that the production of new types of NMT phones has ceased, and there are still no phones that can be used in both GSM and NMT networks. This, together with the foregoing, reduces the likelihood that the number of NMT subscribers in Iceland will increase or that the price for the service will drop. In the evaluation of PTA, these limitations in the NMT system and the difference in GSM and NMT indicate that these are two separate markets. 71. Considering the above, it is PTA’s assessment that access and call origination on the NMT 450 mobile network does not belong to the same service market as access and call origination on GSM mobile networks but constitutes a separate market. For this reason, PTA analyses the market for access and call origination on the NMT mobile network separately in this report. PTA does not consider it necessary to review the three conditions listed in Section 1.4.3, as the Administration takes the view that the above-mentioned market falls within market 15 in the ESA Recommendation in the same manner as the market for access and call origination on GSM mobile networks. 2.3 Conclusions concerning the demarcation of the relevant service market 72. It is PTA’s conclusion that the relevant service market at the wholesale level consists of two markets: the market for access and call origination on public GSM mobile networks, and the market for access and call origination on the NMT 450 mobile networks. Both markets are analysed in this report. 73. The relevant wholesale service market for access and call origination on public GSM mobile phone networks consists of:

• all services for access and call origination on GSM mobile networks that are provided, or that can be provided

• access to GSM via pre-paid cards and monthly subscriptions • access for both individuals/residences and corporations • access to SMS services • access to other data services via GPRS or EDGE

74. The relevant wholesale service market for access and call origination on the NMT 450 mobile phone networks consists of:

• all services for access and call origination on the NMT mobile network that can be provided

• access to NMT via monthly subscription • access for both individuals/residences and corporations

75. In its draft analysis of the relevant market, PTA came to the conclusion that access to the NMT network via pre-paid cards also fell under the definition of the relevant market. Síminn submitted comments on this. PTA considered this an appropriate conclusion despite the fact that Síminn only offered users access to the

29

NMT network via subscription, as PTA did not wish to rule out access by means of pre-paid cards. It has become clear, however, since the draft was publicised, that it is exceedingly likely that the NMT network will cease operation at the end of the year 2008. In view of the possible termination of the NMT system, PTA does not consider it necessary to specify that the relevant market for access and call origination on the NMT network also includes pre-paid cards. 76. In the opinion of PTA, the following do not fall within the relevant service markets:

• access and call origination on fixed-line networks • voice calls with IP technology (VoIP) • voice call termination in GSM and NMT mobile networks • SMS termination in GSM mobile networks • international roaming

3 Geographic demarcation of the relevant market 77. According to the Guidelines,37 the geographic market covers the land area where the pertinent operators participate in supply and/or demand for the relevant product or service, where the competitive conditions are sufficiently homogeneous that it is possible to distinguish the area from neighbouring areas on the basis of dissimilar competitive conditions. In assessing demand-side substitutability, it is appropriate to consider customers’ taste and geographical purchasing patterns. The Guidelines state, furthermore, that the traditional definition of a geographical market in the field of electronic communications is determined with reference to the extent of the electronic communications network in question and to the legislative jurisdiction of the regulatory framework applying to the relevant market. 78. Here in Iceland it must be considered as established that the competitive conditions in the mobile phone market are, in their fundamentals, the same for the entire country, and the retail and wholesale prices are the same all over the country. The Electronic Communications Act, no. 81/2003, applies to the entire country, and the licences for currently operating mobile phone undertakings state that the right to use the frequency zone extends to the entire country. Today Síminn and Og Vodafone’s mobile networks reach almost all of Iceland (see Figures 4, 5, and 6). Síminn’s NMT network is clearly more extensive than either Síminn or Og Vodafone’s GSM network, as it reaches the entire country and the offshore waters surrounding Iceland. Og Vodafone’s GSM network is smaller than Síminn’s, which reaches some 98% of all Icelanders, but Og Vodafone has concluded national roaming agreement with Síminn for those areas not reached by Og Vodafone’s network. IMC Ísland’s GSM network is smaller than the other two, and today the company has radio transmitters in the following locations: Akureyri, Egilsstadir, Eskifjördur, Neskaupsstadur, Reydarfjördur, Saudárkrókur, and Húsavík. IMC Ísland has also concluded an international roaming agreement with Og Vodafone, which provides IMC users the option of roaming on Og Vodafone’s GSM network. According to the terms of the frequency allocation, IMC is required to set up radio transmitters in two towns in coming months. Since SKO is only resale agent, the company does not control a mobile phone network. 37 See Section 2.2.2. of the ESA Guidelines.

30

Figure 4 Síminn’s GSM distribution system.

Source: www.siminn.is Figure 5 Og Vodafone’s GSM distribution system.

Source: www.ogvodafone.is

31

Figure 6 Síminn’s NMT distribution system.

Source: www.siminn.is 79. There have been comments to the effect that the country should be divided into roaming areas and non-roaming areas and that the market should be demarcated in a narrower fashion. PTA is of the opinion, however, that at the present time there is no occasion for dividing the relevant market for GSM mobile networks into geographic regions; in view of this, the Administration has taken the position that the geographic demarcation of the wholesale markets for access and call origination — on the GSM mobile networks, on the one hand, and on the NMT 450 mobile network, on the other — is the entire country. 80. In view of the foregoing discussion, it is PTA’s conclusion that the two relevant markets that have been defined here extend to the entire country. 4 The status of the mobile phone market 4.1 Summary and history 81. Today four undertakings operate on the Icelandic mobile phone market. These are Síminn, Og fjarskipti ehf. (Og Vodafone), IMC Ísland ehf., and Ódýra símafélagið ehf. (SKO), which recently entered the market. The three companies mentioned first are all vertically integrated undertakings that also operate as service providers at the retail level. SKO is a resale agent that operates only at the retail level and resells mobile services from Og Vodafone. No other service providers are in operation on the Icelandic mobile phone market. Developments in mobile phone services in Iceland

32

82. Síminn began offering analogue NMT 450 mobile phone services in the year 1986 and is the only company that offers, and has a permit for, NMT services in Iceland. At year-end 1986, subscribers to the NMT network numbered 2,106. Subscribers increased in number until the year 2000, at which time they totalled 27,268. After that time, the number of NMT subscriptions dropped, reaching 19,480 by year-end 2005. 83. In addition to its NMT mobile phone services, Síminn began offering GSM services in the year 1994. Its GSM customers totalled 2,119 at the end of that year. The following year saw the greatest proportional growth in the number of mobile phone subscriptions in Iceland, with a fourfold increase over the prior year. In the year 2000, Síminn began offering GSM with GPRS services. At year-end 2005, Síminn’s GSM customers (as measured in number of mobile phone numbers) totalled 184,833. Síminn has built up its own distribution system for GSM services, which reaches some 98% of all Icelanders. 84. Tal hf. received a mobile licence in the year 1997 and began offering services in competition with Síminn in 1998. Halló! Frjáls fjarskipti hf. and Lína.net were granted mobile licences in 2000 but abandoned plans to offer mobile phone services. Íslandssími hf. was granted a mobile licence in the year 2001 and operated in the fixed-line and mobile phone markets. In 2002, Halló! Frjáls fjarskipti hf. and Tal hf. merged with Íslandssími hf. On 16 April 2003, the electronic communications undertaking Og fjarskipti hf., which resulted from the merger of these three undertakings, made an extensive agreement with Vodafone Group for collaboration in sales, marketing, service, and technology, as well as the use of the company’s brand under the name Og Vodafone. In the year 2005, the company became a part of the holding company Dagsbrún hf. As of year-end 2005, Og Vodafone’s GSM mobile phone customers (as measured in number of mobile phone numbers) totalled 99,682. Og Vodafone offers mobile phone services that reach approximately 98% of Icelanders; most of this service takes place on its own network, but the company also has a roaming agreement with Síminn. 85. IMC Ísland ehf. has had a mobile licence (DCS 1800) since 27 June 2000 and has offered local mobile services in Akureyri since July 2002. This service still seems, however, to be in the experimental stage. IMC began selling pre-paid phone cards in Akureyri in the year 2004, and by year-end 2005 only 6 cards had been sold. The company’s operations are based primarily on its international roaming service for foreign users. At year-end 2005 the number of subscribers to the company’s mobile phone services totalled 2,580, all of them customers of IMC Ísland’s affiliate, Worldcell, Inc. The majority of these customers are corporations and agencies in Washington, DC, and their use is travel-related. Today IMC operates radio transmitters in Akureyri, Egilsstadir, Eskifjördur, Neskaupsstadur, Reydarfjördur, Saudárkrókur, and Húsavík. IMC has also made an international roaming agreement with Og Vodafone. 86. The mobile phone undertaking SKO entered the market as a new operator in April 2006. The company is a resale agent that purchases all of its mobile phone services from Og Vodafone and thus does not control a mobile phone network. The company is owned by Dagsbrún hf., as is Og Vodafone. Given the description in Section 2.1, it can be assumed that SKO is a simple resale agent that sells under its

33

own independent brand name but purchases all support services at the wholesale level. SKO has concluded an agreement with Síminn, dated 5 July 2006, providing it an access to the roaming agreement between Og Vodafone and Síminn, and can therefore offer comparable mobile services to users as Og Vodafone. 87. Figure 7 shows developments in the development of mobile phone systems in Iceland from 1985-2005, as well as an overview of the companies involved in that development. Figure 7 Licence holders on the mobile phone market, 1985-2005.

Source: Post and Telecom Administration 4.2 The retail market 88. Mobile phone undertakings on the market offer individual and corporate users access and mobile phone services through pre-paid phone cards or subscription, as appropriate. In most instances, the cost is divided into a monthly charge, an origination fee, and a per-minute charge for each call, in addition to a fixed price for each SMS sent and a per-megabyte charge for GPRS data services. No registration fee is charged for pre-paid cards, but the per-minute charge is usually higher. 89. Users have access to mobile phone services, such as voice calls and SMS, through current GSM mobile phone technology. These two types of services are usually offered together as a package. Other services, such as Internet and other data services have become accessible through GSM mobile phones in recent years and are therefore a part of the mobile phone services that fall within the relevant market for access and call origination on GSM mobile networks. Moreover, GSM users have access to international roaming, which means that they can use their mobile phones to place and receive voice calls and SMS while they are abroad.

34

90. The service offerings in the NMT network are fewer than those in GSM networks, with the result that NMT subscribers are, in essence, limited to voice call access. International roaming with Icelandic NMT phones is also limited and is dependent on Síminn’s having made a roaming agreement in the country in question. According to information found on Síminn’s Internet website, roaming agreements have been made with Sweden, Norway, Finland, and the Faeroe Islands; that is, with one operator in each of these countries. Number of users on the retail market; division between subscription and pre-paid phone cards38 91. Figure 8 shows the trends in the companies’ mobile phone subscriptions, divided into the various systems that are offered in Iceland. The growth in the number of mobile phone users has slowed in recent years, most significantly in the year 2002, when the number of users increased by only 6.4%, as opposed to 17.9% growth for the previous year. In the year 2003 the growth in the number of mobile phone users increased proportionally once more, or by 8.7% over and above the previous year; at the end of 2003, users totalled 255,768. In 2004 the number of GSM users grew by 5.1%, totalling 268,772 by year-end. In the year 2005 the number of GSM users rose by 5.9%, reaching 284,521 by year-end, but during the same period the number of NMT users dropped by 8.5% to a year-end total of 19,480. Síminn had 184,833 GSM customers at year-end 2005, xxxxx of whom used pre-paid cards. In comparison, Og Vodafone had 99,682 customers, xxxxx of whom used pre-paid cards, while IMC Ísland had 2,856 customers, 2.850 of whom were contractually bound subscribers through the parent company abroad. Figure 8 Number of customers on the Icelandic mobile phone market from its inception

Viðskiptavinir í lok hvers árs

0

50

100

150

200

250

300

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Ár

Fjöl

di (þ

ús.)

Síminn NMT Alls GSM Síminn GSM Önnur fyrirtæki GSM

Source: Post and Telecom Administration. Explanatory notes: Other operators are Tal, Íslandssími, Og Vodafone, and IMC Ísland.

38 Measured in terms of the number of mobile phone numbers, not national ID numbers.

35

92. The use of pre-paid cards for GSM mobile phones has grown faster in recent years than has the number of contractual GSM subscriptions, as can be seen in Figure 9. At year-end 2000 the percentage of subscriptions was xx.x%, as opposed to xx.x% for pre-paid cards. By year-end 2005 the percentage of subscriptions had dropped to xx.x%, while the proportion of pre-paid cards had risen to xx.x%. Figure 9 Number of GSM subscriptions and pre-paid cards Source: Post and Telecom Administration. 93. Figure 10 shows the number of GSM customers as a proportion of the total population at the end of each year. The figure indicates that, in recent years, the increase in GSM promulgation in Iceland has slowed in proportion to the total population, as the market approaches saturation. Figure 10. GSM users as a percentage of total population at the end of each year

Útbreiðsla GSM

0102030405060708090

100

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Ár

Hlu

tfall

(%)

Source: Post and Telecom Administration.

4.3 Undertakings in the mobile phone market 94. It is not possible to say that there is a real wholesale market for access and call origination on GSM or NMT mobile networks in Iceland. Despite the recent entry of SKO into the mobile phone market, it is not possible to ignore the fact that the company is wholly owned by the holding company Dagsbrún hf., which also owns Og Vodafone. Síminn, Og Vodafone, and IMC Ísland operate networks on the wholesale markets that are under scrutiny here but also offer mobile phone services at the retail level. SKO is a resale agent on the retail market and is only purchaser at the wholesale level, therefore the company is not to be considered for imposition of remedies on relevant market. No other service providers operate on the mobile phone market in Iceland. 95. IMC Ísland is as yet a small mobile phone undertaking with limited operations, and it needs access to Síminn and/or Og Vodafone’s mobile networks in order to provide mobile phone services in Iceland; it has made an international roaming agreement with Og Vodafone for this purpose.

36

96. Síminn and Og Vodafone both own large mobile networks and are required to negotiate for interconnection at cost-oriented prices, as both have been designated as having significant market power on the mobile phone market and the interconnection market pursuant to Article 24 of the previous Telecommunications Act, no. 107/1999.39 No obligation to grant wholesale access to mobile networks has been imposed on Síminn or Og Vodafone, however, and the companies have not concluded any such access agreements apart from the roaming agreements between Og Vodafone and Síminn and, most recently, the resale agreement between SKO and Og Vodafone. However, it is not clear whether this kind of a resale agreement is available to other parties. It could be mention here that SKO has an agreement with Síminn providing SKO an access to the roaming agreement between Og Vodafone and Síminn. In the opinion of PTA, national roaming is the only type of real access to mobile networks that is sold at the wholesale level in this country. That access is based on the general obligation for the mobile network operators to provide for such an access to their networks pursuant to Article 35 of the Electronic Communications Act. Síminn sells Og Vodafone access to a part of its distribution system on the basis of a roaming agreement (see Figure 5). An agreement for national roaming between Síminn and Og Vodafone has been in effect since 2 March 2005. It applies to all of Síminn’s roaming services for Og Vodafone customers in predefined areas of the country. 97. IMC Ísland has sought out national roaming agreements with Síminn and Og Vodafone but without success. It is PTA’s opinion that Síminn and Og Vodafone’s inaction and behaviour towards IMC’s requests to negotiate for national roaming indicates that the companies are hindering access to their mobile networks and are limiting the possibilities for further competition on the mobile phone market.40 As has previously been stated, IMC Ísland has made an international roaming agreement with Og Vodafone. This agreement has been in effect since 26 July 2005, but the fees paid in accordance with it are higher than those offered in connection with national roaming agreements. PTA also has information indicating that two companies requested wholesale access to Síminn’s NMT network in the year 2004. Those attempts were not successful. 5 Market analysis 5.1 Introduction 98. When the relevant market has been defined, it is necessary to analyse the competition on that market with reference to the criteria that affect market power, in order to determine whether one or more undertakings can be considered to have SMP. The criteria used to measure undertakings’ market power depend on the characteristics of each market, and it is in the hands of regulatory authorities to determine what criteria are most appropriate in any given instance. The market analysis is based on the criteria that are discussed in the ESA Guidelines and in PTA’s introductory document on market analysis.

39 See www.pta.is 15 July 2003: Request by Iceland Telecom hf. on Og fjarskipti hf.’s market share. 40 See also the discussion in Section 5.1 of Annex C concerning the results of the PTA consultation on the draft analysis of Market 15.

37

99. The markets under discussion here are wholesale markets, as has been stated previously. In light of the fact that no actual wholesale mobile market exists in Iceland and mobile network operators almost only provide services to their own retail arms, i.e. internal sales (self-supply), PTA needs to bases its analysis on the assumption that the structure of supply at the wholesale level is derived from supply at the retail level. Therefore, the relevant markets need to be analysed on the basis of the competitive conditions prevailing at the retail level. For that a large part of the market analysis is dedicated a description of the retail market for mobile phone services. In addition it is stated in the ESA Recommendation41 that it is appropriate to begin market analysis by describing the retail market over a specified period of time, with consideration given to supply-side and demand-side substitutability. When a market that extends to supply and demand at the retail level has been analysed, that analysis creates a foundation for the identification of the relevant wholesale market, which is the market for supply and demand for products that third parties wish to supply in the retail market. If there is insufficient competition in the retail market, it is often possible to make improvements by means of measures taken at the wholesale level. In many respects, competition at the retail level reflects competition at the wholesale level, and certain market conditions can be found in both markets. 100. Many of the conditions that we see on the relevant market today are affected by the fact that the legislation governing the electronic communications market contains rules on, for example, price, access, interconnection, and other factors. Furthermore, obligations have been imposed on Síminn and Og Vodafone with respect to non-discrimination and cost analysis, among other things. This is borne in mind in the assessment of competition in the relevant markets and of the current operators’ market power. 101. The following sections contain an assessment of the competitive conditions on the relevant markets, with consideration given to the chief criteria affecting those conditions. First, the market for access and call origination on public GSM mobile networks is analysed, and the market for access and call origination on the NMT mobile network is analysed thereafter. Following this, in Section 6, an assessment is made of whether any undertaking, either alone or collectively with others, possesses significant market power. 5.2 The market for access and call origination on public GSM mobile networks 5.2.1 Market share42 102. The market share of an undertaking is an important criterion in the market analysis. On the other hand, it alone is not sufficient to determine whether an undertaking has SMP, though it can give a strong indication of whether that undertaking has a dominant market position. According to established case law, very large market shares – in excess of 50% - are in themselves, save in exceptional circumstances, evidence of existence of a dominant position. It is considered likely

41 See criterion 10 in the Recommendation. 42 This criterion corresponds to “market shares” in Paragraphs 76 and 77 of the Guidelines.

38

that a company with a market share of 50% has a dominant position, and it would be exceptional if a company with such a market share were not considered to have dominance. According to the Guidelines, there is usually no suspicion that a single undertaking has a dominant position (single dominance) until its market share has reached at least 40%. This depends, however, on the size of the undertaking in comparison with its competitors. In some instances, an undertaking with a market share under 40% can be dominant. An undertaking with a market share under 25% would, in all likelihood, not be considered to dominate unless it were a case of joint dominance together with other undertakings. Developments in market share on the retail market 103. Developments in market share over a given period of time are also meaningful in the assessment of whether an undertaking has a dominant market position. If an undertaking has a constant, large share of the market, this is an indicator of dominant market position; however, a fluctuating or diminishing market share indicates the reverse. A large market share is less of an indicator of market power in a new and expanding market than it is in a market that is growing slowly. 104. Figure 11 shows the developments in the market share of the mobile phone operators in Iceland, by number of GSM customers (that is, the number of mobile phone numbers, both with subscriptions and with pre-paid cards), from 1994 to 2005. From 1994 until 1997, Síminn had a 100% market share, which dropped to 84.1% when Tal entered the market in the year 1998. Síminn’s market share dropped from that time until year-end 2003, at which time it measured 64.0%, as opposed to 36.0% for Og Vodafone. In the year 2004 Síminn’s market share rose by 0.5%, and Og Vodafone’s market share dropped by a corresponding amount; therefore, at year-end 2004, Síminn’s market share was 64.5%, and Og Vodafone’s was 35.5%. The same happened in 2005, when Síminn’s market share rose by another 0.5% to a year-end level of 65%; this increase was offset by a corresponding decrease for Og Vodafone, which ended the year with a market share of 35%. IMC Ísland’s market share of domestic customers totalled 0.002%. Since SKO only began its operation last April, there are no figures for the company’s market share. Figure 11 Developments in market share as measured in number of GSM customers

0102030405060708090

100

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Ár

Hlu

tfall

(%)

Síminn Önnur fyrirtæki

Source: Post and Telecom Administration. Explanatory notes: Other operators are Tal, Íslandssími, Og Vodafone, and IMC Ísland. 105. IMC Ísland’s market share in terms of number of domestic customers does not have any visible impact and is included with the market share of other undertakings in

39

Figure 11; that is, Tal and Íslandssími until year-end 2002 and then Og Vodafone in 2003, 2004, and 2005. In the opinion of PTA, IMC’s market share is small enough that it can be doubted that the company has real operations on the relevant market. As has been stated previously, IMC has 2,850 subscribers, all of whom are domiciled abroad, and their use is travel-related. The company had only sold 6 pre-paid phone cards in this country by year-end 2005. The geographical scope of its mobile network is also limited. 106. In its analysis of market 16, PTA came to the conclusion that, in the relevant market for voice call termination in its own mobile network, IMC was not in a strong enough position to be able to hinder competition or to operate, to any substantial degree, without concern for competitors, customers, or consumers. In view of IMC Ísland’s limited operations in this country, its small number of domestic customers (6 pre-paid cards sold), the small number of minutes terminated in the company’s mobile network, and the strong position of Síminn in the electronic communications markets, the strong position of Síminn and Og Vodafone in the mobile phone market and as purchasers of wholesale termination services in IMC’s mobile network — it was PTA’s assessment that the relevant market was characterised by unusual circumstances. These unusual circumstances mean that, despite the fact that IMC Ísland has a 100% market share in voice call termination in its own network, it is not possible to draw the conclusion that the company has a dominant market position in the relevant market. In view of this, PTA came to the conclusion that IMC cannot be considered to possess significant market power on the market for voice call termination in its own network. 107. Considering the foregoing, it is PTA’s assessment that IMC’s position on the relevant market for access and call origination on GSM mobile networks is weak enough that it is not possible to consider that the company possesses market power or can hinder competition on the relevant market at the present time. In view of this, PTA does not consider it necessary to conduct further analysis of IMC Ísland’s market power and position on the relevant market at the present time; the Administration is of the opinion that this would affect neither the results of the analysis nor the assessment of Síminn and Og Vodafone’s market power on the relevant market. However, PTA considers it appropriate to consider IMC’s experience on the mobile phone market in Iceland and to bear in mind the company’s level of success in gaining access to other operators’ mobile networks. 108. Table 2 shows the market share of undertakings on the GSM mobile market in terms of revenues, number of minutes of calls placed from mobile phones, and number of customers at year-end 2003, 2004, and 2005. In terms of minutes, Síminn’s market share has dropped from xxxx% in the year 2003 to xxx% in 2004; however, it rose again to xxxx% in the year 2005. Og Vodafone’s market share as measured in terms of minutes rose from xxxx% in 2003 to xxxx% in 2004, dropping again to xxxx% in 2005. The difference between market share as measured in minutes and market share as measured by revenues and number of customers can be accounted for, in part, by the fact that Síminn and Og Vodafone have competed for customers primarily through special offers that involve a given number of free minutes of calls to specified numbers, cf. Table 1. The increased number of minutes is not necessarily reflected in increased revenues or a greater number of customers. It can also be seen that, in the year 2005, Síminn’s market share increased in terms of pre-paid cards,

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rising from xx% to xxxx%, while Og Vodafone’s market share in pre-paid cards dropped from xxxx% to xxxx%. Og Vodafone’s market share in subscriptions increased between years, totalling xx% at year-end 2005; perhaps this partially explains the company’s increased market share in traffic, as these are generally older customers with a higher income, who do not have as much price-elastic demand as do younger users. In terms of total revenues from GSM mobile operations in the year 2005, Síminn’s market share was [60-65]%, as opposed to [35-40]% for Og Vodafone; this is closer to the year-end market share in terms of number of customers than it is to the market share in minutes. Table 2 Market share of undertakings on the GSM mobile phone market Síminn Og Vodafone Year 2003 2004 2005 2003 2004 2005 Total revenues from GSM [60-

65]% [60-65]%

[60-65]%

[35-40]%

[35-40]%

[35-40]%

Minutes from mobile phones Xxx% XX% Xx% Xxxx% Xxx% Xx% Customers at end of period 64.0% 64.5% 65.0% 36.0% 35.5% 35.0% — in pre-paid cards xxx% xx% xxx% XXX% XXX% xxx% — in subscriptions xxx% xxx% xxx% xxx% xxx% xxx%

Source: Post and Telecom Administration. 109. It can also prove helpful to examine the level of concentration in the market. The indicator that is most often used for this is the so-called concentration index (the Herfendahl-Hirschman Index, or HHI).43 The HHI index is derived by taking the square of the sum of the market share of all undertakings in the relevant market, and it gives a closer picture of the structure of the market than does simple market share. The HHI ratio rises, both as the number of undertakings in the market drops and as the market share of undertakings differs. In a market characterised by monopoly, the concentration ratio will measure 10,000. The lower the concentration ratio is, the more competition there is on the market.44 Table 3 shows the concentration ratio (HHI) in the GSM market, both in terms of subscription and in terms of pre-paid cards, at year-end 2003, 2004, and 2005. Table 3 Concentration ratio (HHI) on the GSM mobile phone market Year 2003 2004 2005 Minutes from mobile phones 5,204 5,115 5,396 Customers at end of period 5,392 5,420 5,448 — in pre-paid cards 5,323 5,489 5,592 — in subscriptions 5,450 5,365 5,337

43 To obtain the HHI coefficient, the market share of each undertaking in the market is squared and all of the results added together. The value of the index lies between 0 and 10,000. As its value rises, market concentration is deemed greater. If the result is under 1000, no action is thought necessary. If the result is between 1000 and 1800, the market is moderately concentrated, and if it is over 1800, there is significant concentration. 44 The HHI coefficient is used in European competition law and by competition authorities. The HHI is used as a basis for the Horizontal Merger Guidelines issued by the American Department of Justice and the Federal Trade Commission in 1992, with subsequent amendments. The HHI is used chiefly in assessing the effect of corporate mergers on market competition. It is considered that, if the index rises by 100 and exceeds 1800, it can be assumed that the merger will seriously affect competition in the market. These benchmarks are not exact but give a rough indication of the competitive status of a market in view of market conditions.

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Source: Post and Telecom Administration. 110. If the market share between companies has levelled off, the concentration ratio will decrease, as can be seen for minutes and subscription. Despite this, the concentration ratio is quite high, which can be traced to the fact that the mobile phone market in Iceland is a duopoly, as IMC Ísland’s market share has virtually no effect. In this context, it is worth pointing out that, in November 2003, the HHI ratio of GSM users in the EU countries was below 5,000 everywhere except Luxembourg.45 Conclusions 111. In view of the fact that no real wholesale activities take place on the relevant market in Iceland, with the exception of corporate sales and Og Vodafone’s national roaming in Síminn’s GSM network, it is only possible to measure the market share of the undertakings on the relevant market in terms of their position on the retail market. PTA takes the view that retail-level market share is an indicator of the undertakings’ market power at the wholesale level, and due to the conditions reigning in the relevant market, there is no choice but to use market share at the retail level as a guideline. 112. IMC Ísland’s market share of domestic customers totalled 0.002% as of year-end 2005. It is PTA’s assessment that IMC’s position on the relevant market for access and call origination on GSM mobile networks is weak enough that it is not possible to assert that the company possesses market power or can hinder competition on the relevant market at the present time. In view of this, PTA does not consider it necessary to conduct further analysis of IMC Ísland’s market power and position on the relevant market at the present time; the Administration is of the opinion that this would affect neither the results of the analysis nor the assessment of Síminn and Og Vodafone’s market power on the relevant market. However, PTA considers it appropriate to consider IMC’s experience in the mobile phone market in Iceland and to bear in mind the company’s level of success in gaining access to other operators’ mobile networks. Since SKO only began its operation last April, there are no figures for the company’s market share. 113. Síminn’s market share on the GSM mobile phone market was 100% from 1994 until 1997. After 1998, Síminn’s market share dropped year by year until 2002 but has remained largely unchanged since that time. As can be seen in Figure 11 and Table 2, Síminn’s market share is over 60%, as measured in both revenues and number of customers; according to the Guidelines, this indicates that the company has a dominant market position on the relevant market. Síminn’s market share in the year 2005 totalled XXX% in terms of minutes, 65% in terms of number of customers, and [60-65]% in terms of revenues. For the same period, Og Vodafone’s market share was, on the other hand, [35-40]% in terms of revenues, 35% in terms of number of customers, and xxx% in terms of minutes. It can be considered as established that market share as measured in revenues or number of customers gives a more accurate picture of an undertaking’s market power than does market share in terms of minutes, as greater average use could, for example, be traceable to the terms offered to users, such as free minutes of calls to specified numbers, customer age distribution, and the like. 45 See page 35 of the analysis by ComReg (Irish regulatory authority) of market 15, Document no. 04/05 of 27 January 2004 (http://www.comreg.ie).

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114. It is difficult to predict how the market share of the companies on the Icelandic market will develop over the next few years, given the fact that it has remained virtually unchanged for the past 4 years. It seems as though a certain balance has been reached in the companies’ market share, which tends to indicate stagnation in the relevant market. The 0.5% increase in Síminn’s market share in terms of number of customers, both in 2004 and in 2005, could indicate that the company has managed to resist further decreases in market share. In the opinion of PTA, Og Vodafone needs to look for new ways to gain market share from Síminn and the entry of SKO could be step in that direction. Also, the entry of independent service providers could increase the supply of services and promote enhanced competition on the mobile phone market. It is difficult to predict what the entry of SKO in the market will result to, so no conclusions will be drawn from it at this stage. The same applies for the future of IMC in the market. 115. The concentration ratio in terms of number of users has risen, which is a consequence of increases in Síminn’s market share; in addition, the concentration ratio in terms of minutes has dropped. The concentration ratio in terms of number of users was 5,448 at year-end 2005, while the concentration ratio by minutes was 5,396 at the same point in time. The concentration ratio in terms of pre-paid cards has dropped slightly in the wake of the increase in Síminn’s market share, but it has decreased in terms of subscriptions, as the market share has levelled off between Síminn and Og Vodafone. 116. In view of these circumstances, it can be said that the mobile market is currently characterised by a duopoly between Síminn and Og Vodafone despite the fact that four mobile phone companies are in operation in the country. This conclusion is based on the fact that IMC Ísland’s operations are insignificant and SKO is owned by the party that owns Og Vodafone. According to the ESA Guidelines, PTA must take into account the foreseeable developments in the market in its assessment of significant market power. PTA must assess whether the market tends sufficiently towards competition and, if circumstances warrant it, how competition may be stimulated. In other words, if a high level of concentration in the relevant market results in a lack of competition, PTA must react with appropriate measures. In PTA’s assessment, the level of concentration of the market in Iceland is unlikely to change substantially in the near future unless market conditions change. 117. Given the foregoing, Síminn’s market share indicates that the company has significant market power on the relevant market. 5.2.2 Control over facilities not easily duplicated46 118. If an undertaking has control over an infrastructure, or facilities, that it is difficult and expensive to duplicate, this could constitute a considerable barrier for potential competitors. This must be examined in connection with the discussion of sunk costs in Section 5.2.4.1.

46 This criterion corresponds to “control of infrastructure not easily duplicated” in Paragraph 79 in the Guidelines.

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119. Both Síminn and Og Vodafone have GSM mobile networks that reach almost all Icelanders and extend to a large geographical part of the country. Síminn’s GSM mobile network is larger and reaches 98% of all Icelanders. Og Vodafone’s GSM network does not have as wide distribution, but the company has made a national roaming agreement with Síminn in order to bridge the gap. The build-up of Síminn’s mobile phone network began much earlier than that of other undertakings in Iceland, and this gave Síminn the advantage in mobile network development. In the same manner, Síminn and Og Vodafone now have the advantage over other mobile phone operators as regards the build-up of a comprehensive mobile network. 120. It can be said that, so long as there are frequencies for mobile phone communications, it is possible to build up new networks. The question is rather whether such build-up is wise in terms of expense and market conditions. In comparison with other electronic communications networks, GSM networks are less expensive to build up in terms of distribution, at least in densely populated areas. Conditions in Iceland are unusual, however; communities are far apart, and many rural Icelanders live in isolated areas. Thus it can be assumed that it is more expensive to build up a distribution system in Iceland than it is in most other countries. Iceland’s small population could reduce the level of interest in building up other comprehensive mobile networks in addition to those already in existence. As is stated in Section 4.1, two phone companies have abandoned plans to build up mobile networks after having received frequency licences. This could indicate that there is little interest in, or foundation for, building up other comprehensive mobile networks in Iceland. 121. It would be possible to reduce investment costs by collaborating with regard to electronic communications structures; that is, co-location or other joint utilisation of network facilities. Co-location involves allowing new parties to position their equipment in places where masts already exist. The savings generated by this could be significant, especially in sparsely populated areas. Article 25 of the Electronic Communications Act stipulates for joint utilisation, and in this context, it should be pointed out that Síminn has granted other electronic communications undertakings access to its infrastructure and facilities for many years, both because of a general obligation to do so and because of specific obligations imposed in the wake of the company’s designation as having SMP under the provisions of the previous Telecommunications Act. 122. In view of this, it is clear that Síminn and Og Vodafone control a distribution system that, technologically speaking, can be duplicated. In the opinion of PTA, many things indicate that is not desirable, in view of the geographical conditions in Iceland and the country’s small population, to build up a third comprehensive GSM network. The fact that Síminn’s GSM mobile network is larger than Og Vodafone’s and the company has, to a large extent, built up their electronic communications networks in the shelter of its former status as a monopolist in electronic communications, indicates that Síminn has a strong position on the relevant market. 5.2.3 Overall size and experience of the undertaking47

47 This criterion corresponds to “overall size of the undertaking” in Paragraph 79 in the Guidelines.

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123. The size of an undertaking — for example, based on its turnover or some other measure — can be important in assessing dominant market position. If an undertaking is substantially larger than its competitors, this can give that undertaking a competitive advantage. This advantage could involve better methods for production or purchasing, greater financial strength, enhanced access to capital, wider distribution, and better marketing. Such an advantage can also appear outside the relevant market but can be meaningful nonetheless. 124. An undertaking that has greater specialised experience in the market than its competitors could have a similar advantage; for example, expert knowledge in technological matters, or knowledge of the market itself and the legal environment reigning there. 125. The description of the currently operating mobile phone undertakings in Section 4.1 is the foundation for the evaluation of these criteria. As has previously been stated, Síminn began offering NMT mobile services in 1986 and GSM services in 1994; it began offering GPRS services in its GSM network in the year 2000. Tal began offering GSM mobile phone services in 1998, and Íslandssími was granted a mobile phone licence in 2001. The company Og Vodafone was formed by their merger in the year 2003. 126. Table 4 shows the scope and total revenues of the two undertakings in the electronic communications market for the years 2003, 2004, and 2005. This table shows that there is a considerable difference in the operations and total revenues of the two companies, especially in electronic communications divisions. Síminn’s total revenues are almost four times greater than Og Vodafone’s total revenues in the fixed-line phone division in the year 2005. It is interesting to note that Og Vodafone’s revenues in the fixed-line phone division have risen, while Síminn’s revenues decreased; this can be traced to Og Vodafone’s purchases of Margmidlun and a portion of Lína.Net.48 Síminn’s revenues in the data division are over twice those of Og Vodafone for the year 2005. Table 4 Total revenues by divisions in the years 2003, 2004, and 2005 (amounts in ISK millions) 49 Síminn Dagsbrún

(Og Vodafone) Year 2003 2004 2005 2003 2004 2005 Fixed-line phone division

7,042 6,508 6,054 1,356 1,503 1,545

Mobile phone division50

6,134 7,182 8,128 3,645 3,890 4,352

Electronic communication

1,425 1,507 1,311

48 In the latter part of the year 2004, Og fjarskipti acquired the electronic communications undertaking Margmidlun, as well as a large share in the undertaking Lína.Net, from Reykjavík Energy. 49 It should be emphasised that the comparison of revenues by division in Table 4 could yield misleading results concerning the scope of Síminn and Og Vodafone, as the definition of revenues by division can vary in the accounting for the annual financial statements. Because of this, it is appropriate to view Table 4 as an indicator of scale and scope in the companies’ operations. 50 This includes revenues generated by Síminn’s GSM and NMT operations.

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s networks51 Data division 2,402 2,756 2,862 655 892 1,269 Other operational units52

1,758 2,467 3,686 549 642 8,159

Total 18,762 20,419 22,041 6,205 6,927 15,325 Sources: Financial statements of the companies. Explanatory notes: Og fjarskipti hf. became the holding company Dagsbrún hf. in the year 2005, and Og Vodafone was the brand name of the electronic communications division of Dagsbrún. Information on Dagsbrún hf.’s revenue distribution by division was obtained from the Internet website of the Iceland Stock Exchange: http://news.icex.is/newsservice/MMIcexNSWeb.dll/newspage?language=IS&pagetype=latest&primarylanguagecode=IS&newsnumber=33584. In last June the electronic communication operation was divided from the holding company Dagsbrún hf. and the subsidiary company, Og fjarskipti ehf., established to run the electronic communications operation under the brand name Og Vodafone. 127. Síminn has long, extensive experience in electronic communications. It has operated in the mobile phone market longer than any other undertaking and has operated on the electronic communications market for almost a century. Og Vodafone is a younger company that has operated on the market in its current form since the year 2002. Its predecessors entered the mobile phone market in 1998 and 2001. On the other hand, Og Vodafone has an extensive agreement with the Vodafone Group for sales, marketing, service, and technological matters, as well as the use of the Group’s brand name. It can be expected that this agreement strengthens the company somewhat and that the company can utilise the experience that Vodafone has gathered as one of the largest mobile phone companies in the world. 128. Given the foregoing, it must be assumed that both Síminn and Og Vodafone possess solid, reliable experience in the mobile phone sector. Síminn, on the other hand, is a larger company than Og Vodafone, as can be seen in Table 4, especially in electronic communications divisions. This indicates that Síminn has a significant market power because of its size and longer experience. 5.2.4 Entry barriers53 129. Entry barriers is a collective term for various factors that affect an undertaking’s market power. If barriers to entry are few on a given market, the potential for profitability acts as a magnet for new undertakings wishing to gain market share from those already in the market. Potential competition from new parties can affect the behaviour of a dominant undertaking and can diminish the detrimental effects of that undertaking’s behaviour. Entry barriers, on the other hand, can weaken or prevent potential competition.

51 Reference is made to the discussion in Síminn’s 2003 annual report concerning the definition of an electronic communications network. These include connections via submarine cable (Cantat-3 and Farice), as well as satellite, for voice, data, and image transmission. 52 Other Síminn operating units are revenues from other services and subsidiaries of the Icelandic Broadcasting Corporation Ltd., which merged with Síminn effective 30 June 2005. Other Dagsbrún hf. (Og Vodafone) operating units are revenues from other services and broadcasting and printed media in the year 2005, as well as the electronic communications undertaking P/F Kall in the Faeroe Islands. 53 This criterion corresponds to “barriers to entry” in Paragraph 81 in the Guidelines.

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130. There is a strong link between entry barriers and undertakings’ profitability. As entry barriers increase, so does the profitability that can be expected; this can be traced to less competition on the market rather than to operational efficiency. It is most desirable for current operators that entry barriers be numerous and exit barriers few. Under such conditions, current operators could prevent new undertakings from gaining a foothold on the market, and unprofitable undertakings would cease operations readily. 131. The objective of PTA’s market analysis and the possible measures taken as a result of that analysis is to promote competition on the market. This is done with the aim of stimulating innovation and development and promoting undertakings’ ability to compete, for the benefit of consumers. One method of doing this is to reduce the entry barriers on the market. 5.2.4.1 Sunk costs54 132. When an undertaking enters a new market, it must often carry out a given amount of preparatory work and incur a certain amount of initial expense. If entry into the market is not successful, it is sometimes possible to recover such expenses; for example, through the sale of initial investments or equipment. Sunk costs are the expenses that a new party must absorb as a loss if he is not successful in gaining a foothold on the market. Sunk costs are an entry barrier because undertakings that are already active on the market are not faced with them. In most instances, current operators have already paid those expenses. 133. Some expenses, such as those for marketing, are much greater at the beginning of operations. If a new party wishes to attract a significant portion of the customers of current operators, he must most likely engage in substantial and costly marketing efforts. On the mobile phone market, this could even involve subsidising the purchase of mobile phones or hands-free equipment. Such expenses can, in general, be classified as non-recoverable. 134. Sunk costs can lie in investments in electronic communications equipment and business costs related to marketing, especially among young companies that are gaining a foothold on the market. It can be assumed that sunk costs will likely be high in Iceland due to geographical conditions and distribution of settlements. 135. In PTA’s estimation, there are considerably high sunk costs associated with the build-up of a GSM mobile network with acceptable distribution in this country, and this represents a significant barrier to entry into the market. 5.2.4.2 Economy of scale55 136. Economy of scale exists in an undertaking’s operations when increased production is accompanied by reduced overall per-unit costs. This is a characteristic of technology companies with relatively high fixed costs and low variable costs. 54 This criterion corresponds to “sunk costs” in Paragraph 81 in the Guidelines. Footnote 86 states that sunk costs are one of the most important barriers to entry, especially in the electronic communications sector. 55 This criterion corresponds to “economies of scale” in Paragraph 79 in the Guidelines.

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Economy of scale can function both as entry barriers for new operators and as an advantage with respect to other competitors. Network operators on the market attempt to operate their networks with an eye to optimum utilisation. New network operators need time to build up their operations and to attract customers and traffic; therefore, they cannot expect to benefit from economy of scale in the same manner as current operators with many years’ experience. 137. Operations at both Síminn and Og Vodafone are characterised by economy of scale. The expenses incurred by both companies in operating their GSM networks are, to a large degree, fixed costs involved in the build-up of the electronic communications network and related equipment. 138. Síminn’s size does not appear to compromise its flexibility or perspective in the company’s competition with its chief competitor on the mobile phone market. For example, Og Vodafone has, in its marketing efforts, attempted to appeal to young people and corporations. In addition, Og Vodafone has emphasised entertainment in its marketing endeavours and has identified itself as a less expensive option on the mobile phone market. Síminn, on the other hand, has tried to appeal to all target groups but has, however, reacted to Og Vodafone’s marketing emphases through aggressive advertising campaigns and by changing its branding and image in order to attract younger customers. 139. Given the foregoing, it must be assumed that economy of scale is a significant entry barrier in the relevant market. The build-up of a GSM mobile network in Iceland involves, proportionally speaking, high fixed costs due to the investments that are necessary. Furthermore, the small population in Iceland places a certain limitation on how much economy of scale it is possible to achieve through investment in an electronic communications network. Access to currently operating networks, at least for a given time, could reduce the impact of these entry barriers and could promote enhanced economy of scale in the operation of mobile phone networks if it leads to an increase in overall network traffic. PTA believes that Síminn reaps greater advantages from its size in the Icelandic mobile market which gives the company a stronger position on the relevant market. 5.2.4.3 Economy of scope56 140. Economy of scope involves its being less expensive to manufacture two or more products together than to manufacture them separately. Reduced expenses result from the joint utilisation of manufacturing supplies. A good example of this is the utilisation of an electronic communications network to provide dissimilar services to end users. Economy of scope can function both as an entry barrier for new operators and as a competitive advantage over other competitors on the market. 141. Síminn owns the large majority of electronic communications networks in Iceland, with GSM and NMT mobile networks, as well as a fixed-line network. Moreover, Síminn owns the majority of telephone exchanges, leased lines, and local loops, and operates the Broadband (a distribution system for television and Internet via fibre-optic cables), as well as having, in the year 2004, purchased one-fourth of

56 This criterion corresponds to “economies of scope” in Paragraph 79 in the Guidelines.

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the share capital in Íslenska sjónvarpsfélagid (ÍS), which operates the television station Skjár einn and owns the broadcasting rights to British football. This domination by Síminn is accompanied by a certain economy, which allows the company to reduce its costs for the operation of mobile phone services. In the future, Síminn will likely be able to make use of interoperability between 2G and 3G mobile phone networks. 142. The scope of Og Vodafone’s electronic communications operations is not as broad as that of Síminn; however, the company’s operations are extensive and have grown in recent years. Og Vodafone operates fixed-line and mobile phone systems but is dependent on Síminn, however, for leasing of local loops and leased lines, as well as national roaming. In the year 2004, Og Vodafone acquired a television station with its purchase of the Icelandic Broadcasting Corporation Ltd., thereby substantially increasing the scope of its operations. The operational form of the company has changed significantly over the past year, and the company is now part of a massive media conglomerate owned by the holding company Dagsbrún hf. Thus Og Vodafone will likely be able to make use of interoperability between 2G and 3G mobile phone networks in the future. 143. The scope of the companies’ operations is somewhat dissimilar, and higher revenues in some Síminn divisions indicate that there is more breadth in operations at Síminn than at Og Vodafone; see Table 4. 144. Concerning the scope of the companies on the retail market, it can be said that Síminn operates a total of seven retail stores around the country, instead of the previous 12.57 Síminn now operates three stores in the Reykjavík area and four in other areas (Ísafjördur, Akureyri, Egilsstadir, and the military base at Keflavík Airport). Furthermore, Síminn works with some 20-25 collaborators around the country. However, Síminn does not sell equipment in its collaborators’ stores but only provides access to service for customers. Síminn also operates an online store on the Internet. 145. Og Vodafone operates four retail stores in Kringlan Shopping Centre, Smáralind Shopping Centre, at Sídumúli 28, and in Akureyri.58 In addition, the company has agents who sell the full range of company services in Keflavík, Akranes, Selfoss, Borgarnes, and the Westman Islands, and has a number of agents who sell “start-up” packages and pre-paid cards for Freedom users. 146. The foregoing discussion makes it clear that both Síminn and Og Vodafone enjoy economy of scope. Síminn’s economy of scope is greater, however, which allows the company to offer its services at a lower price than Og Vodafone and other potential network operators. Therefore, it is difficult for others to offer the same prices as those offered by Síminn, either at the retail or at the wholesale level. 147. Considering the foregoing, it is the estimation of PTA that substantial economy of scope on the relevant market is accompanied by significant barriers to entry. Co-location and other joint utilisation of electronic communications

57 According to information obtained from Síminn’s Internet website on 1 June 2006. 58 According to information obtained from Og Vodafone’s Internet website on 1 June 2006.

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infrastructure could, however, mitigate the impact of economy of scope as a barrier to entry, in a manner similar that applying to economy of scale. 5.2.4.4 Access to capital59 148. Access to capital could have a decisive effect on companies’ possibilities in a competitive market. This applies especially to markets requiring large initial investments. The difference in undertakings’ access to capital can function as a barrier to entry. All other things being equal, financially sound undertakings with easy access to capital are in a better position and can better defend themselves against competition than can undertakings with less ready access to capital. 149. It is quite capital-intensive and risky to build up a mobile phone network as extensive as those owned by Síminn and Og Vodafone. Easy access to capital can constitute an entry barrier and can be an indicator of a dominant market position. 150. To a large degree, access to capital depends on the total turnover of the undertaking involved. As revenues increase, access to capital generally becomes easier. In this context, reference is made to Table 4 above. It shows that Síminn’s total turnover for the year 2005 is still considerably higher than that of Dagsbrún hf. (Og Vodafone) for the same period, or ISK 22.041 billion, as opposed to ISK 15.325 billion. The largest factor in this is that other revenue items at Dagsbrún (Og Vodafone) rose significantly between 2004 and 2005. On the other hand, Síminn has a significant advantage in terms of revenues from electronic communications networks. 151. Investors’ financial strength is also important. In the year 2005, the 98.8% of Síminn’s share capital that was owned by the government was sold to the company Skipti ehf. for ISK 66.7 billion. The largest shareholders in Skipti ehf. are Exista ehf., KB Bank hf., and the pension funds Lífeyrissjódur verslunarmanna and Gildi.60 On 30 June 2005, Íslenska sjónvarpsfélagid hf. (ÍS) merged with Síminn. Síminn also owns Skíma hf., Taeknivörur ehf., and Upplýsingaveitur ehf., a new company for the operation of information services and telephone directories, as well as owning an 88% share in the computer company Anza hf. 152. In December 2004, Og Vodafone acquired two subsidiaries of Nordurljós: the Icelandic Broadcasting Corporation Ltd., which operates Channel 2 and the Bylgjan radio station, and Frétt, which publishes Fréttabladid and DV. In the year 2005 the operational form of all these companies was changed, and the resulting undertaking was the holding and investment company Dagsbrún hf., which is now one of the largest media and electronic communications undertakings in Iceland. Dagsbrún hf. is the parent company of the electronic communications undertakings Og Vodafone, 365 Broadcasting and 365 Publishing. Dagsbrún hf. also owns the electronic communications undertaking P/F Kall in the Faeroe Islands, the second-largest company of its type in the Faeroes; as well as the security services company Securitas; and Skodun, which owns a large share in Kögun, the information technology company. The mobile phone company SKO, which entered the market in

59 This criterion corresponds to “easy or privileged access to capital markets/financial resources” in Paragraph 79 in the Guidelines. 60 Information published on the Exista ehf. Internet website, 28 July 2005.

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April 2006, is also wholly owned by Dagsbrún hf. The principal shareholders in Dagsbrún hf. are Baugur Group hf., Runnur ehf., Landsbankinn, and Milestone ehf.61 153. It can be assumed that both Síminn and Og Vodafone have relatively easy access to capital through their operations and investors. This makes it easier, for example, for both companies to defend their position against new competitors, and it is an indicator of market power in the relevant market. On the other hand, it is not possible to rule out the possibility that another undertaking could emerge with access to capital that is comparable to that enjoyed by Síminn and Og Vodafone. It must be considered as a fact, however, that the status of the financial markets today is less advantageous for undertakings interested in entering the relevant market than it is for current operators with less need to invest. As can be seen in Figure 10, the market is experiencing a certain level of saturation with regard to the number of GSM phone users. For this reason, it could prove more difficult for a third mobile network operator to build up a comprehensive mobile network given the potential profitability of such operations on this market. In view of this, PTA considers it inappropriate to assume that all potential newcomers into the relevant market will have ready access to capital. That being the case, it must be considered as established that, given the current conditions, access to capital could constitute a barrier to entry into the relevant market. 5.2.5.5 Technological advantages 62 154. An undertaking’s superiority with respect to technology or knowledge could constitute a barrier for other, newer undertakings that wish to enter the market. The financing of research and development is a non-recoverable expense, and a long period of time often elapses before the benefits of such investments become clear. The importance of a technological advantage is much greater on markets where there is little innovation and technological development. 155. The mobile phone market in Iceland consists of a public GSM mobile phone network that offers the possibility of placing and receiving voice calls, both in Iceland and abroad. Furthermore, Síminn operates the NMT mobile network, which reaches the entire country and the offshore waters surrounding it. 156. It can be assumed that Síminn reaps the benefits of its head start on the Icelandic mobile phone market in comparison with other undertakings. It can be assumed that this advantage has diminished because of the technology that is available on the mobile phone market, and it can be said that technological advantages are not a limiting factor in competition between undertakings operating in the market. It can be assumed, however, that Síminn retains its advantage in expert knowledge of network installation around the country and in network structure and use; these advantages are the result of the company’s long experience. Og Vodafone has reacted to Síminn’s advantage by making an extensive agreement with the Vodafone Group for sales, marketing, services, and technological issues.

61 Information published on the Dagsbrún hf. Internet website, 3 March 2006. 62 This criterion corresponds to “technological advantages or superiority” in Paragraph 79 in the Guidelines.

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157. In PTA’s estimation, Síminn and Og Vodafone possess comparable technology on the mobile phone market, though Síminn has a certain advantage as a result of its expert knowledge, as is stated above. On the other hand, the technological experience and expert knowledge of the two companies together could prove a barrier for new undertakings wishing to enter the market, if those undertakings were unable to gain access to currently operating networks. However, PTA believes it is not possible to conclude decisively that this criterion represent an entry barrier in the relevant market, specially since technological development can give new operators the opportunity to build less expensive networks than the existing operators were able to. 5.2.4.6 Barriers to expansion63 158. A market with significant potential for growth is much more attractive to new operators than is a stagnant market (a mature market). Undertakings contemplating entry into a stagnant market must likely aim at luring customers away from the operators already on the market. Limitations in a market’s ability to expand and offer more extensive services can be viewed as a possible barrier to entry. 159. In PTA’s estimation, there are possibilities for established undertakings to grow on the market, but on the other hand, it is more difficult for new operators to enter the mobile phone market and attract new customers. As can be seen in Figure 8, the rate of growth in the number of retail customers has slowed in recent years, which indicates that promulgation has reached a certain level of saturation. Increased saturation in the retail market makes it more difficult for new undertakings to gain a foothold in competition with established operators. Increased saturation requires increased selection of services if revenue increases are to be maintained without a change in current operators’ market share. With reference to Table 4, increased saturation has not been accompanied by diminishing revenues for currently operating undertakings. Table 4 shows that Síminn and Og Vodafone’s revenues from mobile phone operations have increased in recent years, which indicates that the companies are still growing in terms of revenues. Despite this, it is PTA’s opinion that the above-mentioned saturation on the relevant market and the costs associated with acquiring new customers could prove to be a barrier to entry for new operators. 5.2.4.7 Access to distribution and sales systems64 160. A developed distribution and sales system can function as an entry barrier for new operators. This applies especially to markets where the build-up of a sales and distribution system is costly, or where established electronic communications undertakings have concluded exclusive agreements with the largest and/or most important distributors on the market. 161. As has been stated previously, there are no independent service providers on the Icelandic mobile phone market. IMC Ísland still has very limited operations in this country and mainly in Northeast part of Iceland65, and SKO, which is owned by 63 This criterion corresponds to “barriers to expansion” in Paragraph 79 in the Guidelines. 64 This criterion corresponds to “a highly developed distribution and sales network” in Paragraph 79 in the Guidelines. 65 See www.wikingwireless.com.

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Dagsbrún hf., resells service from Og Vodafone and only through the Internet. Therefore, it is primarily Síminn and Og Vodafone that are important on the retail market for GSM mobile phone services. In most instances, the mobile phone itself is sold together with a subscription or pre-paid cards (Freedom) as a package. Refills for customers using the Freedom system can be purchased in most filling stations and news agents’ shops, as well as on the Internet, through online banking and ATMs, and via SMS. 162. As can be seen in the discussion in Section 5.2.4.3, both Síminn and Og Vodafone have retail stores and sales agents all over the country. Furthermore, both companies have offers and information on mobile phone services on their Internet websites. Síminn also operates an online store through which it is possible to purchase mobile phones and related services. 163. The numerous ways in which it is possible to sell mobile phones and related services — for example, via the Internet — indicates that access to a sales and distribution system need not be a significant entry barrier in the relevant market. It can be assumed, however, that Síminn has better access to the nation’s residences because of its strong position on the fixed-line market, as approximately 85% of Icelanders have subscriptions with Síminn,66 and Síminn uses its collection system for fixed-line services as a means of acquainting its customers with the company’s offers and service options in other electronic communications divisions. Furthermore, it can be assumed that Síminn’s extensive, highly developed sales and distribution system strengthens its position on the relevant market. 5.2.4.8 Vertical integration67 164. Vertical integration takes place when the same party operates on more than one manufacturing and/or sales level; for example, when a party manufactures a product, sells it to others at the wholesale level, and sells it himself at the retail level. An undertaking that integrates dissimilar aspects of his operations in the value chain in this way can, because of his position on the wholesale and retail markets, hinder potential competition on the market with the aim of strengthening his position with respect to competitors. 165. Síminn and Og Vodafone can be defined as vertically integrated undertakings, as both companies operate electronic communications networks and have the possibility of selling wholesale access to those networks, as well as providing services to end users in the form of sales, marketing, customer assistance, etc. This form of integration is characteristic of companies in mobile phones operations, and it is possible that new undertakings would operate in the same manner. 166. When consideration is given to the fact that there are no virtual network operators or independent service providers on the Icelandic market, the question arises of whether vertical integration among existing operators hindered the build-up of such companies. An examination of vertical integration involves the entire value chain,

66 Síminn’s share is calculated from approximated figures on the number of phone numbers in its fixed-line network at year-end 2005. 67 This criterion corresponds to “vertical integration” in Paragraph 79 in the Guidelines.

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from telephone exchanges and masts to communications with end users. The importance of a sales and distribution system is discussed in Section 5.2.4.7. 167. Síminn possesses the bulk of the transmission capacity via leased lines in the country, which is considered an important aspect of mobile phone services. There is the risk that a party that dominates the ownership of transmission capacity could have the tendency to discriminate for its own benefit as regards the sale of transmission capacity in its own mobile network at the wholesale level. The ESA Recommendation specifies two wholesale markets for leased lines (markets 13 and 14), which have been defined. These markets will be analysed at a later date. If Síminn is considered to possess significant market power on those markets, it could be that the company will have to abide by obligations imposed for the purpose of diminishing the negative impact of such a position. 168. Vertical integration can limit competition at the retail level. In view of the fact that PTA has not analysed the markets that could make the most impact, it is difficult to say whether vertical integration constitutes a significant entry barrier on the relevant wholesale market. It can be assumed, however, that Síminn’s ownership of the majority of the underlying supplies (leased lines, etc.) could have some effect. PTA considers, however, that those effects could be reduced through appropriate obligations if the results of the analysis reveal that Síminn possesses significant market power on the markets under discussion. 5.2.4.9 Purchasers’ freedom, access to information, and switching costs 169. Limitations or costs incurred by end users in switching service providers give dominant players on the market more room to operate without concern for the market and thus to maintain their market share. Such limitations could be for financial, technological, or efficiency reasons, or they could stem from the fact that end users trust established operators on the market more than new operators and do not wish to take the risk of switching. 170. A lack of information about the market could also constitute a limitation; for example, an unwillingness to switch service providers. In order for end users to have a real choice among service providers on a given market (when switching or initiating business), they must have access to information that allows them to compare offer prices. The use of complex price lists, discount schemes, free minutes, prices that differ according to whether calls are on-net or off-net, etc., compromises transparency and can strengthen the position of dominant entities on the market. 171. Requirements related to switching costs or locking of mobile phones, as well as access to information, could affect new operators’ possibilities for entering the market. Access to information 172. In Iceland, end users must choose, for the most part, from between two mobile phone operators — Síminn and Og Vodafone — because, as is stated earlier in this document, IMC Ísland’s participation on the relevant market (and the mobile phone market in general) is limited, and SKO is owned by Dagsbrún hf., the holding company that owns Og Vodafone. Síminn and Og Vodafone have various types of

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subscriptions and offers, as can be seen in Table 1; therefore, it could prove complicated to compare the two and to get an overview of what it actually costs to use a mobile phone. Furthermore, it is necessary to examine the relationship to other electronic communications services, such as fixed-line phones and Internet. 173. The consumer survey that IMG Gallup conducted for PTA in February and March 2004 included questions on how complicated or simple information on price, subscriptions, offers, etc., for GSM services was. Of those who responded, 40% of users considered the information complicated, and 48.6% considered it simple. 11.4% considered the information neither complicated nor simple. In the PTA consumer survey from April 2005, the same question was asked. In that instance, 48% of users considered the information complicated, 33.8% considered it simple, and 17.9% considered it neither complicated nor simple. Thus it can be seen that the number of users who consider electronic communications companies’ information complicated has increased. 174. With consideration given to demand-side substitutability, it can be expected that offers from mobile phone companies will affect users’ choice of subscription, usage patterns, service providers, and price awareness. It can be expected that users’ price awareness will diminish with increased diversity of offers, which will then lead to a reduction in elasticity of demand. 175. The above-mentioned consumer surveys included a survey of consumer price awareness. The PTA consumer survey of February-March 2004 revealed that only approximately 17% of respondents believed they knew what their mobile operator’s per-minute charge was, and less than half of that number gave correct or near-correct answers. Even fewer, or around 12%, believed that they knew what the per-minute charge was for voice calls between Síminn and Og Vodafone’s networks. Of those who believed they knew, less than 40% gave an answer that was correct or near-correct. When asked what an SMS cost, 59.2% of Síminn customers could not answer, as opposed to 51.5% of Og Vodafone customers. Similar questions were asked in PTA’s consumer survey from April 2005, when a slight difference in price awareness was detected between Síminn and Og Vodafone customers. The proportion of Síminn customers who believed they knew the per-minute charge for voice calls within Síminn’s network had dropped to 12.4%, while the number of Og Vodafone customers who believed they knew their provider’s per-minute price for on-net calls had risen to 20.7%. A greater number of participants gave a correct or near-correct answer in the latter survey, and Og Vodafone’s customers appeared to be better informed than Síminn’s. The same can be said about the per-minute price for voice calls between Síminn and Og Vodafone’s networks: a greater proportion of Og Vodafone customers, or 17.8%, believed they knew the per-minute price, while the percentage of informed Síminn customers dropped to 8.6%. When respondents were asked what an SMS cost, the results were quite similar to those of the prior year: 60.2% of Síminn customers, and 51.2% of Og Vodafone customers, could not answer. 176. In PTA’s consumer survey of April 2005, respondents were also asked whether they knew that it is more expensive to call between networks than to call within the same network, and it was revealed that 95.6% of those who answered assumed that it is more expensive to call between networks. Users were also asked if they knew whether they were calling a mobile phone in their own network or in

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another network. Less than half said they never knew (32.3%) or seldom knew (15.6%), while 14.3% said they always knew, 26.6% claimed to know often, and 11.1% said they knew sometimes. Those who claimed to know sometimes, often, or always whether they were placing an on-net or off-net call were asked which of the following statements applied to them when they knew that they were calling to another network: 17.9% tried to shorten the call, 17.1% used fixed-line phones, 8.1% sent SMS messages, and 56.8% placed the call as though it were an on-net call. 177. From this, it can be seen that users have little awareness of what it costs to place a call from a mobile phone, and even though most of them know that it is more expensive to call between networks, it does not seem to make much difference whether a user knows what network he is calling. It can therefore be assumed that mobile phone users would probably not use other forms of communication or choose not to call if a small but significant non-transitory price increase were implemented. After the earlier survey was conducted, number portability between mobile networks became a possibility. This will most likely reduce users’ price awareness further because it is now less clear to what mobile network the call is being placed. Given the above considerations, it is possible to draw the conclusion that a small but significant non-transitory increase in call termination prices for voice calls in mobile networks would not have a significant effect on the behaviour of the caller, and it would probably not lead to his using other forms of communication. 178. It is interesting to note that Og Vodafone customers seem to be better informed than Síminn’s customers — that is, as regards the per-minute price for use of a GSM mobile phone — and they seem slightly, though not significantly, more price-conscious. In the opinion of PTA, this difference can be explained to some degree by examining what age groups most of the companies’ customers belong to. The April 2005 survey revealed that the largest group of Og Vodafone customers was between the ages of 16 and 24, while the bulk of Síminn’s customers were between 55 and 75 years of age. PTA is of the opinion that younger users are more price-conscious than older customers where GSM phone use is concerned. 179. In view of the above-mentioned results, it is PTA’s assessment that mobile phone users are largely unaware of what it costs to place a call from a GSM phone. It is clear to PTA that it could be complicated for users to compare subscriptions and offers from mobile phone companies and obtain an overview of what it costs to use a mobile phone, which could have a negative impact on competition in the relevant market because it limits customer mobility. Switching costs 180. Both Síminn and Og Vodafone previously had binding offers for mobile phone services and sold subsidised GSM phones that were locked for other GSM networks and therefore did not permit use by customers who wished to switch service providers unless the customers paid a special unlocking fee. The same applied to customers who wished to terminate a binding agreement before the end of the minimum term of contract, usually one year. These binding offers and locked phones may have limited customer mobility to some degree and have caused those customers to be more reluctant to switch service providers. In this context, however, it is appropriate to state that the results of the PTA consumer survey did not indicate that this was a significant barrier.

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181. It has been revealed since the preliminary draft analysis of the relevant market was published that both companies have ceased the practise of binding customers to their mobile phone services and now sell only open, or unlocked, phones, with the exception of Og Vodafone’s “Vodafone Simply” phones.68 5.2.4.10 Product diversification / bundling69 182. Product diversification refers to how the consumer experiences a product and distinguishes between it and another comparable product. Product diversification in undertakings’ offerings can generate loyalty in customers and can make it difficult for new operators to enter the market, unlike a situation where product offerings are more homogeneous. Strong brand names have a comparable effect. 183. Today Síminn and Og Vodafone offer voice call services, SMS, and various other data service options for mobile phone users. These services are based on standard technology from foreign parties. Both companies also offer various services via GSM phone, including receipt of e-mail, group messaging, call forwarding, payment for products and services, etc. Furthermore, the companies offer a variety of subscription options that are tailored to the needs of various target groups. Despite some difference in these subscription options, it is neither difficult nor expensive for either company to offer the same options as its competitor. 184. It must be considered as established that Síminn offers more mobile phone diverse services than Og Vodafone. In this context, it is appropriate to mention BOX (Web and phone service) and Radar (location-based service). Offsetting this is the fact that Og Vodafone utilises its connection with the international electronic communications undertaking Vodafone and advertises its mobile phone services in Iceland under the name Og Vodafone in order to fortify the image of the company. Og Vodafone’s lack of offerings for BOX and Radar could possibly affect the sale of mobile phone services to corporations rather than to individuals; however, PTA is of the opinion that this does not make a decisive impact on the competition between the two companies. In PTA’s estimation, the diversity of products and services in the mobile phone market does not constitute an entry barrier or limit competition to any significant degree. 185. An undertaking that dominates a particular market can utilise its position in order to bundle products on that market with products on another market, thus providing offers that other competitors have difficulty duplicating. If those competitors do not have the opportunity to offer something comparable, this will strengthen the dominant position of the undertaking on the former market and can give that undertaking a competitive advantage on the latter market. Such a competitive advantage could be examined when market power on the latter market is assessed. 186. The sale of mobile phones and subscriptions as a package is a good example of the above-mentioned bundling. In view of the fact that none of the established 68 This is based on information obtained from the companies’ Internet websites on 16 February 2006. 69 This criterion corresponds to “product/services diversification (e.g., bundled products or services)” in Paragraph 79 in the Guidelines.

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mobile phone operators is hindered in engaging in such bundling, it can be assumed that this does not generate any competitive discrepancy among them. On the other hand, the ability to offer such subsidy of mobile phones is dependent on financial strength, and the resulting competitive advantage could function as an entry barrier for new operators. 187. It is especially important to examine bundling in mobile and fixed-line phone services. Síminn and Og Vodafone offer mobile, fixed-line, and Internet services. Síminn’s market share on the fixed-line market is much higher, however, than that of Og Vodafone, in addition to which Síminn controls a majority of the local loops and leased lines. Both companies own television stations as well and therefore have the option of increasing their service offerings even further. Given the market conditions in Iceland, it is not likely that other undertakings could enter the electronic communications market and offer services as diverse as those offered by the above-mentioned companies. 188. It must be assumed that it is important for corporations to do business with an electronic communications undertaking that can offer a total solution for all electronic communications services. An electronic communications undertaking that can offer services for mobile phone, fixed-line phone, and Internet, as well as offering all necessary electronic communications equipment, is in a much better position in the competition for corporate business. A service provider that cannot offer such a total solution will have difficulty amassing strength in the corporate market. 189. Disputes have arisen in connection with bundling of services on the electronic communications market. An example of this is the offer made by Síminn in the summer of 2004 — “All together with Síminn” — which included voice call, mobile phone, and Internet services sold together as a package on special terms. Og Vodafone filed a complaint with the Competition Authority, which rendered a temporary ruling to the effect that Síminn was prohibited from making this offer because it represented misuse of a dominant market position.70 This ruling was confirmed with a decision by the Competition Council.71 190. Given the foregoing, it must be considered that Síminn has a stronger position on the relevant market, especially in view of the position that the company has on other markets for fixed lines, local loops, and leased lines. An undertaking wishing to enter the electronic communications market must, in most instances, conclude an agreement with Síminn for access to networks or infrastructure. In view of this, PTA considers that Síminn’s strong position on this market could constitute an entry barrier for new undertakings wishing to enter the mobile phone market. However, PTA believes this criterion to be of limited significance provided that appropriate regulations are undertaken on the relevant markets. 5.2.4.11 Conclusions on entry barriers 191. Considering the above discussion, it is possible to draw the conclusion that there are significant entry barriers for new undertakings wishing to enter the mobile

70 Interim decision by the Competition Authority, no. 2/2004, dated 9 July 2004. 71 Competition Council Decision no. 21/2005, dated 22 June 2005.

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phone market. As has been revealed, Síminn and Og Vodafone are the only real operators on the relevant market. Neither virtual network operators nor independent service providers exist on the mobile phone market, despite the lack of legal or regulatory limitations on such activity. In this context, it is worth pointing out that there is no shortage of frequency licences for allocation in Iceland, as is the case in other European countries. It can be considered that access to established mobile networks — for example, in the form of national roaming, resale, virtual network, co-location, and joint utilisation — could be an important element in diminishing the entry barriers on the mobile phone market. 192. It is clear that there are considerably high sunk costs associated with the build-up of a mobile network with acceptable distribution in this country. The build-up of a mobile network in Iceland must be examined in the context of the small population of the country and the relative saturation of the mobile phone market. 193. Economy of scale exists in the relevant market, and this can function both as an entry barrier for new operators and as a competitive advantage with respect to other operators on the market. It must be assumed that both Og Vodafone and IMC Ísland suffer for having entered the mobile phone market later than Síminn. Síminn has benefited from greater breadth and scope in its operations, which gives the company greater financial strength than its competitors. Síminn’s strong position on other markets — particularly the fixed-line market and the markets for local loops and leased lines — provide it with a unique position and could constitute an entry barrier for new operators wishing to enter the mobile phone market, as they must, in most instances, negotiate with Síminn for access to networks and infrastructure. The fragmentary entry of other undertakings than Síminn into the mobile phone market, as can be seen in Figure 7, can indicate that substantial entry barriers exist in the mobile phone market and that Síminn’s strong position plays a big role in that matter. 194. Users’ limited awareness of what it costs to place a call from a mobile phone, coupled with their limited mobility, also tends to reduce competition on the market and can function as an entry barrier for new parties contemplating entry into the mobile phone market. 5.2.5 Price comparison and price trends on the retail market 195. Both a comparison of prices for services rendered by domestic undertakings and price trends over a given period of time can give an indication of how effective the competition is on the relevant market. PTA also examined an international comparison of retail prices charged by mobile phone undertakings in order to compare the position of Icelandic users to that of users in other countries. 196. The price lists of Síminn and Og Vodafone on the retail market for GSM mobile phone services in Iceland are, in their fundamentals, structured similarly. Both companies offer subscription-based services that are charged with a monthly fee plus an origination fee and a per-minute charge for each voice call. Both companies also offer pre-paid cards without payment of a separate monthly fee. The companies offer various prices and subscription options, depending of the customer’s usage needs; these options involve differing monthly and per-minute charges. It seems that competition for customers takes place primarily through various offers for mobile

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phones and through offers involving free minutes for voice calls placed to specific numbers within the same network (one or more numbers) and free SMS. 197. Both companies charge differing prices for on-net and off-net calls. Prices for voice calls from Síminn’s mobile network to that of Og Vodafone are higher than are prices for voice calls from Og Vodafone’s mobile network to Síminn’s. This is probably because the wholesale price for voice call termination in Og Vodafone’s mobile network is higher than the price for voice call termination in Síminn’s mobile network. This price difference is based on the fact that Síminn’s expenses for voice call termination in its own network were, at one time, considered lower than Og Vodafone’s expenses for voice call termination in its own network.72 198. In Annex B to the draft decision on Market 15, PTA has compared the prices of the companies based on users’ dissimilar calling patterns by using the methodology developed by OECD and Teligen Ltd. This new methodology is divided into three price baskets, all of which include one-third of the expenses for initial fee or registration fee — that is, the expense is distributed over a three-year period — as well as the monthly fee and other charges that may accompany a subscription or subscription offer and a specified number of SMS per month. These three price baskets are based on low use, average use, and high use. 199. A comparison of the lowest annual cost in each OECD country can also be found in Annex B to the draft decision on Market 15 (Figures 1 – 6), both for mobile phone subscriptions and for pre-paid phone cards. The annual cost is calculated in Euros with value-added tax and takes into account purchasing power parity (PPP). 200. An examination of the international comparison of prices for subscriptions reveals that, in all usage categories, Iceland has gone down the list since the price comparison was first published with the draft analysis of market 15 in June 2005, when price lists from February 2005 were used as a guideline. The greatest change involved the cost of subscription for average use, where Iceland went down from fifth place to eighth place. For low use, Iceland went down one place, to sixth place; and for high use, Iceland went down by two places, from seventh to ninth place. It seems that prices in Iceland have remained stable or risen while prices abroad have dropped. 201. From the foregoing, it can be seen that mobile phone expenses in Iceland are rather low in an international context, especially as regards the use of pre-paid cards; however, they are high in comparison with the other Nordic countries. It should be borne in mind that this comparison is based on fee-based services without consideration for discounts from the per-minute price for calls placed to specified numbers, or for other use that may be included in the subscription. In those instances, prices are calculated with consideration given to purchasing power by country (see further criteria in Annex B). 202. Also examined in Annex B (Figures 7 – 12) are the trends in costs for low, average, and high use of mobile phone subscriptions and pre-paid cards by Síminn and Og Vodafone customers. The Teligen price basket, which is based on a definition

72 See PTA decision of 23 April 2003 on Síminn’s interconnection fee, and PTA decision of 15 July 2004 on preliminary cost analysis in Og fjarskipti’s electronic communications networks.

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of annual costs and calling patterns, goes back to August 2002. Teligen’s calculations are made four times a year and are based on prices in February, May, August, and November of each year. In this document, annual cost developments are allowed to reflect price trends, as the criteria for calculation are the same as they were in August 2002; however, changes in costs from one period to another are based solely on price changes occurring since that time. The comparison of prices charged by Síminn and Og Vodafone is based on the least expensive subscription at any point in time for the usage level under scrutiny. It refers to fee-based services and does not take into consideration discounts or free voice calls to friends. 203. A comparison of mobile phone subscriptions shows that, in August 2002, Síminn’s price for low, average, and high use was lower than that charged by Og Vodafone. Og Vodafone’s price for average subscription use was lower than Síminn’s in August and November 2004, but it rose thereafter and was virtually equal to Síminn’s price in February 2005. Since that time, it has risen and was higher than Síminn’s price in August 2005. Síminn’s subscription prices have been rather stable, while Og Vodafone’s prices have dropped and have approached those charged by Síminn. The trends in the companies’ prices indicate that there is not much price competition between the two with regard to fee-based services for mobile phone subscriptions (see criteria and Figures 7, 8, and 9 in Annex B). 204. A comparison of subscription prices charged by Icelandic mobile phone operators shows that prices were relatively stable from August 2002 to August 2005. Síminn’s price for mobile phone subscriptions based on low use remained virtually unchanged from August 2002 to February 2005, whereupon it rose by approximately 2.5% from that point until August 2005. During that same period, Og Vodafone’s prices dropped by approximately 17.5% and have approached Síminn’s prices without, however, dipping below them. For average use, Síminn’s price rose by 4.7% while Og Vodafone’s price dropped by 11.4% during the same period; as of February 2005, Og Vodafone’s price was nearly the same as Síminn’s. Since that time, Síminn’s prices for average use have risen to a level higher than Og Vodafone’s prices. Síminn’s subscription prices for high use dropped by roughly 6.4% during the period under scrutiny, while Og Vodafone’s prices dropped by 21.8% but are still higher than Síminn’s prices. The stability of subscription prices for all use categories indicates that there is little price competition between the two companies for business among these target groups. 205. A comparison of pre-paid phone cards shows that Og Vodafone’s prices as of February 2005 are virtually the same as Síminn’s for average and high use but are 3.5% higher than Síminn’s prices for little use. A look at price trends from August 2002 until February 2005 shows that the two companies’ prices have developed in a similar manner and little has changed. Since February 2005, on the other hand, prices have risen at both companies, and in August 2005 Síminn’s pre-paid card prices were, for the first time, higher than those charged by Og Vodafone for all three use categories. The chief reason for this change is price increases that took effect after February 2005. Síminn’s prices were 4% for little use, 5.9% higher for average use, and 5.7% for high use. The price trends under discussion do not, however, indicate that there has been significant price competition between the companies in recent years with respect to fee-based services (see criteria and Figures 10, 11, and 12 in Annex B).

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206. The above discussion does not indicate that there is much price competition between the companies. It is PTA’s opinion that the two companies compete primarily by offering their own customers benefits such as free minutes and free SMS within their own network, as can be seen in Table 1. The OECD price comparison is based on the price lists of electronic communications companies on a quarterly basis and considers a defined annual usage, related to little, medium and heavy usage. Annual usage does not take into consideration the particular benefits which electronic communications companies provide to their own customers, such as free phone calls to particular phone numbers within the same network. The reason is that it is not perfectly clear how these benefits help the ordinary user, nor how they should be considered in a typical calling pattern for little, medium and heavy usage. Since the price comparison can not take into consideration these benefits, this criterion gives a negative image of the situation on the relevant market. 207. A comparison of Síminn and Og Vodafone’s average revenues per customer (that is, per mobile phone number) in the GSM market for the years 2003, 2004, and 2005 reveals that the gap between the companies is narrowing. Síminn’s average revenues rose from ISK xxxxx in the year 2003 to ISK XXX in 2005. During the same period, Og Vodafone’s average revenues increased from ISK XXX to ISK XXXX and are still a little bit higher than Síminn’s average revenues. That difference involves, among other things, higher fee-based services, as was stated earlier. An examination of the mobile operators’ average revenues per user shows that the difference between them has decreased significantly, as it was 12.6% in the year 2003, 3.6% in the year 2004, and 4.2% in the year 2005. Table 5 Average revenues per customer in the GSM market. Year 2003 2004 2005Síminn XXX XXX XXXOg Vodafone XXX XXX XXX

Source: Post and Telecom Administration 5.2.6 Competition in the relevant market 208. The primary objective of the market analysis is to examine whether there is effective competition on electronic communications markets and to respond with appropriate measures if there is not. In the analysis of the market for access and call origination on GSM mobile networks, it is possible to identify four criteria for competition that determine undertakings’ average long-term profitability. These criteria are potential competition, pressure from substitute products, countervailing buying power, and competition among established operators on the market. Potential competition 209. Potential competition involves the opportunities for new undertakings to enter the market. Potential competition can affect established undertakings’ prices and can diminish their possibility for maintaining prices that they could not sustain on an actively competitive market. Potential competition can also reduce current operators’ readiness to abuse their market power. It is necessary to examine this with reference to entry barriers; see Section 5.2.4. The presence of entry barriers and a shortage of potential competition usually go hand-in-hand.

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210. The reason that new undertakings enter a market is often those undertakings’ desire to gain a portion of the market share and profits of existing undertakings. This risk acts to constrain current operators and provides them with competition that they respond to in various ways. An example of this is increased economy of scale and lower per-unit costs, which strengthens the existing operator’s position with respect to potential competition. Product diversification such as that as reflected in quality or branding is a means of responding to competition. Substantial investment costs provide resistance, especially if they are accompanied by reinvestment of existing assets (switching costs). Moreover, limited access to distribution channels could make things difficult for competitors. If costs are independent of economy of scale but are dependent instead on technological expertise and proficiency, there is the possibility that specialised knowledge will constitute a barrier if it is kept secret from others. In a similar manner, undertakings that are first to enter the market can utilise their experience and knowledge as a competitive advantage over the operators that enter the market later. Access to resources such as frequencies, regulatory measures taken by the authorities, and technological advances can also affect new undertakings’ ability and interest in commencing operations on the market. 211. As is stated in Section 5.2.4.11, there are significant entry barriers on the relevant market, which indicates that there is a shortage of potential competition. This conclusion must be considered correct in view of the situation reigning on the mobile phone market today. The entry of other undertakings than Síminn into the mobile phone market has been rather fragmentary, as can be seen in Figure 7. Síminn was first to offer mobile phone services in Iceland and has benefited from that head start. The entry of Og Vodafone is a result of the merger of smaller operators on the market at year-end 2002 and of reorganisation that was carried out in the beginning of 2003. 212. With increased concentration on the market over the past three years, the number of electronic communications undertakings has dropped, and the only independent resale agent disappeared from the market when Og Vodafone terminated its agreement with BT. Although, the mobile phone company SKO entered the market recently. SKO is marketed as low-cost phone company with simple and cheap structure. The company resells mobile phone services from Og Vodafone and is also owned by Dagsbrún hf. and can therefore hardly be considered an independent undertaking. However, it is not possible to ignore the fact that SKO is a potential competition and is first and foremost a threat to Síminn since Og Vodafone will, no matter what, get income of SKO’s customers. Despite the entry of SKO to the mobile phone market, Síminn has not lower its minute charges for voice calls from its GSM network but has in fact answered SKO’s entry by changing its subscription offers more in coherence with SKO’s offer. Furthermore, Síminn’s minute charges for voice calls to fixed-line and the monthly charges for certain subscriptions types have risen.73 In PTA’s view, this rise is an indication that Síminn has a significant market power in the mobile market and can to a large extent operate without concern for competitors or customers.

73 Based on information from the price list for “Betri leið” on Síminn’s website. Síminn has made the change that include in the monthly charges are free domestic voice calls.

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213. Actually, there are only two operators on the relevant market, and they offer very similar services. It is not possible to view IMC Ísland as an active operator at the present time, as the company has a small distribution system and has not been successful in negotiating with either Síminn or Og Vodafone for national roaming in their GSM networks. At the same time, the market has reached a certain level of saturation. The growth in the number of users has slowed, and virtually no new services that increase use have emerged. It seems that, under current conditions, the entry of independent service providers in the mobile market cannot take place. 214. It is worth considering whether the mobile phone market in Iceland has become so saturated that it cannot accommodate any more operators. In neighbouring countries, resale agents and virtual network operators have been quite visible recently, and some of them — such as Tellmore in Denmark and Virgin Mobile in Great Britain and the United States — have been reasonably successful. In Norway there are two mobile network operators — Telenor and NetCom — but there are also a number of independent service providers that offer mobile phone services based on agreements with one or both network operators for access to their networks. This development has not taken place in the Icelandic market. PTA considers it a desirable one, however, and believes that it could increase competition for the benefit of consumers. Pressure from substitute products 215. As is stated in Section 2.2.10, PTA has come to the conclusion that access and call origination on the NMT network does not fall within the market for access and call origination on GSM networks but is instead a separate market, which is analysed later in this document. PTA takes the view that there is limited substitutability between NMT and GSM because the use of NMT phones takes place mostly in areas where it is not possible to make contact with a GSM phone and because the difference in the price of calls from GSM and NMT phones is considerable. In view of trends in the number of customers for NMT and GSM mobile services during recent years, it is not considered likely that NMT mobile phone services will have a significant effect on the competition between GSM operators in the foreseeable future. Based on the conclusions from Section 2, there is, at this time, no visible substitute product that could constrain the price of GSM mobile phone services. Countervailing buying power74 216. Customers with a strong negotiating position can make an impact on competition and restrict providers’ potential to operate without concern for their competitors and their customers. Such a position exists primarily when a customer buys a large portion of an operator’s production, is well informed of other offerings, can switch to another operator without significant expense, and even has the potential to commence production of a comparable product/service. 217. Potential countervailing buying power that makes an impact can be in the hands of end users or independent service providers who purchase wholesale services from mobile network operators. Both must be examined when an assessment is made of whether an undertaking has significant market power because countervailing

74 This criterion corresponds to “absence of or low countervailing buying power” in Paragraph 79 in the Guidelines.

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buying power at the retail level could diminish market power at the wholesale level. As has been revealed, retail sale of mobile phone services is primarily in the hands of Síminn and Og Vodafone. This lack of independent service providers means that countervailing buying power at the wholesale level does not exist at present. 218. There are only a few large purchasers at the retail level, and they do not weigh heavily enough to make a decisive impact on competition on the mobile phone market. Purchasing power in the retail market can be measured, for example, in increased customer mobility and in customers’ willingness to switch service providers. The results of the above-mentioned consumer surveys indicated that there is not much user mobility between operators on the mobile phone market. The results of the survey carried out in February and March 2004 showed that only 20.6% of users had switched providers, while 79.4% had not switched. Most, or 54.5%, said they had not switched because they were satisfied with the service they received. Of those who had switched, 25% said they did so because of price and 20.1% said they had done so because of a special offer. In the PTA consumer survey conducted in April 2005, users were asked whether they had switched GSM service providers in the past two years. Of those who answered, 15.7% had switched, and among this group, price was the chief reason for the switch in 37.6% of cases. Because the question asked in the prior survey was not limited to a specific period of time, as was the case in the latter survey, it would be careless to compare the results and draw sweeping conclusions from them. 219. The limited user mobility in this country can be partially explained by the fact that number portability between networks did not become possible until October 2004. In this context, it is worth mentioning, however, that in the prior survey only 5% of those who had not switched mobile phone provider said they had not done so because number portability was not a possibility or because the respondent did not wish to change phone numbers. Despite the fact that the survey did not indicate that the lack number portability had diminished user mobility, PTA considers it likely that more users will switch now that number portability is possible. 220. It is PTA’s opinion that the countervailing buying power in the retail market is insufficient to create increased competition. Furthermore, there are no independent service providers in the relevant market and therefore no potential buying power there. Competition among operators on the market 221. The drop in Síminn’s market share since the year 1998 shows that new operators on the mobile phone market have provided Síminn with competition. On the other hand, there has been certain stagnation in that trend since the year 2002, simultaneous with a reduction in the number of mobile phone companies on the market. 222. The international price comparison contained in Annex B to the draft decision on Market 15 shows that the price of mobile phone services in Iceland is low in an international context, with consideration given to purchasing power, but that it is high compared with the Nordic countries. It is worth mentioning that it appears as though prices in Iceland have remained stable or risen while prices abroad have dropped. The national comparison shown in Annex B reveals that the gap in prices charged by

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Síminn and Og Vodafone for subscriptions and pre-paid cards has narrowed, especially since the year 2003. Og Vodafone has directed its marketing emphases at providing the least expensive mobile phone services to customers using pre-paid phone cards. Síminn, on the other hand, has been less expensive for subscription users, but Og Vodafone is gaining ground and has been slightly less expensive for average use since August 2004. 223. An examination of the retail prices for GSM mobile phone services reveals that prices were relatively stable from August 2002 to November 2004, especially those for pre-paid cards. Since February 2005, however, there have been changes in the prices for pre-paid cards, and in August 2005, Síminn’s prices exceeded Og Vodafone’s prices in all three categories for the first time. In general, though, Og Vodafone’s prices have changed more than Síminn’s prices, especially for subscriptions, and have tended to increase and decrease so as to approach Síminn’s prices. This co-ordination of prices indicates that there is not much price competition between the operators on the mobile phone market, and it appears that Síminn is, in most instances, the leader in price determination and that Og Vodafone adapts its prices to those charged by Síminn. It is PTA’s opinion that the two companies compete primarily by offering their own customers benefits such as free minutes and free SMS within their own network, as can be seen in Table 1. SKO’s entry to the mobile phone market has, so far, not entailed more effective price competition. 5.3 The market for access and call origination on the NMT mobile networks 224. As is stated in Section 2.2.10, it is PTA’s assessment that access and call origination on the NMT mobile networks does not belong to the same service market as access and call origination on GSM mobile networks but constitutes a separate market that must be analysed separately. For this reason, PTA analyses the market for access and call origination on the NMT mobile networks separately in this report. 225. The NMT 450 network is the only analogue mobile network in Iceland. It has been operated by Síminn since 1986. The NMT network reaches all Icelanders. It has a much larger range in Iceland than does the GSM network and is accessible both in the highlands and in the offshore waters surrounding the country. Retail access to the NMT mobile network is sold only by subscription from Síminn. Wholesale access to the NMT mobile network has not been granted heretofore, neither national roaming nor other forms of wholesale access. 226. In PTA’s view, the most important factors in the analysis of the relevant market for access and call origination on the NMT mobile network are market share, entry barriers, potential competition, and countervailing buying power. The analysis will also include an examination of prices and price trends. As regards other criteria, PTA makes reference to the above-mentioned analysis of the market for access and call origination on public GSM mobile networks. PTA considers that many of the results of that analysis also apply here; for example, with respect to economy of scale, economy of scope, access to capital, access to a sales and distribution system, and vertical integration.

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5.3.1 Market share 227. As is stated in the discussion of market share in Section 5.2.1 according to established case law, very large market shares – in excess of 50% - are in themselves, save in exceptional circumstances, evidence of existence of a dominant position. The greater an undertaking’s market share, the more likely it is that the undertaking has a dominant market position. Developments in market share and market share stability are also indicators of a dominant market position; that is, if an undertaking constantly has a large market share, this indicates market dominance. 228. Given that Síminn is the only undertaking in Iceland that operates an NMT mobile network and offers such services to end user, the company has a 100% market share on the market for NMT mobile phone services. Therefore, Síminn has had a monopoly on access and call origination on its own NMT network since 1986, when it began offering these mobile services. 229. The fact that Síminn has a 100% market share on the market for NMT mobile phone services in Iceland is a strong indication that the company possesses significant market power on the wholesale market for access and call origination on the NMT mobile network and can, to a large extent, operate without concern for customers and other electronic communications operators. 5.3.2 Entry barriers and potential competition 230. It can be considered that entry barriers on the relevant market are significant and that there is little likelihood that a new operator will enter the NMT market in the next few years, as the operation of NMT networks is being discontinued the world over, and most factors indicate that NMT services will also be discontinued in Iceland within a few years; see the discussion in Section 2.2.10. It can be assumed that the sunk costs associated with the build-up of another NMT mobile network in Iceland would be substantial and that it would not be realistic for any undertaking to commence such build-up. Furthermore, it can be assumed that it is costly to maintain such a mobile network for such a small group of subscribers. Síminn has the technological advantage with regard to the NMT mobile network in Iceland, and this also represents a significant barrier to entry into the NMT market. 231. With reference to Figure 8, it is possible to draw the conclusion that the potential for growth on the relevant market is very little or virtually non-existent. The number of NMT users’ drops year by year, and it is not expected that this trend will change. The market is stagnant and uses obsolescent technology, and there is no reason to expect that revenues will grow as a result of increases in the selection of services, as can be expected in the GSM network. The supply of NMT phones is limited in comparison with GSM phones, which are, in most cases, less expensive than new NMT phones, which are sold at approximately ISK 40-50,000. According to the information that PTA has gathered, it would appear that the production of new types of NMT phones has been discontinued. In PTA’s assessment, this, together with the considerations listed above, reduces the likelihood that the number of NMT subscribers will increase or that the price for the service will drop.

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232. In the opinion of PTA, the unequivocal entry barriers and the shortage of potential competition indicate that Síminn has significant market power on the relevant market for access and call origination on its own NMT mobile network. 5.3.3 Prices and price trends 233. As is revealed in Section 2, there is a substantial difference in the price of voice calls placed from the NMT and GSM networks (see Figures 1, 2, and 3), and it is much more expensive to call from the NMT network than from others. In order to gain a better overview of NMT prices, PTA prepared Table 6, which shows price trends from 1 September 2000 to 1 November 2005 for general NMT mobile phone subscriptions. It can be seen that the price has risen at the same time that the price for GSM use has remained relatively stable, as can be seen in Section 5.2.5 and in Annex B to the draft decision on Market 15. The registration price for NMT, which had been the same since 1 September 2000, dropped by 76% on 1 November 2005 while other items have risen in price. Thus the monthly charge has risen by 5%, and the call set-up fee for voice calls, which was imposed for the first time in the fall of 2001, has risen by 140%. During this period, the per-minute charge within the NMT network has risen by 14% for day-rate calls and by 30% for calls at the evening/weekend rate. The per-minute charge for daytime calls placed to Síminn’s GSM mobile network has risen by 67%, while the evening rate has increased by 105%. For calls placed to other GSM networks, the day rate has increased by 183% and the evening/weekend rate has risen by 126%. In a similar manner, the per-minute charge for calls placed to a fixed-line network other than Síminn’s has risen proportionally more during the period under discussion. Table 6 Price trends for the use of NMT mobile phones; general subscription

1 Sep

001 Sep

011 Sep

021 Dec

031 Oct

04 1 Nov 05

Registration price 4,980 4,980 4,980 4,980 4,980 1,200Monthly charge 506 532 532 532 532 532Síminn’s call set-up fee 2.00 2.10 3.40 4.40 4.80Call set-up fee in other networks 2.00 2.40 3.80 4.80

4.80

Per-minute rate: In NMT, day rate 16.60 15.60 15.60 17.60 17.60 19.00 -evening/weekend rate 14.60 13.60 13.60 15.60 17.60 19.00In Síminn’s GSM network, day rate 18.00 24.90 28.01 26.90 26.90

30.00

-evening/weekend rate 14.60 18.00 19.43 20.00 26.90 30.00To other GSM networks, day rate 18.00 24.90 28.01 30.00 30.00

33.00

-evening/weekend rate 14.60 14.60 14.82 21.43 30.00 33.00To Síminn’s fixed network, day rate 16.60 16.60 16.87 18.60 18.60

21.00

-evening/weekend rate 14.60 14.60 14.82 16.60 18.60 21.00To another fixed network, day rate 16.60 16.60 16.87 18.90 18.90

21.00

-evening/weekend rate 14.60 14.60 14.82 16.80 18.90 21.00Source: Post and Telecom Administration

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234. From the above, it is clear that it is more expensive to use an NMT mobile phone than it is to use a GSM or fixed-line phone. The trends in prices for the use of NMT mobile phone services show that prices are still rising and have risen considerably since September 2000. 5.3.4 Countervailing buying power 235. As has been revealed, Síminn is the only operator engaged in the sale of NMT mobile phone services, and there are no resale agents or virtual mobile network operators. This lack of independent service providers means that countervailing buying power at the wholesale level does not exist. 236. There are few purchasers in the retail market, and as has been shown, 19,480 NMT subscriptions had been sold by year-end 2005, and the number of NMT customers had dropped by 1,820 from the previous year. In the opinion of PTA, it is not likely that there are large purchasers who could either make an impact on prices for NMT mobile services or affect competition on the NMT market. As is stated previously, PTA has drawn the conclusion that the largest users of NMT are sailors and those who travel in the highlands and other wilderness areas of Iceland. Because of the extensive range of the NMT network, these users have no choice but to buy NMT services from Síminn; therefore, under such conditions, there is little likelihood that they could create countervailing buying power. 237. It is PTA’s opinion that no countervailing buying power exists on the retail market for NMT mobile phone services. Furthermore, there are no independent service providers on the NMT market and therefore no potential buying power at the wholesale level. 5.3.5 Summary of the NMT market 238. Síminn is the only undertaking in Iceland that operates an NMT mobile network and offers NMT services to end users. Therefore, Síminn has a 100% market share in NMT mobile phone services; this market share has remained unchanged since 1986, when the company began offering these services. It is PTA’s assessment that the relevant market is characterised by unequivocal entry barriers and a shortage of potential competition, and that it is not foreseeable that this situation will change because the operation of the NMT network will cease in the next few years. It is clear that it is more expensive to use an NMT mobile phone than to use a GSM or fixed phone; furthermore, trends in prices for NMT use do not indicate that prices are likely to drop, especially in view of the decrease in the number of users. It is PTA’s opinion that countervailing buying power exists neither on the retail market nor on the wholesale market for NMT mobile phone services. 239. In the opinion of PTA, the above results indicate that Síminn possesses significant market power on the wholesale market for access and call origination on the NMT mobile network and can, to a large degree, operate without concern for customers and other electronic communications companies.

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6 Assessment of significant market power 6.1 General 240. The assessment of significant market power (SMP) is based on Section 3.1 of the ESA Guidelines and on the criteria discussed in Section 5 of this document. In keeping with Paragraph 76 in the ESA Guidelines and considering the current market conditions, PTA bases its assessment on the analysis of the relevant markets as they are today, with consideration given to the developments of the past few years and the coming months. 241. Article 18, Paragraph 1 of the Electronic Communications Act, no. 81/2003, cf. Article 12 of Act no. 78/2005 Amending the Electronic Communications Act, states the following: An undertaking shall be deemed to have significant market power if it, either individually or jointly with others, holds a position of economic strength on a certain market which enables it to prevent effective competition and to operate to a substantial extent without concern for competitors, customers and consumers. 242. This is an important point of departure in the market analysis, and PTA wishes to emphasise that it is significant market power that is the appropriate measure and not abuse of a dominant position. Thus the consideration of whether a dominant position has been abused or not is not the fundamental point of the market analysis. The above provision shows that it is only necessary to demonstrate that the possibilities are extant, not that they have been utilised. This does not mean, however, that an undertaking’s behaviour in the market does not make any difference in the assessment of SMP. Even though the formal aspects of the market are most meaningful in the market analysis, behaviour that promotes a dominant position or maintains a dominant undertaking’s competitive advantage can diminish competition on the market. 243. As was revealed in Section 5 on market analysis, an assessment of market share is not sufficient, in and of itself, to determine whether an undertaking should be designated with SMP in a market. It is necessary to examine all appropriate criteria. A determination of SMP cannot be based entirely on one criterion; instead, it must be founded on a number of criteria and their interplay with one another. 244. A company can be designated as having SMP by itself (single dominance) or collectively with one or more other companies (joint or collective dominance). If the conclusion is that one undertaking has significant market power, it is usually unnecessary to ponder the question of joint dominance. If, on the other hand, the conclusion is that no single undertaking possesses significant market power, it is necessary to examine whether the conditions for joint dominance exist. In addition, an undertaking that has SMP in a relevant market may also be considered to have SMP in a related market if the links between the markets are such that the undertaking can use its power in one market to enhance its power in the other, cf. Article 18, Paragraph 2 of the Electronic Communications Act.

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6.2 PTA’s assessment of significant market power in the relevant markets 6.2.1 The market for access and call origination on public GSM mobile

networks 245. There are only two undertakings with any sizable operations on the market for access and call origination on public GSM networks: Og Vodafone and Síminn. SKO is a resale agent on the retail market and is only purchaser at the wholesale level. In the opinion of PTA, IMC’s operations in Iceland are too limited, and the company’s position in the relevant market too weak, to allow for the designation of IMC as having any market power. In view of this, PTA does not consider it necessary to conduct further analysis of IMC’s power in the market at the present time. In view of the fact that no real wholesale activities take place in the relevant market in Iceland, with the exception of corporate sales and national roaming, it is only possible to assess market power on the bases of the competitive conditions prevailing at the retail level and the companies’ market shares in the retail market, based on the number of subscriptions and pre-paid cards, the number of minutes originating in own network, and revenues from mobile phone services. PTA is of the opinion that market share at the retail level gives an indication of the situation at the wholesale level; therefore, the Administration considers the companies’ position at the retail level in its assessment of significant market power in the relevant market. 246. In general, an undertaking is considered to have a dominant market position if it possesses more than a 50% market share. At year-end 2005, Og Vodafone’s market share was 35% in terms of number of customers, XX% in terms of number of minutes of calls placed from its own mobile network, and [35-40]% as measured in revenues for the year 2005 (see Table 2). At the same time, Síminn’s market share was 65% as determined by number of customers, XX% in terms of the number of minutes of calls originating on its own network, and [60-65]% in terms of revenues. This makes it clear that Síminn’s market share is well over the limits that indicate a dominant market position, especially as regards revenues and the number of customers. In PTA’s assessment, market share as measured in revenues or number of customers gives a more accurate picture of an undertaking’s market power, as greater average use could, for example, be traceable to the terms offered to users, such as free minutes of calls to specified numbers, customer age distribution, and the like. Og Vodafone and its predecessors increased their market share until the year 2002, but since that time there has been a certain stagnation, which could indicate that the market has achieved a sort of balance with regard to operators’ market share. However, the 0.5% increase in Síminn’s market share in terms of number of customers, both in 2004 and in 2005, could indicate that the company has managed to resist further decreases in market share. 247. Síminn’s financial strength is obvious, as is supported by the information in Table 2, which shows that Síminn’s share in terms of revenues on the mobile phone market was [60-65]% in the year 2005, while Og Vodafone’s share was [35-40]%. Table 4 also provides a good picture of the difference in total revenues for Síminn and Og Vodafone, especially in electronic communications divisions. Furthermore, it can be assumed that Síminn has relatively easy access to capital through its operations and investors, and that the same can be said of Og Vodafone.

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248. The bigger distribution of Síminn’s GSM mobile network provides the company with greater strength on the relevant market. At the same time, Og Vodafone is dependent on Síminn for national roaming. Both Síminn and Og Vodafone are considered to possess solid, reliable experience in the mobile phone sector; however, it is PTA’s evaluation Síminn’s size and longer experience indicates that the company has significant market power in the relevant market. 249. It is PTA’s conclusion that there are significant entry barriers for new undertakings wishing to enter the mobile phone market. There are considerably high sunk costs associated with the build-up of a mobile network with acceptable distribution in this country. The build-up of a mobile network in Iceland must be examined in the context of the small population of the country and the relative saturation of the mobile phone market. Both Síminn and Og Vodafone have economy of scale in the relevant market; however, it must be considered that Og Vodafone and IMC Ísland suffer for having entered the market significantly later than Síminn. Síminn has benefited from greater breadth and scope in its operations, which gives the company greater financial strength than its competitors. Síminn’s strong position on other markets — particularly the fixed-line market and the markets for local loops and leased lines — provide it with a unique position and could constitute an entry barrier for new operators wishing to enter the mobile phone market, as they must, in most instances, negotiate with Síminn for access to networks and infrastructure. 250. Considering the foregoing discussion, Síminn’s large market share, coupled with other factors, indicates that the company has significant market power in the relevant market. On the other hand, in a duopolistic market like that in Iceland, the rule concerning 50% market share is not as strong an indication of market power as it would be if there were a greater number of independent undertakings operating on the market. When such market conditions reign, there is more danger of collusion in the market, which could occur either through tacit agreements or joint decisions made by established operators. Thus it is necessary to examine whether conditions exist that indicate that Síminn and Og Vodafone exercise joint dominance of the relevant market. Those conditions are governed chiefly by market condition and by the behaviour of operators in the market. 6.2.1.1 Joint dominance75 251. Article 18, Paragraph 1 of the Electronic Communications Act assumes that undertakings can be assumed to have significant market power together with one or more other undertakings, in what is variously called joint dominance or collective dominance. Joint dominance means that two or more undertakings that are legally and financially independent of one another can dominate together if the relationship between them is such that they actually behave as if they were a single operator in the market. That relationship need not be formal or structural; it is sufficient that market conditions be conducive to informal co-ordination of methods by different operators, which results in ineffective competition.76 75 See Section 3.1.2, Collective dominance, in the ESA Guidelines. 76 Case no. C 395-396/96: Compagnie Maritime Belge Transports SA and Case no. T-102/96: Gencor Ltd. v. Commission.

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252. The interpretation of the concept of joint dominance is based on legal precedents from the European Courts concerning Article 82 of the Treaty of Rome, which is comparable to Article 54 of the EEA Agreement. PTA is also authorised to consider the decisions of the European Commission under the merger control Regulation. The Courts have, in several merger cases, issued guidelines concerning how the term collective dominance should be interpreted and what conditions must exist.77 In the so-called Airtours case,78 the Court set forth three conditions that must all be met in order for two or more undertakings to be considered to have joint dominance in an oligopolistic market.

1. The undertakings must be in a position to have a tacit co-ordination. In this context, the market conditions must be sufficiently transparent, so that the undertakings can, with acceptable accuracy and speed, follow one another and determine whether the other party is violating the agreement. The most important criteria for deciding that this condition is met are market concentration, transparent market conditions, a mature market, diminishing demand, and homogeneous products.

2. There must be sustainable incentive over time for the undertakings to abide by the co-ordination, which means that there is some sort of retaliatory mechanisms among the undertakings that would make it unprofitable for any of them to violate or deviate from the co-ordinated practice. The undertakings must be conscious of the fact that deviations from the co-ordinated practise will be met by the same type of measures taken by other undertakings and are not profitable for the long term.

3. Existing and future competitors and customers may not be in a position to undermine the results of the co-ordination. Most important in this context is the question of whether there exist potential competitors and consumers who could counter the joint dominance. High barriers to entry into the market are important in this sort of assessment.

253. In EU case law, there are strict requirements relating to proof of co-ordinated action. In the above-mentioned case, it was confirmed that a heavy burden of proof rested on the Commission with regard to prohibiting mergers due to the risk of collective dominance. 254. Paragraph 99 in the ESA Guidelines states that if there are no formal links between the undertakings in question, it is necessary to examine whether certain criteria exist in the market that is conducive to joint dominance. These criteria include, among others:79 high market concentration, transparency, a mature market, diminishing demand, homogeneous products, low elasticity of demand, similar cost structures, similar market shares, mature technology, high entry barriers, limited countervailing buying power, lack of potential competition, various informal links between undertakings, retaliatory mechanisms, and lack or reduced scope for price competition.

77 The Merger Control Regulation No 4064/89, dated 21 December 1989; see Paragraph 103 in the ESA Guidelines. 78 Case no. T-342/99 Airtours v. Commission, dated 6 June 2002. 79 A list of the criteria for collective dominance can be found in Paragraph 98 of the ESA Guidelines. The list is not exhaustive, and lack of fulfilment of some of the criteria does not rule out collective dominance.

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255. PTA’s draft analysis of the relevant market can be found in Section 5.2, and many of the conclusions in that section apply to an examination of whether the criteria for joint market domination exist. High market concentration80 256. As is stated in Section 5.2.1, there is high concentration in the GSM mobile market. The concentration index (HHI) is over 5,000, no matter whether it is measured in terms of revenues, minutes, or customers, and it has increased over the past year, which is a consequence of the disappearance of undertakings previously operating in the relevant market. Furthermore, the combined market share of Síminn and Og Vodafone is very large, almost 100%. Under conditions like these, there is a greater likelihood of collective dominance. A high level of concentration need not mean, however, that the market promotes co-ordinated behaviour; other factors must come into play. In this context, PTA wishes to draw attention to the fact that because Iceland has a small population and a small mobile market in comparison with other European countries, there is little likelihood that the level of market concentration in Iceland will be low, as market conditions do not support a large number of competitors. It is unlikely that this situation will change significantly in coming years. PTA considers it appropriate to bear this in mind in evaluating the importance of this criterion here. Transparency81 257. In the retail market for GSM mobile services, PTA generally assumes that the mobile operators’ price lists are made public and are accessible to all; this includes publication on the companies’ Internet websites. However, they are not transparent in the sense that it is difficult to assess how prices are structured and what lies behind them. Furthermore, it can be assumed that consumers have difficulty understanding the difference in the price for on-net and off-net voice calls. In PTA’s estimation, the same applies to the wholesale level, where prices do not clearly reflect the underlying costs. In this context, PTA makes reference to the discussion in the analysis of Market 16 concerning cost analyses of the companies’ interconnection fees and the imposition of a price control obligation, cf. Sections 4.2 and 6.4.5 in the analysis of Market 16. 258. There is already an obligation on Síminn to publicise a reference offer. This is based on the company’s having been designated as having SMP in both fixed-line network and leased lines; cf. Article 26 of the previous Telecommunications Act, no. 107/1999, and the Rules Concerning Reference Offers for Interconnection, no. 94/2002. In order to meet the requirements of this obligation, Síminn publishes on its Internet website a standard contractual agreement for interconnection and other aspects of its services. The requirements stipulated by Síminn and the company’s price for interconnection are therefore accessible to all. The business that takes place at the wholesale level is primarily between Síminn and Og Vodafone, which have concluded agreements for network interconnection and national roaming. These agreements include, among other things, information on prices and are accessible to all interested parties.

80 This criterion corresponds to “market concentration” in Paragraph 98 in the ESA Guidelines. 81 This criterion corresponds to “transparency” in Paragraph 98 in the ESA Guidelines.

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259. In view of the fact that Iceland is a small country, mobile phone operators have less difficulty keeping track of their competitors’ movements, but it can be said that, in other respects, transparency regarding the operators’ investments and actions is limited. In this context, PTA would like to highlight the fact that regardless of the smallness of the market, PTA believes that Síminn was not aware of the entry of SKO into the mobile phone market until it was public to everyone. Therefore, Síminn was not in a position to react to the entry of SKO in the way one would have expected if Síminn had earlier been aware of the new competition. On the whole, it must be considered that the mobile phone market for access and call origination is considerably transparent, which is in large part the consequence of the smallness of the market and of the lack of actual wholesale market. However, PTA is of the opinion that there are several factors indicating that the market is not transparent enough to conclude that the companies have joint dominance.. A mature market and stagnation in demand82 260. PTA is of the opinion that the market for GSM services appears to have achieved maturity. It seems as though the build-up of more comprehensive mobile networks is not a desirable option. On the other hand, it is not possible to rule out the entry of a new operator into the market with a localized mobile network; for example, in the Reykjavík area. In addition, it can be considered likely that service providers that do not own mobile networks will enter the mobile phone market. The growth in the number of users has slowed, which indicates a certain level of saturation; see Section 5.2.4.6. As is stated in Section 5.2.4.9, it is PTA’s assessment that GSM users’ level of price awareness is not high, and this results in a correspondingly low level of elasticity of demand. However, PTA is not of the opinion that the demand for GSM mobile services at the retail level will disappear or be drastically reduced in the next several years. The growth in demand will probably remain constant and will be consistent with the levels of the past several years. The growth in the number of users has been comparable for the two companies in recent years; see Figure 8. Despite the fact that growth in the number of users has slowed, the companies’ revenues from mobile phone operations have increased year by year, as Tables 4 and 5 indicate. With increased innovation in mobile phone services — for example, information services and Internet access via mobile phone — it can be expected that revenues will increase, which could encourage new operators to enter the market. Given these considerations, PTA is of the opinion that the mobile phone market has not yet reached full maturity and that there are still possibilities for competition and growth. Homogeneous products83 261. The more homogeneous products are, the stronger the potential for price competition between the undertakings in question, which could lead to co-ordinated behaviour. In view of the fact that mobile phone services are based on standard technology, it is realistic to assume that the services of mobile phone operators will be comparable. At the retail level, mobile phone services constitute a rather homogenous product, minutes and units. Possible diversification at the retail level could involve factors such as branding, image, special offers on particular services, and quality. The companies also offer various types of service other than voice call services for mobile phones, and they attempt to differentiate themselves with, for example, data, 82 This criterion corresponds to “mature market and stagnant and moderate growth on the demand side” in Paragraph 98 in the ESA Guidelines. 83 This criterion corresponds to “homogeneous product” in Paragraph 98 in the ESA Guidelines.

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photography, and e-mail services. This means that the companies compete on many more levels than the supply of basic mobile phone services; that is, access and call origination in GSM mobile networks. 262. Homogeneity in mobile services at the retail level need not affect the wholesale level, however. The service that is generally purchased at the wholesale level is access and call origination. Though this service is compatible with the services sold at the retail level, they are based on dissimilar contractual agreements. Potential contractual agreements at the wholesale level depend on what sort of access is purchased and how much; that is, whether it is roaming access, virtual network access, or resale of minutes. In view of this, PTA considers that it is not possible to say that services at the wholesale level are homogeneous. Given these considerations, it is the opinion of PTA that this criterion does not indicate unequivocally that the market is characterized by joint dominance. Similar cost structures84 263. In the opinion of PTA, the cost structure of the two companies is not similar at this point. PTA bases its assessment on the fact that Og Vodafone is a younger company than Síminn. PTA has consented to Og Vodafone’s rationale concerning the company’s termination prices on the basis of a preliminary cost analysis,85 which includes, among other things, costs related to the disadvantages of the merger of Íslandssími, Tal, and Halló!. Therefore, Og Vodafone’s termination prices are higher than Síminn’s termination prices. On the other hand, PTA is of the opinion that the long-term cost structure of Síminn and Og Vodafone’s termination prices is similar, and that both companies have the potential to achieve good levels of profitability. In this context, it should be pointed out that PTA recommends that the voice call termination price be the same for Síminn and Og Vodafone effective 1 June 2008, in accordance with the decision on Market 16.86 Similar market shares87 265. Behaviour that interferes with competition, in the form of co-ordinated actions, is likelier to occur when the market share of the undertakings involved is similar or comparable. A large difference in market share between two companies reduces the likelihood of joint market dominance. As is stated in Section, 5.2.1, Síminn has a market share of 65% and Og Vodafone’s market share is 35%, in terms of the number of GSM mobile phone customers. The difference in Síminn and Og Vodafone’s market share is 30 percentage points, which is considerable, in the opinion of PTA, and prevents the fulfilment of the criterion concerning similar market share. The Irish regulatory authority (ComReg) came to the conclusion in its analysis of Market 15 that the mobile operators Vodafone and O2 possessed joint dominance.88 In that case, Vodafone had a 54% market share in terms of number of

84 This criterion corresponds to “similar cost structures” in Paragraph 98 in the ESA Guidelines. 85 See PTA decision of 23 April 2003 on Síminn’s interconnection fee, and PTA decision of 15 July 2004 on preliminary cost analysis in Og fjarskipti’s electronic communications networks. Síminn’s current call termination price is ISK 8.92, and Og Vodafone’s call termination price is now ISK 13.2 at the day rate and ISK 11 at the evening rate. 86 See Annex 2 to the decision on market 16. 87 This criterion corresponds to “similar market shares” in Paragraph 98 in the ESA Guidelines. 88 See www.comreg.ie: Documents no. 04/188 and 04/188a, dated 9 December 2004. PTA wishes to draw attention to the fact that the decision and the imposition of obligations on the basis of the above-

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customers, and O2 had a market share of 40%. In the Norwegian regulatory authority’s (NPT) analysis of Market 15, it was revealed that Telenor had a market share of 68%, as opposed to NetCom’s 32%. When discussing joint dominance, NPT was of the opinion that this large difference in the two companies’ market share indicated effective competition rather than joint dominance.89 However, in the end NPT came to the conclusion that Telenor had a significant market power in Market 15. 266. In the estimation of PTA, Og Vodafone’s market share does not give cause to assume that the company has a dominant market position. It is also important to consider how stable the market share levels have been, and in this context, it is worth pointing out that the market share in GSM mobile services in Iceland has been rather stable since 2002 but that Síminn’s market share dropped steadily from 1998 until that time. In PTA’s opinion, the market share of the two operators has been stable for a considerable period of time, but counterbalancing this is the fact that the merger of the companies that formed Og Vodafone did not occur until year-end 2002 and the beginning of 2003. Furthermore, it can be assumed that Og Vodafone’s attempts to gain market share from Síminn will be met with full force. This can be seen in the fact that, over the past two years, Síminn has managed to increase its market share in number of customers by 1 percentage point. In the opinion of PTA, Og Vodafone needs to look for new ways to gain market share from Síminn and the entry of SKO could be step in that direction. Mature technology90 266. In the opinion of PTA, the technology used in the GSM mobile phone market is of a general nature and is accessible to all. There does not seem to be much innovation in the 2G mobile phone system as far as voice calls are concerned; however, as has been stated previously, the mobile market is not limited to voice calls, and other mobile phone services make an impact in this context. It is possible for undertakings to differentiate themselves to some degree through mobile services other than voice calls, which could also encourage the entry of new operators. In the opinion of PTA, the mobile market is, to some extent, in a stage of technological development. PTA is of the opinion that more technological innovation and enhanced services can be expected with the coming of the 3G mobile network, but because it is still unclear when the build-up of that network will commence in Iceland, it is not possible to take it into consideration in this document. Given the foregoing, it is PTA’s opinion that this criterion does not give a clear indication of the presence of joint dominance in the relevant market. High entry barriers and lack of potential competition91 267. It was PTA’s conclusion in Section 5.2.4.11 that there are high entry barriers for new undertakings wishing to enter the mobile phone market. There are considerably high sunk costs associated with the build-up of a mobile network with

mentioned analysis of Market 15 in Ireland have been deemed invalid with a decision by an appellate court dated 14 December 2005. 89 See www.npt.no: updated analysis of Market 15, dated 23 January 2006, pg. 71. 90 This criterion corresponds to “lack of technical innovation, mature technology” in Paragraph 98 in the ESA Guidelines. 91 This criterion corresponds to “high barriers to entry and lack of potential competition” in Paragraph 98 in the ESA Guidelines.

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acceptable distribution in this country, and the potential for growth is limited due to the saturation in the market and the small population. There also appears to be a shortage of potential competition, as the disappearance of mobile operators from the market shows, and there is a lack of independent service providers. IMC Ísland still has limited operations in the mobile market and therefore does not make any significant impact on the market position of Síminn and Og Vodafone. At this moment, it is too early to assess the impact of the entry of SKO into the mobile market and it is not possible to ignore the fact that the company is wholly owned by the holding company Dagsbrún hf., which also owns Og Vodafone. However, it is clear that SKO is a potential competition and is first and foremost a threat to Síminn since Og Vodafone will, no matter what, get income of SKO’s customers. 268. These entry barriers and the lack of potential competition create conditions conducive to co-ordinated behaviour. It should be kept in mind, however, that various remedies are designed to diminish the barriers to entry into a market. Included in these are access obligations such as those involving national roaming, virtual network access, co-location and joint utilisation, which should make the mobile phone market more accessible if they are imposed on one or both of the undertakings operating in it. Furthermore, there is no lack of frequency licences for allocation in Iceland. In the opinion of PTA, the strong position of Síminn has a significant effect, both on the possibilities of established mobile operators as is evident from the market exit of companies, see figure 7, and on the potential entry of other operators into the mobile phone market. Lack of countervailing buying power92 269. It is PTA’s opinion that the countervailing buying power in the retail market is insufficient to create increased competition. Because there is no real wholesale market for access to mobile networks, there is no potential countervailing buying power there either. Such a situation is conducive to co-ordinated behaviour. On the other hand, when this criterion is examined in comparison with others, its importance must be considered limited in this context. Various informal links between undertakings93 270. There are significant formal and informal links between the two operators, which exist in most cases because of business activities between them, often on the basis of legal requirements; e.g., commerce resulting from number mobility, regular meetings on interconnection, negotiations regarding national roaming agreements, etc. The two companies also engage in formal collaboration, such as that pertaining to the operation of The Icelandic Number Company and Farice. It is not possible to ignore the fact that each of the two companies is the other’s largest customer and that this results in many types of interaction between them. Neither must it be forgotten that Iceland is a small society, and many of Síminn’s former employees now work for Og Vodafone. Despite various formal and informal links between the two companies, PTA is of the opinion that there is little to indicate that these links are abnormal; on the contrary, they seem rather to be necessary for the resolution of various problems that come up. These links between the companies create conditions conducive for co- 92 This criterion corresponds to “lack of countervailing buying power” in Paragraph 98 in the ESA Guidelines. 93 This criterion corresponds to “various kind of informal or other links between the undertakings concerned” in Paragraph 98 in the ESA Guidelines.

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ordination of activities, but it must be considered as established that more criteria are needed in order for a suspicion of such co-ordination to arise. Retaliatory mechanisms94 271. In order to come to a conclusion concerning joint dominance, it is necessary that there be retaliatory mechanisms that prevent the undertakings from violating the agreement between them. An example of this could be a threat to engage in strong price competition, which would have varying consequences for the companies involved. It has been stated before that there is co-ordination of prices which indicates that there is not much price competition between the companies and that Síminn seems, in many instances, to be the leader in determining price levels. It is PTA’s opinion that the two companies compete primarily by offering their own customers benefits such as free minutes and free SMS within their own network, as can be seen in Table 1, and the price comparison can not take into account these benefits. 272. Despite the co-ordination in pricing, PTA has not found adequate proof of the existence of a credible set of retaliatory mechanisms that limits the companies’ competition in prices or services. First of all, this trend has not existed for a long enough period of time, in PTA’s opinion. Second, it appears that the price for mobile phone services in Iceland is not much higher than it is elsewhere in Europe; therefore, it is not possible to draw the conclusion that the companies are maintaining abnormally high prices. Thirdly, the entry of SKO into the mobile phone market can be considered as an attempt by Og Vodafone to increase its market share and improve its position in the market since both companies are owned by Dagsbrún hf., and SKO is reselling Og Vodafone’s mobile services. In PTA’s opinion this does neither indicate co-ordination of behaviour nor has Síminn reacted to this new party with similar method as one might consider natural if there exists an actual retaliatory mechanisms. 273. Considering the foregoing, PTA is of the opinion that no retaliatory mechanisms exist on the mobile phone market and SKO’s entry undermines the likelihood of tacit agreement between Og Vodafone and Síminn to keep status quo. Lack or reduced scope for price competition95 274. An examination of the retail prices for GSM mobile services shows that prices were rather stable from August 2002 to August 2005; cf. the discussion in Section 5.2.5 and in Annex B to the draft decision on Market 15. Og Vodafone’s prices have changed more than Síminn’s prices, however, especially for subscriptions, because Og Vodafone’s prices have increased and decreased in response to Síminn’s prices. In general, Og Vodafone’s prices have tended to increase and decrease in order to approach Síminn’s prices. Limited price competition or comparable prices could indicate co-ordinated behaviour on the part of the operators involved. On the contrary, there is considerable competition centring on the companies’ image, as well as on subscription options and free minutes for calls placed to specific numbers. Both Síminn and Og Vodafone offer GSM subscription options that provide users with the option of free minutes for calling specific numbers within the same network or company. In PTA’s opinion, this arrangement could prove unclear for some users and 94 This criterion corresponds to “retaliatory mechanisms” in Paragraph 98 in the ESA Guidelines. 95 This criterion corresponds to “lack or reduced scope for price competition” in Paragraph 98 in the ESA Guidelines.

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could reduce their options for using it to reduce their phone costs. In addition, this sort of arrangement is of unequal benefit to users. In PTA’s estimation, the entry of independent service providers, resale agents, or virtual network operators could increase price competition from current levels. 275. There is no indication that retail prices on the mobile phone market are or have been considerably above the cost prices. International price comparison reveals that prices in Iceland are still among the lowest in Europe. Although national price comparison reveals limited price competition between the companies, PTA is of the opinion that this is not sufficient to indicate co-ordinated behaviour. On the other hand, PTA is of the opinion that the retail price of mobile phone services cannot continue to develop in the manner that it has developed because if it did so, it would support the suspicion of co-ordinated behaviour on the part of the companies. Both Síminn and Og Vodafone have the option of engaging in price competition, but it must be considered as fact that Og Vodafone would find such competition more difficult to bear because of Síminn’s relative financial strength, especially in electronic communications, as is shown clearly in Table 4. 276. The average monthly use of mobile phones, as measured in minutes per user, is generally less here than in Finland, France, Ireland, and Great Britain, for example, but more than in Germany; see Table 7. A lower rate of mobile phone use in this country in comparison with other countries indicates that there is room to increase mobile phone use considerably from current levels. Increased use could conceivably be achieved through a reduction in per-minute prices. Table 7 Average monthly mobile phone use, measured in minutes per user. Finland 247 France 213 Ireland 198 Great Britain 144 Iceland 140 Germany 74

Source: Global Wireless Matrix, Q204, Merrill Lynch/ComReg data. Post and Telecom Administration. Summary 277. In the opinion of PTA, Síminn’s position on the mobile phone market is much stronger than Og Vodafone’s position. There are many indications that Síminn has significant market power in the mobile market. Furthermore, it is appropriate to reiterate that Og Vodafone is dependent on Síminn in many instances; for example, for national roaming, leasing of local loops, leased lines, and utilisation of infrastructure. The range of Síminn’s GSM network is also more than that of Og Vodafone’s network, and this situation is unlikely to change significantly in the near future. 278. As the above discussion indicates, there are numerous factors that indicate that the conditions for joint dominance exist in the GSM mobile market: for example, a high level of market concentration, a mature market, declining demand, mature technology, high entry barriers, a lack of potential competition, and lack of countervailing buying power. As has been revealed, markets characterised by the above criteria are relatively conducive to co-ordinated behaviour on the part of the

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operators concerned. Many of these criteria are an unavoidable consequence of the situation that results from the smallness of mobile phone market, the small population of Iceland and the maturity that demand levels and the technology in question have achieved, both in this country and elsewhere in Europe. In view of this, PTA is of the opinion that these criteria are less important than those that tend to be under the control of the companies in question or those that result from the companies’ position on the market. 279. The criteria for joint dominance include an assumption that co-ordinated behaviour between undertakings has been of some duration. In this context, it is necessary to consider the fact that the merger of the undertakings that formed Og Vodafone occurred in the latter part of the year 2002, which means that the company has operated in its present form for just over 3 years. In the opinion of PTA, those predecessors of Og Vodafone that offered mobile services — that is, Íslandssími and Tal — could not have been in such a position that either or both could have been considered to have joint dominance together with Síminn.96 280. Though PTA is not bound by the decisions of the Competition Authority and the Competition Council in its analyses of electronic communications markets, the methods that the Administration is to use in defining markets and assessing significant market power are based on the fundamental principles of competition law. Therefore, it is not possible to ignore the fact that the Competition Council has confirmed that Síminn has a dominant market position in the GSM mobile phone market; cf. inter alia Competition Council decision no. 40/2003 and no. 21/2005. It is clear that Síminn cannot possess significant market power both by itself and jointly with other operators. 281. It is the opinion of PTA that a shortage of effective competition in the relevant market does not result from joint dominance among the existing operators. PTA is of the opinion that there is no decisive information to indicate that the two companies operate in a co-ordinated manner. As things stand, there is insufficient information to indicate that the two companies behave toward other electronic communications undertakings, customers, or consumers as though they were a single undertaking since few important criteria for joint dominance are not satisfied. The difference in Síminn and Og Vodafone’s market share is 30 percentage points, which is considerable, in the opinion of PTA, and prevents the fulfilment of the criterion concerning similar market share. The cost structure of the companies is not similar and transparency in the market is not sufficient to conclude that the companies have joint dominance. PTA is of the opinion that no retaliatory mechanisms exist on the mobile phone market and SKO’s entry undermines the likelihood of tacit agreement between Og Vodafone and Síminn to keep status quo. The lack of decisive indicators of co-ordinated behaviour on the part of the two companies creates a legal uncertainty that recommends against drawing the conclusion that joint dominance exists in the relevant market. 282. On the other hand, the developments in retail pricing of GSM mobile phone services is a cause for concern, as is the fact that independent service providers, resale agents, and virtual network operators do not exist in the Icelandic mobile market,

96 See PTA decision of 15 July 2003 on the request from Iceland Telecom on Og fjarskipti hf.’s market share.

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whether this is due to lack of interest or reluctance on the part of existing operators. It is clear, however, that neither Síminn nor Og Vodafone has negotiated with IMC Ísland for national roaming in their networks, despite IMC’s requests for such negotiations.97 PTA will follow developments in these matters closely in coming months and will take action if there are no changes. 283. Considering the foregoing, PTA is of the opinion that there is insufficient reason to come to the conclusion that joint dominance exists in the relevant market at this time. 6.2.1.2 Assessment of significant market power 284. PTA wishes to emphasise that it is significant market power that is the appropriate measure and not abuse of a dominant position. Thus the consideration of whether a dominant position has been abused or not is not the fundamental point of the market analysis. This does not mean that the behaviour of operators in the market has no bearing on an assessment of significant market power, but it is not necessary to demonstrate that market power has been abused in order to come to the conclusion that an undertaking has SMP. 285. In the opinion of PTA, the conclusions in Section 5 and the above discussion indicate that Og Vodafone does not have significant market power in the relevant market. The company’s market share in number of customers is 35%, which is too low for a designation of SMP, especially in view of the fact that Síminn has a substantially larger market share. Neither do trends in the two companies’ market share indicate, under current conditions, that Og Vodafone’s market share will increase significantly in coming years. 286. Following what was stated in chapter 6.2.1, it is the opinion of PTA, that most factors indicate that Síminn has significant market power. Síminn’s large market share is salient among these factors, as the company has a market share of 65% as measured in number of customers. Figures from year-end 2005 show that Síminn’s market share in number of customers rose by 0.5% in 2005 and that its market share has remained virtually unchanged for the past 3 years. The disappearance of operators from the relevant market — that is, the companies that merged to form Og Vodafone and others that abandoned plans to offer mobile phone services, see Figure 7 — indicates strongly that Síminn has a significant market power in comparison with other undertakings. PTA believes that the merger of the three companies to form Og Vodafone is among other a result of Síminn’s superior position in the mobile phone market. Furthermore, the fact that IMC Ísland was forced to conclude an international roaming agreement in order to offer mobile phone services in Iceland indicates that both Síminn and Og Vodafone are misusing their market power, as neither company has, so far, been willing to negotiate with IMC Island for national roaming. 287. It is difficult to predict how the companies’ market share might develop over the next few years because it has remained relatively stable for the past 3 years. It is too early to draw any conclusion of what will be the impact of SKO’s entry in to the

97 See the discussion in Section 5.1 of Annex C concerning the results of the PTA consultation on the draft analysis of Market 15.

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mobile phone market. It is PTA’s opinion that access to established mobile networks — for example, in the form of national roaming, resale, virtual network, co-location, and joint utilisation — could be an important element in diminishing the entry barriers on the mobile phone market and generating some change in existing operators’ market share. It is worth mentioning that independent service providers operate in many competitive mobile phone markets in Europe, in some instances without the involvement of regulatory authorities; therefore, PTA believes it is unlikely that such service providers could not operate on the Icelandic market, even though it were considered a competitive market. In the estimation of PTA, the results of the market analysis and the oligopolistic nature of the Icelandic mobile phone market indicate that competition on the relevant market is not sufficiently effective. The same applies to the retail market. PTA is of the opinion that competition on the mobile phone market could become more effective if the conditions were created for more service-based competition. 288. Based on these factors and the results of the analysis of the relevant market, it is PTA’s assessment that Síminn possesses significant market power in the wholesale market for access and call origination on public GSM mobile networks. In view of this, PTA intends to designate Síminn as having significant market power in the wholesale market for access and call origination on its GSM mobile network. It is also PTA’s conclusion that Og Vodafone no longer possesses significant market power in the relevant market. 6.2.2 The market for access and call origination on the NMT mobile network 289. Síminn is the only undertaking in Iceland that operates an NMT mobile network and offers NMT services to end users. Thus Síminn has a 100% market share in NMT mobile phone services; this market share has remained unchanged since 1986, when the company began offering these services. This large market share and Síminn’s monopolistic position indicate that Síminn has significant market power in the relevant market for access and call origination on its NMT mobile network. 290. It is PTA’s assessment that the relevant market is characterised by unequivocal entry barriers and a lack of potential competition, and that it is not foreseeable that this situation will change, especially in view of the fact that the operation of the NMT network will likely cease in a few years. The price for use of NMT mobile phones is high in comparison with the price for use of GSM phones and fixed-line phones. The number of users of the NMT network is dropping year by year, which means that the cost for network operation is distributed among fewer users; therefore, it is unlikely that the price will drop. It is PTA’s opinion that countervailing buying power exists neither in the retail market nor in the wholesale market for NMT mobile phone services. 291. In the opinion of PTA, the above results indicate that Síminn possesses significant market power in the wholesale market for access and call origination on the NMT mobile network and can, to a large degree, operate without concern for customers and other electronic communications companies. In view of this, PTA intends to designate Síminn as having significant market power in the wholesale market for access and call origination on its NMT mobile network.

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7 Imposition of remedies 7.1 Remedies — general 292. If market analysis reveals that there is not effective competition on the relevant market and that one or more electronic communications undertakings on that market possess significant market power, PTA is required to impose at least one specific obligation on the operators designated with SMP.98 293. If PTA has previously imposed specific obligations on operators pursuant to the previous Telecommunications Act, these shall be reviewed and either maintained, amended, or withdrawn in accordance with the results of the market analysis. 294. Article 27 of the Electronic Communications Act states that when an electronic communications undertaking is designated with significant market power, PTA may impose on it obligations concerning transparency, non-discrimination, accounting separation, open access to specific network facilities, price controls and cost accounting, as necessary for the purpose of promoting effective competition.99 These obligations are described more fully in Articles 28 – 32 of the same Act. 295. The obligations that may be imposed on undertakings in retail markets include access to leased lines at a cost-oriented price, cf. Article 33 of the Electronic Communications Act, and carrier selection and pre-selection, cf. Article 53 of the same Act. 296. In selecting obligations to be imposed in order to solve given competition problems, it is necessary to use certain fundamental principles as guidelines.100 All remedies that are imposed shall be based on the nature of the defined competition problem and shall be designed to solve it. They shall be transparent, justifiable, reasoned, and in line with the objectives they are designed to achieve; that is, to promote competition, contribute to the development of the internal market, and safeguard users’ interests. Obligations must be proportionate and may not impose heavier burdens on operators than is considered necessary. 297. In the previously mentioned ERG report on remedies, emphasis is placed on infrastructure-based competition through the restructuring of electronic communications facilities or networks where this is considered desirable. In such cases, imposed obligations should promote such build-up. When infrastructure-based competition is not considered desirable due to significant and constant economies of scale and scope or other barriers to entry, it is necessary to guarantee sufficient access to electronic communications networks and equipment at the wholesale level. In this context, it is necessary to ensure two things: first, to encourage service-based competition; and second, to guarantee a sufficient fee for access to existing electronic communications networks, thus providing an incentive for further investment in such networks, as well as renovation and maintenance of these networks.

98 See Paragraphs 21 and 115 in the Guidelines. 99 See Articles 9 – 14 of the Access Directive. 100 See Article 8 of the Framework Directive.

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298. For the long term, service-based competition that has its foundation in steered access to a cost-oriented price can be a tool for generating competition through the restructuring of electronic communications networks. This refers to that which is called “the investment ladder,” and its objective is to create conditions that make it possible for new operators to build up their electronic communications networks step by step. 299. In selecting the obligations that are best designed to promote competition on the relevant market, it is possible to consider the position that would exist if obligations were not imposed on undertakings on the relevant market and whether it would be sufficient to use competition legislation alone to guarantee active and effective competition. 7.2 Remedies in effect pursuant to the previous Telecommunications Act 300. As has been stated, both Síminn and Og Vodafone were designated as having significant market power in the market for mobile networks and mobile phone services, as well as in the interconnection market, pursuant to the previous Telecommunications Act, no. 107/1999. The designation of mobile operators with SMP in the interconnection market pursuant to the previous Telecommunications Act is accompanied by the following obligations:

• The operators shall comply with all realistic and feasible requests for access to network connection points, including network connection points other than those offered to the majority of users.

• The operators shall guarantee non-discrimination with respect to the interconnections that they offer and shall grant companies that are considering interconnection access to all necessary information concerning both interconnection and the technological requirements.

• The fees charged by the operators for interconnection shall be transparent and based on the cost for network establishment and operation, as well as a reasonable return on capital employed on the basis of the cost accounting that shall be maintained.

301. These remedies do not entail the obligation to sell access and call origination at the wholesale level. However, it should be pointed out that, pursuant to Article 35 of the Electronic Communications Act, mobile phone undertakings are under a general obligation to grant other mobile phone undertakings roaming access to public mobile networks. This obligation affects all mobile phone operators that own mobile networks and is not limited to undertakings that have been designated as having significant market power. Because of this obligation, Síminn sells Og Vodafone access to a part of its GSM distribution system on the basis of a roaming agreement. An agreement for national roaming between Síminn and Og Vodafone has been in effect since 2 March 2005. 302. The above-mentioned remedies primarily affect the market for voice call termination in individual mobile networks (Market 16), which has already been analysed and the appropriate remedies re-evaluated. Other obligations have been imposed on Síminn on the basis of the company’s designation as having significant

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market power in other electronic communications markets pursuant to the previous Telecommunications Act; these obligations will be re-evaluated when those markets are analysed. 7.3 Competition problems 7.3.1 General 303. The term competition problems refers to conditions that are created in a market as a result of the dominant position held by one or more undertakings and the measures adopted by dominant undertakings in order to force competitors out of the market, hinder potential competition from entering the market, or abuse their position vis-à-vis consumers. The conditions that can be created by an undertaking with a dominant position are discussed above in the market analysis. The following discussion centres on the various measures that a dominant undertaking can adopt in order to force its competitors out of the market or hinder potential competition. 304. A dominant undertaking in the wholesale market could deny access or refuse business from undertakings that operate in the wholesale or retail market and compete with its retail operations. Refusal to grant access or rejection of business can actually close markets — for example, in cases where the wholesale product is a necessary supply for the retail market — and can, in the end, lead to higher expenses for the competitor. Barriers to entry can also appear in forms other than direct rejection; e.g., as unfair terms or prices. 305. Dominant undertakings could also abuse their position through predatory pricing — that is, by pricing their products below cost — and thereby have a detrimental effect on the competition. In this manner, an undertaking could conceivably force smaller competitors out of the market and/or keep potential competitors from entering it. 306. Even when it is required to grant access at a cost-oriented price, a dominant undertaking can discriminate against other operators to the advantage of its own operations through measures other than pricing; i.e., by withholding information, discriminating with regard to quality, using delaying tactics, setting unfair terms, employing strategic product design, and misusing information for their own benefit. These factors can affect the quality of competitors’ products or services, raise their expenses, or hinder sales. 307. Further discussion of obligations can be found in the previously mentioned ERG report on the remedies that can be imposed on electronic communications undertakings with SMP and in PTA’s summary of that report.101 7.3.2 Competition problems — GSM mobile networks 308. As is revealed in Section 6.2.1.2, the results of the market analysis and the oligopolistic nature of the Icelandic GSM mobile phone market indicate that competition in that market is not sufficiently effective. There are no independent

101 See www.pfs.is: Telecom affairs/Market analysis/Market analysis and obligations.

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service providers or virtual network operators in the GSM mobile market, and BT GSM, the only independent resale agent that has entered the market, has ceased operations. There is little likelihood that new undertakings will commence the build-up of a comprehensive GSM mobile network, and to date no contractual agreements have been made for wholesale access to existing mobile networks, with the exception of the national roaming agreement between Síminn and Og Vodafone and the resale agreement between Og Vodafone and SKO. However, there is no indication that comparable resale agreement is available for others and, so far, IMC has been having difficulties trying to negotiate with Síminn and Og Vodafone for national roaming. 309. The primary result of the market analysis is that the relevant market is characterised by Síminn’s strong advantage in the market. This can be traced to the fact that Síminn is the former exclusive licence holder and operated as a monopolist in the electronic communications market in this country until the year 1998. Síminn was also first to offer mobile phone services and enjoys the benefit of that head start. The disappearance of operators from the mobile market — that is, the companies that merged to form Og Vodafone — also indicates Síminn’s greater market power in comparison with other undertakings. Furthermore, the fact that IMC Ísland was forced to conclude an international roaming agreement with Og Vodafone in order to offer mobile phone services in Iceland indicates that both Síminn and Og Vodafone are misusing their market power, as neither company has, so far, been willing to negotiate with IMC Ísland for national roaming. It is PTA’s opinion that Síminn and Og Vodafone’s lack of co-operation with IMC’s requests to negotiate for national roaming indicates that the companies are hindering access to their mobile networks and are limiting the possibilities for further competition in the mobile phone market.102 310. Responses sent by Og Vodafone also indicate that it has proven difficult for new parties to obtain the legally stipulated access to Síminn’s electronic communications network and that prices have been high. In support of its statements, Og Vodafone mentions the difficulties it experienced, at the beginning of competition, in gaining access to Síminn’s masts and infrastructure. Og Vodafone maintains that many of the competition problems mentioned in the ERG report on remedies have emerged in the relevant market in the company’s interactions with Síminn; for example, withholding information, delaying tactics, unfair or inappropriate terms, and predatory pricing. 311. Another competition problem that has existed in the relevant market is the 12-month contractual obligation for mobile phone users, as well as the sale of subsidised mobile phones that are locked for use in other systems. Both companies previously had such binding contracts in their mobile phone operations but have abandoned the practise. Today all of the companies’ mobile telephones are open except those sold through the “Vodafone Simply” arrangement offered by Og Vodafone.103 312. The analysis of the relevant market has revealed that there are significant entry barriers in the mobile phone market and that there is a shortage of potential competition. It can be detected that the market has achieved certain saturation and that

102 See also the discussion of IMC in Section 5.1 of Annex C to the draft decision on market 15. 103 Information obtained from the Internet websites of Og Vodafone and Síminn on 16 February 2006.

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shifts in market share between the two companies have slowed since the year 2002, when the number of service providers in the market diminished. The market is characterised by vertical integration in the operations of both Síminn and Og Vodafone, which meets the companies’ needs from the wholesale level to the retail level. There is limited price competition between the companies despite there being scope for it, both regarding the companies’ financial strength and the possibility of increasing consumer use of mobile phones. 313. It has been revealed that users’ mobility and price awareness are limited. Complicated price lists, non-transparent prices, locking of phones, contractual binding, and other factors can affect this. As transparency in pricing and user price awareness increase, it can be assumed that buying power will begin to affect competition in the retail market, generating increased mobility and providing constraints on the operators. 314. In the opinion of PTA, there is a significant likelihood that Síminn will refuse to sell other undertakings wholesale services for access and call origination or will hinder such access in order to protect its own retail operations from competition if appropriate remedies are not imposed on the company. In this context, it is necessary to impose on Síminn an obligation to grant access and a pricing obligation for access services, as well as an obligation to practise non-discrimination. There is also the likelihood that, with increased competition and the entry of new parties into the mobile market, Síminn will adopt various measures in order to protect its own retail operations; e.g., by delaying contract negotiations or services, withholding or hiding information that is necessary to those wishing to purchase wholesale services from Síminn, setting unfair terms, or discriminating with regard to quality. In view of this, PTA considers it necessary to impose appropriate obligations on Síminn in order to reduce the company’s possibilities for engaging in such anti-competitive behaviour. 315. PTA is of the opinion that competition in the GSM mobile phone market could become much more effective if the conditions were created for more service-based competition. The access of independent service providers to existing mobile networks on fair terms is an auspicious means of stimulating competition and increasing consumer options. Increased service-based competition would probably improve mobile phone services and reduce prices to end users, especially prices for expensive services such as international voice calls; however, it would probably stimulate competition for the build-up of an electronic communications infrastructure only to a limited degree. However, under current conditions PTA considers it appropriate to promote increased service-based competition in the mobile market. 316. In PTA’s estimation, the situation in the GSM mobile phone market will not change unless there is active promotion of increased service-based competition. In this context, PTA considers it important to facilitate the entry of independent service providers into the market. 7.3.3 Competition problems — NMT mobile network 317. As has been revealed, Síminn is the only operator in the market for access and call origination on the NMT mobile network and therefore acts as a monopolist. This situation has remained unchanged since 1986, when the company began offering

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NMT mobile services. The NMT market is characterised by unequivocal entry barrier and a shortage of potential competition, and it is not foreseen that this will change. There is no real wholesale market in existence, though several parties have requested wholesale access to Síminn’s NMT network. It is PTA’s opinion that countervailing buying power exists neither in the retail market nor in the wholesale market for NMT mobile phone services. 318. The relevant market is limited by several factors that affect the possible means of promoting competition. In recent years, the use of NMT mobile phones has been discontinued in most countries where NMT networks existed, and it is extremely likely that the network in Iceland will also be closed in a few years. It can be assumed that it is costly to maintain such a mobile network for a group of subscribers that is already small and is decreasing in size every year. The supply of NMT phones is also limited, and such phones are usually more expensive than most types of GSM phone. Furthermore, it appears that the manufacture of new types of NMT phones has ceased. 319. The above limitations mean that it is unrealistic to aim at the build-up of another NMT mobile network. The only possibility is to open the way for wholesale access to the existing NMT network. 7.4 Proposed remedies pursuant to the new Electronic Communications Act 7.4.1 Obligations in the market for access and call origination on GSM mobile networks 320. In its analysis of the wholesale market for access and call origination on GSM mobile networks in Iceland, PTA came to the conclusion that competition on the GSM mobile market is not sufficiently effective and that Síminn has significant market power in the relevant market. Section 7.3.2 discusses the competition problems in the relevant market, and this section contains PTA’s recommendations for obligations that should be imposed on Síminn in order to solve these competition problems and pave the way for more effective competition on the relevant market. The obligations have the primary objective of increasing competition on the GSM mobile market and creating conditions conducive to the entry of independent service providers. 321. Consider g the competition problems discussed in Section 7.3.2, PTA is of the opinion that the following obligations are best designed to address the conditions in the relevant market:

• Access to the GSM network if reasonable demand is expressed. • Non-discrimination. • Transparency. • Accounting separation. • Price controls.

322. In the opinion of PTA, these obligations are consistent with the objectives set forth in the Framework Directive, the Access Directive, and the provisions of the

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Electronic Communications Act, and are appropriate for the time horizon of the market analysis. Below is a more detailed discussion of the remedies described above and the obligations that PTA intends to impose on Síminn in the relevant market. 7.4.1.1 Access to the GSM mobile network 323. Article 28, Paragraph 1 of the Electronic Communications Act states that PTA may instruct electronic communications undertakings with significant market power to meet normal and reasonable requests for open access to public electronic communications networks, network elements, and associated facilities under certain conditions prescribed by the Administration. Paragraph 2 of the provision contains a list of the requirements that may be imposed on electronic communications undertakings with significant market power on the basis of the obligation to grant access. 324. In imposing an obligation to grant access, it is necessary to consider whether the access in question encourages investments in the network and promotes innovation, efficiency, and sustainable competition. Article 28, Paragraph 3 of the Electronic Communications Act states that, in deciding to impose obligations pursuant to Paragraph 1, PTA shall consider whether it is:

a. technically and financially realistic to use or install competing facilities in view of market developments and the nature and type of interconnection and access involved,

b. feasible to provide the access proposed, c. justifiable, in view of the original investment by the owner of the facility

and the risk taken in making the investment, d. to the advantage of competition in the longer term, e. inappropriate, in view of intellectual property rights, f. conducive to increasing the supply of services.

325. Because of Síminn and Og Vodafone’s strong position in the market, it will likely be difficult for new operators to enter the mobile phone market. There are limitations inherent in the current situation, where 95% of all Icelanders own a mobile phone. The build-up of a new mobile network entails significant investment costs, and it is PTA’s opinion that, given the current market conditions in Iceland, it would be difficult to engage in the set-up and operation of new mobile phone stations or networks. 326. In the opinion of PTA, the above-described duopolistic conditions will continue to reign in the market for access and call origination in GSM mobile networks unless an obligation to grant access is imposed on Síminn with respect to its GSM network. PTA is of the opinion that this is in the interest of consumers because it could encourage the entry of independent service providers — resale agents, virtual network operators, or network operators — into the mobile market. 327. It is assumed at the outset that the operators themselves will negotiate in good faith concerning access to the mobile network. Experience has shown, however, that it is difficult to negotiate for wholesale access to mobile networks unless there is a clear legal obligation such as that pertaining to roaming agreements; cf. Article 35 of the Electronic Communications Act. Despite this, however, and despite repeated

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attempts, IMC Ísland has not been successful in negotiating for national roaming with either Síminn or Og Vodafone.104 In view of this, and considering the above-described competition problems in the GSM mobile market, PTA considers it necessary to impose an access obligation on Síminn in order to promote competition and to facilitate the entry of new undertakings into the market. Such an obligation means that Síminn shall comply with reasonable requests for wholesale access to its GSM mobile network from the date that the decision regarding such access is publicised. 328. In PTA’s estimation, it is not possible to ensure that it will be possible to negotiate with Síminn for access to its GSM network and facilities without the imposition of an access obligation on the company. In this way, new and established operators can be sure that Síminn cannot refuse them reasonable and necessary wholesale access to its mobile network and services. It is necessary for new operators to obtain access to Síminn’s GSM mobile network in order to make competition in the build-up of electronic communications networks possible. Co-location and joint utilisation reduce the cost of building up a new mobile network, and access for national roaming gives new parties the possibility of offering mobile phone services with sufficient distribution without their having to build up a mobile network that extends to the entire country. Such forms of access reduce direct barriers to entry into the market and encourage potential service providers to increase their investments. 329. Article 28, Paragraph 2 of the Electronic Communications Act lists several types of access that may be required of electronic communications undertakings with significant market power. This list of types of access is not exhaustive, and new types could be added, for example, because of technological developments, the entry of new services, or the build-up of a third-generation mobile phone network. Considering this, and considering the forms of wholesale access to mobile networks that are possible, cf. Section 2.1, PTA considers it inappropriate to limit the access obligation to one, or only a few, specific forms of access. PTA is of the opinion that this could reduce the effectiveness of the access obligation. In view of the diversity of the mobile phone market and the various needs of the parties that might conceivably seek access, PTA is of the opinion that it is not timely to define too specifically what access should be granted and how. All forms of wholesale access that it is reasonable to grant and that can promote competition in the mobile phone market fall within the access obligation that is imposed on Síminn in the relevant market. 330. As is stated previously, it is assumed that Síminn and the parties requesting wholesale access to Síminn’s GSM mobile network will negotiate themselves. Should such negotiations for network access prove unsuccessful, it is possible to refer the matter of dispute to PTA. PTA will examine cases individually as they arise. However, it is not clear that all requests for access will be deemed reasonable. The following discussion of the most common forms of access is included in order to give Síminn and other parties a general frame of reference. It should be noted that this is not an exhaustive list. 331. PTA is aware that terms and conditions, including price, are a part of every access agreement, and are extremely important factors in negotiating for access. These criteria are addressed later in this document in the discussion of appropriate

104 See the discussion in Section 5.1 of Annex C to the draft decision on market 15.

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remedies in support of the obligation to grant access. In the estimation of PTA, the access obligation is the cornerstone of the resolution of many of the competition problems that exist in the mobile phone market. The obligation to grant access is not sufficient in and of itself, however, to guarantee that terms and conditions will be fair and realistic. In order to ensure this, further obligations are necessary. National roaming 332. Pursuant to Article 28, Paragraph 2, Subparagraph (e) of the Electronic Communications Act, it is authorised to require that an electronic communications undertaking with significant market power offer roaming in its mobile networks in order to guarantee interoperability of services to users. 333. In the opinion of PTA, it is very important to impose on Síminn an obligation to respond to reasonable requests from other mobile network operators for national roaming in its GSM mobile network. Despite the fact that mobile phone undertakings are under a general obligation to grant roaming access to their mobile networks pursuant to Article 35 of the Electronic Communications Act, and despite the fact that Síminn and Og Vodafone have negotiated for national roaming on the basis of that obligation, PTA considers it very likely that Síminn will attempt to hinder roaming access or will refuse to grant such access to its mobile network if an obligation to grant national roaming access in the company’s GSM network is not imposed based on the authority in Article 28, Paragraph 2, Subparagraph (e) of the Electronic Communications Act. In support of this, PTA makes reference to IMC Ísland’s repeated yet unsuccessful attempts to negotiate with both Síminn and Og Vodafone for national roaming. 334. PTA is of the opinion that access for national roaming is one of the fundamental preconditions for competition with Síminn and Og Vodafone, as it is important for mobile phone companies to be able to offer services all over the country. National roaming access is also an important precondition for the possible built-up of other mobile networks in this country and for the introduction of infrastructure-based competition. National roaming could reduce the financial risk taken on by new parties in the market and could be conducive to increased competition in the mobile phone market. 335. Even though so-called third-generation (3G) mobile networks have not been built in Iceland, it can be assumed that this build-up will commence within a few years. It will be necessary for such 3G mobile phone undertakings to gain access to existing 2G mobile networks so that the 3G operators’ customers can roam in 2G networks while building up the new system. The entry of 3G into the mobile phone market offers the potential for increased competition, but it is difficult to predict when this will happen. Experience from other European countries shows that 3G mobile phone companies will need a long time to gain market share in the GSM mobile market. The Act on Third-Generation Mobile Phones, no. 8/2005, includes a requirement for minimum promulgation of services, cf. Article 3. Such a requirement will possibly prove onerous for those wishing to apply for frequencies for 3G mobile networks, and it can be assumed likely that existing mobile network undertakings will be in an advantageous position with regard to such applications.

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336. As regards agreements concerning national roaming, the fundamental principle will be that the parties shall negotiate for such access themselves. No further requirements are set with regard to minimum build-up of the mobile network other than those specified in the frequency licence. The price for roaming is a matter for negotiation between the parties, but if such a case should be referred to PTA, it will be handled in a manner consistent with the discussion in Section 7.4.1.5. 337. PTA considers it appropriate to bear in mind a new provision on roaming agreements, which was added to Article 35 of the Electronic Communications Act with the passing of the Act Amending the Electronic Communications Act, no. 78/2005. According to this amendment, a decision on a roaming agreement will not be applied to access to a GSM mobile station that is set up for additional promulgation of the mobile network until two years after the station is brought into use. The comments to the legislative bill that was enacted as Act no. 78/2005 includes a statement about this provision to the effect that it is clear that the current provision concerning roaming will reduce profitability even further and will diminish the desire to build up networks. An attempt is made to reduce these negative effects with the two-year adaptation period or head start for the electronic communications undertaking that is willing to incur the build-up expense for further distribution of its GSM electronic communications network. In the opinion of PTA, this new provision also applies to the imposition of the obligation to offer roaming access pursuant to Article 28, Paragraph 2, Subparagraph (e). PTA is of the opinion that the above rationale also applies when roaming access is granted on the basis of the authority in Article 28, Paragraph 2, Subparagraph (e). Síminn is therefore authorise to exercise this exemption, no matter whether an agreement for national roaming in the company’s mobile network is concluded on the basis of Article 28, Paragraph 2, Subparagraph (e) of the Electronic Communications Act or on the basis of Article 35 of the same Act. 338. As has previously been revealed, it is also possible to request roaming access on the basis of Article 35 of the Electronic Communications Act, but this provision contains a general obligation that affects all mobile phone undertakings that own mobile networks. The national roaming agreement between Síminn and Og Vodafone was made with reference to Article 35 of the Electronic Communications Act. The imposition of an obligation to grant access for national roaming does not affect the national roaming agreements that have already been made. PTA also takes the view that Síminn may not withdraw access for national roaming that has already been granted. Co-location or joint utilisation 339. Pursuant to Article 28, Paragraph 2, Subparagraph (d) of the Electronic Communications Act, it is permissible to require that an electronic communications undertaking with significant market power offer co-location or joint utilisation, including joint utilisation of cable ducts, buildings and structures, or masts. 340. Furthermore, Article 25 of the Electronic Communications Act contains a general provision stipulating the obligation to negotiate for co-location or other types of joint utilisation of infrastructure or land or real estate holdings; this is comparable to the provisions contained in Article 51 of the previous Telecommunications Act, no. 107/1999.

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341. It could prove very costly for network operators in the mobile phone market to build up the substantial infrastructure that is necessary in order to offer sufficient network promulgation. Such expenses are, in many instances, non-recoverable. For such parties, joint utilisation could diminish potential competition barriers and reduce additional costs; this reduction is due to the fact that facilities have been built in all main stations (where there is access to electricity, radio infrastructure, etc.). 342. Furthermore, it is desirable from a macroeconomic point of view to utilise such facilities jointly, including situations where it is possible to utilise the excess capacity and economy of scale of existing mobile networks. The environmental point of view also weighs heavily here, as it is desirable that new parties be able to install their radio equipment on masts that have already been set up if this is possible. 343. Síminn and Og Vodafone practise joint utilisation of infrastructure, such as buildings and masts, on the basis of Article 25 of the Electronic Communications Act. Despite this fact, PTA considers it necessary to impose this obligation on Síminn on the basis of Article 28, Paragraph 2 of the same Act because there is now a greater likelihood that the company will attempt to limit new parties’ access to its infrastructure in order to protect its own retail operations. Moreover, the obligation to practise co-location or joint utilisation as stipulated in Article 25 is limited with specific conditions that are listed in Article 25, Paragraph 2. This provision refers to an electronic communications undertaking that has been granted the right to utilise land for electronic communications infrastructure and facilities, while environmental, health, and security considerations hinder other undertakings from building up comparable infrastructure. The obligation to offer co-location or joint utilisation pursuant to Article 28, Paragraph 2, Subparagraph (c) of the Electronic Communications Act is not subject to limitations other than those stipulated in Article 28, Paragraph 3; therefore, the provision is not comparable to Article 25. In addition, Article 28 gives the Administration more authority to set terms for access than does Article 25. 344. In the opinion of PTA, the obligation to offer joint utilisation or co-location is reasonable and should not represent substantial financial burdens for Síminn; on the contrary, it should create an opportunity for the company to utilise its excess capacity. Furthermore, the payments for such access give Síminn the possibility of recouping a portion of its investment in the network. Should the obligation regarding joint utilisation or co-location require changes or expansion, it must be assumed that in most instances this is reasonable and fair. In those instances, however, it is appropriate that the party requesting access bear its share of the expenses. 345. The obligation to offer joint utilisation and co-location is imposed on Síminn with respect to the infrastructure that the company controls. If the parties concerned are unsuccessful in reaching an agreement concerning access for joint utilisation or co-location, PTA may determine appropriate and fair prices and terms for such access. Resale 346. Pursuant to Article 28, Paragraph 2, Subparagraph (b) of the Electronic Communications Act, it is permissible to require that an electronic communications

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undertaking with significant market power offer certain services at the wholesale level, which a third party will then resell. 347. This type of access gives a service provider the possibility of reselling mobile phone services that he purchases at the wholesale level from a mobile network operator. When this involves simple resale under an independent brand name, the service provider does not own any independent mobile network infrastructure and purchases virtually all support services at the wholesale level; see further discussion in Section 2.1. 348. This type of wholesale access is common in other countries, and it could be considered that the operation of the mobile phone company SKO falls under this description. The previous collaboration agreement between BE and Íslandssími involved simple resale of subscriptions and pre-paid phone cards from Íslandssími under the name of BT. 349. The possibility of purchasing wholesale mobile phone services for resale is a necessary element in promoting service-based and price-based competition. It gives the service provider the option of providing mobile phone services without building up its own network. In the opinion of PTA, the obligation to grant resale access is reasonable and creates an opportunity for Síminn to utilise its excess capacity. Virtual network access 350. Pursuant to Article 28, Paragraph 2, Subparagraph (h) of the Electronic Communications Act, it is permissible to require that an electronic communications undertaking with significant market power grant access for virtual networks. Subparagraph (c) of the same Article also states that it is permissible to require that electronic communications undertakings authorise open access to technical interfaces, protocols, or other technology that is necessary to guarantee interactive services or virtual network services. 351. In cases involving pure virtual network access, the virtual network operator controls the system that is necessary for interconnection and roaming in other operators’ networks but does not own a distribution system.105 The technical implementation could be substantially similar to that for national roaming, except that the virtual network operator does not operate a distribution system; see also Section 2.1. A virtual network operator can have its own IMSI code (International Mobile Subscriber Identity code) and its own network code (MNC), and can offer for sale its own SIM cards and can service end users in the same way that a vertically integrated mobile phone undertaking does. 352. This form of access requires a certain amount of investment in the operator’s own system, but this is much less than is necessary when an operator builds up an independent distribution system. Virtual network access is therefore an economical option for those wishing to build up their own mobile phone operations in sensible steps (the ladder of investment). In this context, it is possible to view virtual network access as the next step, after resale, in the build-up of a mobile phone system.

105 Distribution system refers to the wireless part of the mobile phone network.

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353. PTA believes that virtual network operators can offer a broader range of services than can a resale agent and is therefore in a better position to compete with undertakings that own electronic communications networks for the long term. Such access could, however, prove difficult due to the significant costs involved in attracting subscribers in a market that is relatively mature. 354. In the estimation of PTA, the rationale regarding fairness applies here just as it applies to resale access. Virtual network access can both encourage investment in a distribution system and have beneficial effects on competition at the retail level. PTA believes that national roaming and resale access are not satisfactory options in place of virtual network access. The former requires that the operator invest extensively in its own distribution system, and the latter does not give the service provider the same freedom to offer its own services. Therefore, PTA draws the conclusion that it is important to impose on Síminn the obligation to grant virtual network access. Various virtual network levels could be possible, depending on how much access to Síminn’s electronic communications network infrastructure is purchased. Therefore, PTA considers it appropriate that the market have the opportunity to determine exactly what sort of access is most advantageous on any given occasion. Summary 355. Based on the authority in Article 28 of the Electronic Communications Act, PTA intends to impose on Síminn the obligation to respond to reasonable and appropriate requests for access to its GSM mobile networks and to its wholesale-level services. 356. Síminn shall, among other things, respond to reasonable and appropriate requests for:

• national roaming • joint utilisation or co-location • resale access, and • virtual network access.

357. Contractual agreements for access and call origination in Síminn’s GSM mobile network shall be concluded within normal time limits and without unnecessary delays. Síminn is prohibited from delaying contract negotiations without due reason. In order to diminish Síminn’s possibilities for delaying contract negotiations, it is necessary to impose obligations concerning non-discrimination and transparency, as well as the obligation to publish a reference offer. If Síminn rejects a request for access, it shall provide the applicant a reasoned written response explaining the rejection. Síminn may not withdraw previously granted wholesale access to its mobile phone networks. 7.4.1.2 Non-discrimination 358. Pursuant to Article 30 of the Electronic Communications Act, PTA may impose on electronic communications undertakings with significant market power the obligation to practise non-discrimination in approving requests for interconnection or access. Such obligations should ensure, in particular, that an electronic communications undertaking applies equivalent conditions in equivalent circumstances to other undertakings offering electronic communications services and

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that it provides services and information to others under the same conditions and of the same quality as those it provides to its own service departments, subsidiaries, or partners. 359. In order for this to be successful, the obligation to grant access must be imposed together with an obligation concerning non-discrimination. The non-discrimination obligation is intended to prevent a vertically integrated undertaking with significant market power from engaging in conduct that has a negative impact on competition. It is intended to prevent such an electronic communications undertaking from discriminating, for example, in terms of prices and quality of services; that is, selling less expensive and better wholesale services to its own retail departments than it sells to others; or in terms of service time; that is, providing service to its own retail department before serving other parties. Fair, moderate, and reasonable requirements for access, including prices, are a fundamental element in the attempt to promote competition. The non-discrimination obligation does not, however, entail the requirement that all undertakings operate under exactly the same conditions; instead, all differences in terms shall be based on objective considerations. 360. Discrimination can take many forms; therefore, it is difficult to speak in general terms of the circumstances that fall under the obligation to observe non-discrimination. Discrimination can be based on price. A vertically integrated undertaking with a dominant market position can transfer its strength from the wholesale level to the retail level by increasing its competitors’ costs in the retail market. This could happen if the undertaking raises the access price charged to external service providers, which will then affect those service providers’ retail prices. In order for the non-discrimination obligation to have the desired effect, it is often necessary to impose an obligation to practise accounting separation as well. 361. Even though an undertaking operates under an obligation to charge cost-oriented prices, it could attempt to discriminate on the basis of factors other than price in order to hinder competition in the market. Such discrimination could, for example, involve poor dissemination of information, dissimilar quality of service, and unfair contract terms. In the opinion of PTA, the non-discrimination obligation is best designed to address the problems that arise in connection with discrimination on the basis of price and other factors. It must be assumed that the non-discrimination requirement is both appropriate and reasonable. 362. With authority based in Article 30 of the Electronic Communications Act, PTA intends to impose on Síminn an obligation to practise non-discrimination with respect to price and other criteria that have been mentioned. The non-discrimination obligation shall apply to all types of wholesale access, including national roaming, resale, virtual networks, co-location, and joint utilisation. The Síminn department that handles the granting of access shall be separate from other company departments and shall provide comparable services to all customers. The department shall disseminate information to unrelated parties in a manner comparable to that used to disseminate information to the company’s own departments. Information that Síminn gathers in the preparation of contractual agreements for access shall be handled in a manner consistent with the provisions contained in Article 26 of the Electronic Communications Act.

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7.4.1.3 Transparency 363. Article 29, Paragraph 1 of the Electronic Communications Act authorises PTA to require that an electronic communications undertaking with significant market power make public specified information in order to increase the level of transparency related to interconnection or access to facilities; e.g., accounting information, technical specifications, information on network characteristics, terms and conditions for supply and use, and price lists. It is permissible to grant exemptions from the requirement to make information public if the electronic communications undertaking can demonstrate that such publication involves important financial or commercial interests that it is reasonable and appropriate to keep secret. 364. Article 29, Paragraph 2 of the same Act states that when an electronic communications undertaking is required to practise non-discrimination, PTA may require that it publish a reference offer that includes an itemised description of the interconnection or access, together with terms and conditions, including price lists. PTA may require changes to reference offers and is authorised to set rules concerning their content. 365. Terms that apply to access to networks and services are important for new operators and can have a decisive effect on their possibility for gaining market share. It is clear that the competitive position of such parties is at risk if they must submit to discriminatory terms. Furthermore, it facilitates the entry of new parties into the market if potential new operators can foresee the terms that are available for access and for the services that they need to purchase, and if they can determine the basis for pricing and other terms. 366. The publication of a reference offer gives all parties in the market the option of seeing what is offered, and it ensures that undertakings will not be required to pay for services and facilities that they do not need. PTA considers the publication of a reference offer for access to the mobile network necessary for the entry of service providers and virtual network operators. In this way, interested parties can see how it is possible to operate a virtual network, and on what terms. PTA assumes, however, that the parties can negotiate other terms than those contained in the reference offer, but this shall be made public and shall also be available to other parties. 367. It is stated above that PTA considers it necessary to impose a non-discrimination obligation on Síminn. In this context, it is also stated that in order for the non-discrimination obligation to be truly effective, it is also necessary to impose a transparency obligation on Síminn. This is done in order to prevent attempts to discriminate between parties. 368. On the basis of the transparency obligation, it is possible to require that Síminn publish a reference offer. PTA considers it necessary that Síminn publish a reference offer for the types of access that are discussed in Section 7.4.2.1; that is, national roaming, resale, and virtual network access. The more detailed the reference offer, the simpler it is to ensure that non-discrimination is being practised. The offer shall contain a sufficiently detailed description of terms so that the party requesting access can easily determine its position. PTA does not consider it necessary to specify

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exactly what the reference offer should contain; however, the Administration recommends that, at a minimum, the following items be included:

• Basic items pertinent to the agreement o Type of service o Fees, invoices, and accounting o Prices, discounts, and amount of traffic o Quality of service

• Technological implementation o SIM cards and GSM numbers (MSISDN) o Distribution system and communication between systems o Voice calls o International roaming o Other services o Testing

• Customer maintenance • Confidentiality between parties, confidentiality of data and plans, and

protection of personal information • Warranties and payment • Unforeseen events and special circumstances • Security and tapping • Term of contractual agreement and termination of agreement • Handling of dispute matters

369. If Síminn’s reference offer is not considered sufficient for the market, PTA may require that it be amended in accordance with Article 29, Paragraph 2 of the Electronic Communications Act. 370. It is necessary that Síminn send PTA all agreements that are made for access and call origination in its GSM mobile network, in addition to reporting all changes that are made to contractual terms, within a specified period of time. A copy of the signed agreement that is made on the basis of a reference offer shall be sent to PTA in its original form no later than one week after it is signed. Changes to contractual agreements shall also be reported in such a manner that it is clear what, and where, those changes are. The requirement concerning the obligation to provide information is based on the authority in Article 24, Paragraph 6 of the Electronic Communications Act and Article 5 of the Act on the Post and Telecom Administration, no. 69/2003. 371. In order to enhance the credibility of wholesale prices, PTA considers it necessary that Síminn, in collaboration with PTA, make public the accounting information on the performance of its GSM mobile network. PTA is of the opinion that such a requirement is authorised pursuant to Article 29, Paragraph 1 of the Electronic Communications Act. 372. Based on the authority in Article 29 of the Electronic Communications Act, PTA intends to impose on Síminn the obligation to observe transparency and to publish a reference offer for national roaming, resale, and virtual network access, and to make public information concerning network characteristics, terms and conditions for supply and use, price lists, and accounting information for its GSM mobile phone division.

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7.4.1.4 Accounting separation 373. Pursuant to Article 31 of the Electronic Communications Act, PTA may impose on an electronic communications undertaking with significant market power the obligation to practise accounting separation between operations related to interconnection and access and other operations, so that it is possible to allocate revenues and expense to operational units that can be linked to various services. Furthermore, the Administration may demand of an undertaking that operates both electronic communications networks and electronic communications services that its wholesale prices and its internal transfer prices be transparent in order, among other things, to prevent unfair cross-subsidy. PTA may determine what accounting methods shall be used. In order to guarantee transparency and non-discrimination, PTA may require that accounting data, including information on revenues from third parties, be submitted to the Administration. 374. In PTA’s opinion, it is necessary to impose on Síminn an obligation to practise accounting separation in the wholesale market for access and call origination in the GSM mobile network in order to guarantee non-discrimination and transparency, among other things, and so that it is possible to reveal the actual costs involved, where appropriate. It is important for Síminn’s competitors that the price the company charges for access and call origination in its mobile network be the same as its internal prices. 375. The purpose of accounting separation is, among other things, to allow the analysis of accounting information in order to show, as accurately as possible, the performance of individual parts of operations, as though these parts were separate companies. This makes it possible to see an itemisation of the costs arising from the granting of wholesale access and call origination to Síminn’s GSM mobile network. Such itemisation of costs limits Síminn’s possibility of charging for costs that are not related to specified services. 376. Accounting separation can be the premise for the use of cost analysis and for finding the cost basis for the wholesale access that Síminn is required to offer pursuant to Article 28 of the Electronic Communications Act. It is also important that Síminn’s wholesale operations be kept separate from its retail operations in mobile services in order to assess performance, with regard to determining whether the pricing of wholesale services is correct and whether there is cross-subsidy, and ensuring that all parties receive equal treatment regarding prices and terms.

377. Regulation no. 960/2001 on Accounting and Financial Separation in Electronic Communications Operations contains further stipulations on the methods used to carry out accounting separation, assessment of assets, depreciation methods, etc. 378. Based on the authority in Article 31 of the Electronic Communications Act, PTA intends to impose an accounting separation obligation on Síminn. Such separation shall involve, at a minimum, the separation of accounting for wholesale GSM mobile operations, on the one hand, and retail GSM operations, on the other, from other activities. Síminn’s internal transfer prices at the wholesale level shall be

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transparent for the purpose of preventing unfair cross-subsidy, among other things. If Síminn’s accounting separation should prove insufficient, PTA reserves the right to impose obligations for further accounting separation at a later date. 379. Síminn shall, in its accounting, separate revenues, expenses, financial items, and capital for its GSM mobile network. Síminn shall submit to PTA, on an annual basis, a specially itemised profit and loss account and balance sheet for its wholesale and retail operations, together with a summary of the division of indirect expenses that cannot be categorised through comparison with other expense items. The above-described summary for the prior year must be received by PTA by 1 April each year. 7.4.1.5 Price controls 380. Pursuant to Article 32 of the Electronic Communications Act, PTA may impose on an electronic communications undertaking obligations concerning cost orientation of prices, as well as obligations concerning cost accounting systems for the provision of specific types of interconnection or access, if a market analysis indicates that a lack of effective competition means that an electronic communications undertaking with significant market power is demanding excessively high prices or that the difference between wholesale and retail prices is abnormally small. 381. According to the results of the above-mentioned analysis of the market for access and call origination in GSM mobile networks, competition in the mobile market is insufficiently effective, and Síminn possesses significant market power. These results, with reference to Article 18, Paragraph 1 of the Electronic Communications Act, indicate that Síminn could prevent effective competition and could, to a substantial extent, operate without concern for competitors, customers, and consumers. Therefore Síminn has the possibility of maintaining abnormally high prices and/or exerting price-based pressure. Despite the fact that price comparisons, cf. Section 5.2.5 and Annex C, show that Iceland is among the European countries with the lowest prices for GSM mobile services, PTA wishes to point out that the potential for excessive pricing exists nonetheless. In the same manner, PTA considers that Síminn’s position in the relevant market gives the company the opportunity to maintain excessively high prices at the wholesale level in order to prevent new operators from entering the market. It is also noticeable that the retail price in this country has changed very little in the last several years while prices have dropped in other countries; cf. Annex C. 382. Prices are, in many instances, the primary cause of competition problems; therefore, it must be considered that a price control obligation is the most effective way to address such a problem. In the opinion of PTA, obligations concerning transparency and non-discrimination alone are not sufficient to solve competition problems such as cross-subsidy, price discrimination, and excessive pricing. PTA is of the opinion that an obligation concerning price controls is necessary to establish competition in the relevant market and to promote competition at the retail level. PTA considers it necessary to facilitate GSM network access by independent service providers and is of the opinion that it is necessary to impose an obligation concerning price controls on Síminn in order to ensure that the price charged for access is fair, appropriate, and cost-oriented.

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383. There are various methods that can be used for price controls and for determining access prices. According to Article 32 of the Electronic Communications Act, PTA may require an electronic communications undertaking to prepare a cost model for calculation of prices. PTA may, for the purpose of calculating costs, take into consideration the operating costs for similar services regarded as efficiently operated, take into consideration prices on comparable competitive markets, and use cost analysis methods independent of those used by the undertaking in question. In selecting a method, PTA considers it appropriate to emphasise that the method offer the possibility of yielding a result within a relatively short time; that it yield a result that is appropriate and fair to both parties; and that it yield a price that is not far in excess of real cost yet guarantees a fair return on investment. 384. The following are the chief methods used to determine wholesale prices:

• Historical costs: Until the present time, PTA has used this method primarily; it is based on analysing historical costs according to the accounts of the undertaking in question.

• Methods based on the analysis of long-run incremental cost (LRIC): This method is based on the preparation of a cost model. There are various versions of this method.

• Price comparison: Prices in comparable competitive markets are compared, and a price is determined on the basis of this comparison. The price is determined with reference to an average of a specific sample taken from the comparison group.106

• Retail minus: The retail minus method involves determining the wholesale price by subtracting a given percentage from the retail price. The difference that is subtracted from the retail price is for the expense that would otherwise have been incurred by the company at the retail level.

385. It can be assumed that cost analysis is an onerous obligation that should only be imposed if other methods are unsuccessful. Cost analysis involves determining prices based on cost information that is obtained from a cost model and/or cost accounting. To allocate costs to specific aspects of operations and services is a complicated and difficult project that can be addressed in various ways. PTA can employ the LRIC method for cost analysis, which is a method recognised by, among others, the European Commission and ESA. The method guarantees transparency, and the regulatory authority is not dependent on information from the electronic communications undertaking’s bookkeeping. On the other hand, the method is costly and can prove time-consuming. 386. In selecting the best method for determining access prices, it is important to keep two things in mind: first, which method is least onerous for Síminn, and second, the creation of acceptable terms for undertakings that may wish to request wholesale access to Síminn’s GSM mobile network and services. The forms of access listed in Section 2.1 are various, and they call for various methods. With regard to access that does not require extensive investments, such as resale and virtual network access, it could be appropriate to begin by using other, simpler methods than cost analysis.

106 PTA decided to use this method to determine termination prices in Market 16; for reference, see Annex 2 to the decision on Market 16.

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Virtual network and resale 387. In the opinion of PTA, it is important that access to virtual network and resale be guaranteed, with fair and appropriate terms and prices. PTA also considers it important that the conclusions regarding access price be established as soon as possible once the decision on the relevant market has been published. In view of how time-consuming and onerous the cost analysis requirement is, PTA recommends that it only be enforced if the requirement regarding the retail minus method does not yield results. 388. The fundamental principle is that the parties negotiate themselves for access that is based on the reference offers that it is recommended that Síminn publish, cf. Section 7.4.1.3. The reference offers must, however, include some information on prices; therefore, PTA recommends that, at the outset, the retail minus method be used to determine prices for virtual network and resale access. Such a method gives potential service providers wishing to gain access to Síminn’s GSM network and services the possibility of evaluating the economy of the market immediately, and it is not very onerous for Síminn. 389. The retail minus method does not involve significant extra expense for Síminn, which must only take into account its own price lists in determining access prices and need not engage in other work related to cost analysis. In its simplest form, the method can be described as follows: Ap = Rp – Rc Ap is the access price, Rp is the retail price, and Rc represents retail-level costs (that is, the costs related to sales, marketing, collection, etc.) and the mark-up that generates a profit from sales. The costs that an electronic communications undertaking incurs due to retail operations is not added to the wholesale price, as the company avoids it in selling access to the service provider. The expense categories that are avoided are various, and they depend on how much access the service provider purchases. As is stated previously, various virtual network levels could be possible, depending on how much access to Síminn’s electronic communications network infrastructure is purchased at the wholesale level. 390. As is stated above, PTA recommends the use of the retail minus method at first in determining the prices that Síminn shall be required to offer for virtual network and resale access. It is recommended that the wholesale price lists be calculated from the retail price list that is in effect at any given time in Síminn’s mobile network.107 For information purposes, see Table 8, which shows the per-minute price for use of the Síminn’s GSM mobile network via general subscription. Table 8 Síminn’s price list for general GSM mobile phone subscription

Per-minute price Day rate Evening/weekend rate

To a Síminn GSM phone 11.00 11.00 To a fixed-line phone 14.90 14.90 107 When calculating using the retail minus method, the calculation is only based on the portion that Síminn retains; that is, it is necessary to deduct the call termination charge that Síminn’s GSM network pays to other networks.

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To an Og Vodafone GSM and NMT 23.90 19.90 Source: Síminn’s Internet website, 17 October 2005. 391. There are two opposing points of view in determining the difference that must exist between retail and wholesale prices: It is necessary to consider the interests of the service provider that purchases the access; the difference must, at a minimum, be sufficient for operating expenses, depreciation, financial items, and profit if it is to be a real alternative. If consideration is given to the interests of Síminn, which provides the access, it must be kept in mind that the difference should be justifiable considering the initial investment and the risk that was taken with that investment. 392. The discussion below addresses the difference that PTA considers it necessary to maintain between Síminn’s retail and wholesale price lists with respect to access to the company’s GSM mobile network. The discussion centres first on resale access and then on pure virtual network access. Resale 393. A resale agent can be defined as a mobile phone undertaking that has minimum operating expenses — such as sales and marketing expenses, housing, office, and wage and salary expenses — but that does not own any independent mobile phone infrastructure and therefore does not need to incur any significant investment expenses. Therefore, depreciation need not be significant, and financing costs should not be high. 394. As an example, a comparison of Síminn’s wholesale and retail price lists for leased lines reveals a 20% between the two. It is important to consider that there is little or no marketing expense related to the retail sale of leased lines. It can be assumed, therefore, that the costs related to marketing GSM mobile services is much greater than the cost of marketing leased lines. 395. The comments submitted by Íslandssími hf. to the legislative bill on electronic communications in the spring of 2003, which was later passed as Act no. 81/2003, contained a recommendation that the general rule be that wholesale prices are approximately 25% lower than retail prices for a service unless the service provider can demonstrate that another referent is reasonable and fair.108 Íslandssími’s recommendation was not approved, but PTA considers, on the other hand, that it shows a realistic assessment by a service provider of how great the difference between wholesale and retail should be, so that the resale agent has a chance in the market. PTA is of the opinion that, given the difference that exists between wholesale and retail prices for leased lines, it is appropriate to agree with 25% as a referent for wholesale access to a mobile network. 396. Considering this, it is PTA’s assessment that the price for resale access must be at least 25% lower than Síminn’s current retail prices. 397. Table 9 gives an example of the retail minus method of calculating wholesale prices based on a 25% deduction. It shows prices for voice calls from Síminn’s GSM network to Og Vodafone’s GSM network. Síminn’s general subscription prices are 108 Comments by Íslandssími hf., dated 28 February 2003, http://www.althingi.is/pdf/umsogn.php4?lthing=128&malnr=599&dbnr=1399&nefnd=sg

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used as a guideline. The retail price for a voice call from Síminn’s GSM network to Og Vodafone’s GSM network is ISK 23.9. First the value-added tax (ISK 4.7) is deducted, and then Og Vodafone’s call termination charge (ISK 13.5).109 The result is ISK 5.7, and if a 25% discount is granted on that price, Síminn’s wholesale price for access and call origination for resale should be ISK 4.27 at the day rate. On the other hand, Síminn’s wholesale price for on-net calls would be ISK 6.63.110 Table 9 Example of wholesale price calculation based on retail price minus 25% Retail ISK 23.9 Value-added tax ISK 4.7 Call termination charge ISK 13.5 Síminn’s portion 23.9-4.7-13.5 = ISK 5.7 Retail minus (25%) 5.7 *25% = ISK 1.43 Síminn’s wholesale price 5.7-1.43 = ISK 4.27

Virtual network 398. With a decision dated 23 April 2003, PTA required that Síminn reduce its price for voice call termination in its GSM mobile networks to ISK 8.92 exclusive of VAT. PTA’s decision was based on Síminn’s preliminary cost analysis of the price for termination of voice calls placed to the company’s mobile network. In the analysis, expenses are divided into operating expenses and investment expenses. Operating expenses and investment expenses are then allocated to radio stations and other expense categories. It is PTA’s assessment that the preliminary cost analysis that has been submitted by Síminn for voice call termination in the company’s GSM network could give a strong indication of the percentage that it would be appropriate to use in calculating prices for virtual network access based on the retail minus method. 399. It is also appropriate to make reference to PTA’s decision of 10 November 2003, due to Síminn and Og Vodafone’s request regarding the decision concerning terms for roaming agreements. In the handling of that case, a historical cost analysis was performed on some of Síminn’s radio stations. 400. It is PTA’s assessment that these cost analyses indicate strongly that a fair price for pure virtual network access as it is defined in Section 2.1 could be at least 35% below Síminn’s retail prices. 401. Table 10 gives an example of the retail minus method of calculating wholesale prices for pure virtual network access based on a 35% deduction. It shows prices for voice calls from Síminn’s GSM network to Og Vodafone’s GSM network. Síminn’s general subscription prices are used as a guideline. The retail price for a voice call from Síminn’s GSM network to Og Vodafone’s GSM network is ISK 23.9. First the value-added tax (ISK 4.7) is deducted, and then Og Vodafone’s call termination charge (ISK 13.5). The result is ISK 5.7, and if 35% is deducted from this amount, Síminn’s wholesale price for virtual network access should be ISK 3.7 at the day rate

109 Og Vodafone’s GSM call termination price is ISK 13.2, and if the traffic is routed through the company’s fixed network, an extra charge of ISK 0.3 is added. 110 The retail price of ISK 11 minus VAT = 8.84, as the phone call takes place within Síminn’s network. If a 25% mark-up is deducted from 8.84, the wholesale price is then ISK 6.63.

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and ISK 3.2 at the evening rate. On the other hand, Síminn’s wholesale price for on-net calls would be ISK 5.7.111 Table 10 Example of wholesale price calculation based on retail price minus 35% Retail ISK 23.9 Value-added tax ISK 4.7 Call termination charge ISK 13.5 Síminn’s portion 23.9-4.7-13.5 = ISK 5.7 Retail minus (35%) 5.7 *35%= ISK 2 Síminn’s wholesale price 5.7-2 = ISK 3.7

402. It is worth mentioning that, in the analysis that the Irish regulatory authority (ComReg) conducted on market 15,112 it is stated that the price for virtual network access should be at least 35% below retail prices. 403. To compare prices for full virtual network access, it is worth pointing out that the agreement between Sonofone and Tele 2 in Denmark113 shows access prices very similar to those that would be obtained from calculating Síminn’s retail prices minus 35%, which PTA believes to yield a fair result. Table 11 contains possible wholesale prices for virtual network access in Iceland as compared with wholesale prices in Denmark. Table 11 Examples of wholesale prices for virtual network access (MVNO) Per-minute charge for voice calls

Iceland114 Denmark

Off-net calls 3.7 – 3.2 (ISK 3.45) 4.5 - 2.3 (ISK 3.4) On-net calls ISK 5.7 7.71 - 3.9 (ISK 5.8)

Conclusions concerning virtual network and resale access 404. Considering the foregoing discussion, PTA recommends that the deduction from retail prices should be at least 35% based on pure virtual network access and at least 25% for resale access, based on normal operating expenses and a suitable level of profit. The percentage shall then be variable depending on how much access to the mobile network infrastructure is purchased. 405. PTA takes the view that this method is only a temporary solution, as it is not suitable for the long term. This method requires regular updating in connection with changes in retail prices and expenses. In addition, it does not guarantee that the access price will be fully in line with expenses in instances where retail prices are in excess of cost-oriented prices. Thus it is better for the long term that access prices are based on cost analysis. National roaming

111 The retail price of ISK 11 minus VAT = 8.84, as the phone call takes place within Síminn’s network. If a 35% mark-up is deducted from 8.84, the wholesale price is then ISK 5.7. 112 See www.comreg.ie: Documents no. 04/188 and 04/188a, dated 9 December 2004, pg.76. 113 http://www.itst.dk/wimpdoc.asp?page=tema&objno=144880712 4. Amendment to “National Roaming Agreement for a mobile Virtual Network operator (“MVNO”)” 114 The price examples in this column are for reference only.

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406. PTA is of the opinion that access for national roaming is one of the fundamental preconditions for competition with Síminn and Og Vodafone, as it is important for mobile phone companies to be able to offer services all over the country. National roaming access requires more investment than virtual network access and resale access, as it is assumed that mobile phone undertakings requesting national roaming will have built up a network in accordance with the terms of the frequency licence. The cost of operating radio transmitters varies, and it depends primarily on location and on the traffic carried. The cost price for national roaming is therefore dependent on the location of the transmitters used for roaming, and it is difficult to determine a universal price for national roaming access. In PTA’s estimation, it is not possible to calculate the cost of national roaming without it being established exactly in what area the party requesting access intends to roam. Because of this, PTA does not consider it timely to require that Síminn perform a cost analysis before a formal request for national roaming has been made. Therefore, PTA reserves the right to impose on Síminn the obligation to charge cost-oriented prices for national roaming if voluntary agreements cannot be concluded. 407. As is stated previously, a historical cost analysis was carried out on some of Síminn’s radio station in connection with the PTA decision of 10 November 2003 concerning the terms for Og Vodafone’s national roaming in Síminn’s mobile network, cf. ruling no. 1/2004 by the Rulings Committee for Electronic Communications and Postal Affairs. Following the Committee’s ruling, contract negotiations began between Síminn and Og Vodafone, and these led to a national roaming agreement, which was signed on 2 March 2005. The agreement that was signed, however, takes into account the interests of Og Vodafone and, in some respects, Síminn, and need not necessarily suit other parties that have the right to request national roaming. 408. If cost analysis should be carried out, it is PTA’s opinion that it is appropriate to base such analysis on historical costs from Síminn’s accounting as regards the cost of roaming in individual areas. Such an analysis would be the quickest method of determining a price for national roaming access, in addition to the fact that there is already information available concerning the cost of building up Síminn’s radio system in individual areas. On the other hand, if there is an LRIC model for the operation of Síminn’s GSM mobile network, it is more desirable to use that model than to use historical costs. Joint utilisation or co-location 409. In PTA’s estimation, the obligation to offer joint utilisation or co-location is fair and should not represent a significant financial burden for Síminn; instead, it should provide the company with the opportunity to utilise additional capacity. The joint utilisation of facilities is already practised by Síminn and Og Vodafone, and it has been accomplished without any real difficulties, to the best of PTA’s knowledge. In view of this, PTA considers it unnecessary at the present time to impose on Síminn an obligation to conduct cost analysis with regard to prices for joint utilisation or co-location. On the other hand, PTA reserves the right to require that Síminn carry out such cost analysis of prices for joint utilisation or co-location if problems arise in granting this access. Conclusions

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410. Based on the authority in Article 32 of the Electronic Communications Act, PTA intends to impose an obligation concerning price controls on Síminn. It is assumed that Síminn will publish, in a reference offer for access to its GSM mobile network and services, prices for resale, virtual network, and national roaming access in accordance with the foregoing. If it is revealed that the determination of prices according the retail minus method does not yield satisfactory results, PTA reserves the right to impose on Síminn the obligation to conduct a cost analysis of its access prices according to the LRIC method or another cost analysis method deemed most suitable by the Administration. 411. In order to monitor changes in wholesale price lists, PTA considers it appropriate to require that all new wholesale prices set by Síminn, and all changes in those wholesale prices, be reported to the Administration. New wholesale prices will therefore not take effect unless approved in advance by PTA. If the wholesale price list is based on Síminn’s retail price list, it is necessary that both lists change simultaneously. 412. If the imposed remedies and obligations in the wholesale market for voice call termination on individual mobile phone networks (Market 16) do not yield satisfactory results and it is necessary to conduct cost analysis of Síminn’s termination prices using the LRIC method, this could affect the market under scrutiny here (Market 15). Cost analysis according to LRIC would therefore apply to both markets, as both are mobile phone service markets. 7.4.1.6 Summary of obligations for the GSM mobile network 413. PTA considers it necessary to impose the following obligations on Síminn in the market for access and call origination on its GSM mobile network:

• Granting of access in response to reasonable requests for GSM mobile network access and services.

• Non-discrimination. • Transparency and the publication of a reference offer. • Accounting separation. • Price controls.

414. In view of Síminn’s strong position on the mobile market in general, and the company’s position in the relevant market, PTA considers it necessary to impose all of the above-mentioned obligations on Síminn in order to promote increased competition and protect consumer interests. PTA is of the opinion that the above-mentioned obligations will not, on the whole, represent a heavy burden for Síminn, but because other obligations are not better suited to achieving the intended goals, the Administration is of the opinion that the burden they represent for Síminn should not be the determining factor in their imposition. In PTA’s estimation, these obligations are consistent with the principle of proportionality and do not represent a greater burden than necessary. They are justifiable, in view of Síminn’s original investment and the risk taken in making that investment. These obligations are in the interest of long-term competition and are designed to increase the supply of mobile phone services.

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7.4.2 Obligations in the market for access and call origination on the NMT mobile network 415. In its analysis of the wholesale market for access and call origination on the NMT mobile network in Iceland, PTA came to the conclusion that the NMT mobile phone market is characterised by unequivocal entry barriers and a shortage of potential competition, and that this is not likely to change in the foreseeable future. No real wholesale market exists. Several parties have requested wholesale access to Síminn’s NMT network but without success. It is therefore PTA’s opinion that countervailing buying power exists neither in the retail market nor in the wholesale market for NMT mobile phone services. 416. This section contains PTA’s recommendations for obligations that should be imposed on Síminn, which has been designated by PTA as having significant market power in the relevant market. As is stated in Section 7.3.3, the relevant market is limited by several factors that affect the possible means of promoting competition. The chief limitation is the fact that, in recent years, the use of NMT mobile phones has been abandoned in most countries where NMT networks existed, and it is extremely likely that the network in Iceland will also be closed in a few years. These limitations mean that it is unrealistic to aim at the build-up of another NMT mobile network. The only possibility is to open the way for wholesale access to the existing NMT network. 417. Considering this situation and the competition problems discussed in Section 7.3.3, PTA is of the opinion that the following obligations are best designed to address the above-mentioned conditions in the relevant market:

• Granting of resale access to the NMT network. • Transparency. • Non-discrimination. • Price controls.

418. In the opinion of PTA, these obligations are consistent with the objectives set forth in the Framework Directive, the Access Directive, and the provisions of the Electronic Communications Act, and are appropriate for the time horizon of the market analysis. 7.4.2.1 Granting of access to the NMT mobile network 419. Given the situation in the relevant market and the competition problems existing there, PTA is of the opinion that the best solution is to impose on Síminn the obligation to grant wholesale access to its NMT mobile network for the purpose of resale. Other types of access do not apply here because of the limitations in the relevant market. Resale access requires minimum investment and gives the service provider the option of providing mobile phone services without building up its own NMT network. It gives mobile phone companies the option of offering the same comprehensive services that Síminn is able to offer its customers. In PTA’s estimation, the possibility of purchasing access to NMT mobile services for the purpose of resale is a necessary element in bringing about service- and price-based competition in the NMT mobile network.

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420. Based on the authority in Article 28, Paragraph 2, Subparagraph (b) of the Electronic Communications Act, PTA intends to impose on Síminn the obligation to respond to reasonable and appropriate requests for resale access to its NMT mobile network and services. In the opinion of PTA, imposing such an access obligation is fair and offers the company the possibility of utilising excess capacity. 421. Contractual agreements for resale of access and call origination in Síminn’s NMT mobile network shall be concluded within normal time limits and without unnecessary delays. Síminn is prohibited from delaying contract negotiations without due reason. In order to diminish Síminn’s possibilities for delaying contract negotiations for resale access, it is also necessary to impose obligations concerning non-discrimination and transparency. 7.4.2.2 Non-discrimination 422. PTA is of the opinion that, in order for it to be successful, the obligation to grant access must be imposed together with an obligation concerning non-discrimination. The non-discrimination obligation is intended to prevent a vertically integrated undertaking with significant market power from engaging in conduct that has a negative impact on competition. It is intended to prevent such undertakings from discriminating with regard to price and quality of service; that is, selling less expensive and better services to its own retail departments than to other parties. Fair, moderate, and reasonable requirements for access, including prices, are a fundamental element in the attempt to promote competition. The non-discrimination obligation does not mean, however, that all companies must operate under exactly the same terms; instead, all differences in terms shall be based on objective considerations. 423. In PTAs opinion, it is necessary to impose a non-discrimination obligation on Síminn. This will ensure that Síminn does not discriminate with regard to prices and quality of service and that all parties have equal access to the company’s NMT network. 424. With authority based in Article 30 of the Electronic Communications Act, PTA intends to impose on Síminn an obligation to practise non-discrimination with respect to price and other criteria that have been mentioned. It must be assumed that the non-discrimination requirement is both appropriate and reasonable. 7.4.2.3 Transparency 425. In PTA’s estimation, it is necessary to impose on Síminn an obligation to make public the information on the resale prices for its NMT mobile services. This makes it easier for companies to enter the market it if is clear what terms are offered for access and other services that they must purchase from Síminn, and what the foundation is for pricing and other terms. 426. With the authority based in Article 29 of the Electronic Communications Act, PTA intends to impose on Síminn an obligation concerning transparency and to require that the company make public the information on the resale prices for its NMT services.

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7.4.2.4 Price controls 427. According to the results of the above-mentioned analysis of the market for access and call origination in the NMT mobile network, competition in the mobile market is non-existent, and Síminn possesses significant market power in that market. With reference to Article 18, Paragraph 1 of the Electronic Communications Act, this conclusion indicates that Síminn could, to a substantial extent, operate without concern for competitors, customers, and consumers. The price of voice calls from NMT phones is very high, as is revealed in Section 2.2.10. These high prices could stem from the fact that there are few users in the NMT market as compared to the GSM market. On the other hand, it is not possible to ignore the fact that this position creates conditions conducive to Síminn’s maintaining excessively high prices and/or exerting price-based pressure. 428. Prices are, in many instances, the primary cause of competition problems; therefore, it must be considered that a price control obligation is the most effective way to address such a problem. In the opinion of PTA, obligations concerning transparency and non-discrimination alone are not sufficient to solve competition problems such as cross-subsidy, price discrimination, and excessive pricing. 429. PTA has information indicating that two parties have made unsuccessful requests for access to Síminn’s NMT network. This shows that there is interest in purchasing wholesale access to the NMT network. In order to facilitate NMT network access by resale agents and to ensure that the price charged for access is fair, reasonable, and cost-oriented, it is necessary to impose an obligation concerning price controls on Síminn. 430. PTA emphasises that the parties must be free to negotiate themselves for access. PTA considers it appropriate to impose on Síminn the requirement that the company use the retail minus method for calculating prices for resale access to its NMT mobile network. In keeping with the discussion in Section 7.4.1.5, it can be assumed that Síminn’s expenses for marketing its NMT services are lower than its marketing expenses for GSM services. PTA is of the opinion that the retail minus method for NMT is a simple method that will yield results quickly. However, the Administration does not consider it necessary to stipulate a percentage for this method, as there is every likelihood that the NMT network will close within a few years, and this will require changes in the marketing of the service. 431. Based on the authority in Article 32 of the Electronic Communications Act, PTA intends to impose an obligation concerning price controls on Síminn. Síminn shall grant wholesale access to its NMT mobile phone services for the purposes of resale. The access price shall be determined using the retail minus method. If the parties cannot agree on prices for access to the NMT network, PTA reserves the right to determine prices using the retail minus method. 7.4.2.6 Summary of obligations for the NMT mobile network 432. PTA considers it necessary to impose the following obligations on Síminn in the market for access and call origination in its NMT mobile network:

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• Granting of access in response to reasonable requests for purchase of NMT services for resale.

• Non-discrimination. • Transparency. • Price controls.

433. In the estimation of PTA, the above-described obligations and the requirements based on those obligations are necessary and reasonable and are conducive to the establishment of competition in the market. They are justifiable, in view of Síminn’s original investment and the risk taken in making that investment. These obligations are in the interest of long-term competition and are designed to increase the supply of mobile phone services.