The DT Margin Squeeze Case

Stefan Lechler

Head of Competition Law and Merger ControlDeutsche Telekom AG

Global Competition Law CentreLondon, 10 December 2004

The DT Margin Squeeze CaseStefan Lechler10 December 2004 page 2

The DT Margin Squeeze CaseMain issues

Future analysis of all types of wholesale access and retail charges in the telecommunications sector

Overlap/interaction of EC competition rules and Member State sector-specific regulation

Economic principles applied by the Commission to complex price squeeze situations

The DT Margin Squeeze CaseStefan Lechler10 December 2004 page 3

The EU Commission's decisionHistory

Spring ‘99: Several complaints of competitors

Summer ‘99: Requests for information

During 8 months no reaction by EU COM Spring ‘00: EU COM informs DT that proceedings were initiated

against Germany (Art. 226)

No further steps/communication for more than a year

Spring ‘01: Several further requests for information until January 2002

May ‘02: Statement of objections (amended in February 2003)

Fall/winter ‘02: Hearing, further requests for information

21.05.03 Commission decision

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The EU Commission‘s decisionSummary

EU COM: DT abused its dominance in the local loop by charging unfair prices for wholesale access and retail access (“Margin Squeeze”):

Insufficient margin for competitors between the tariff for ULL and the tariff for retail access

Price-Cap 1998 until 2001: Decrease in call charges could have been used for an increase in retail access charges

From 2002: Tariffs for ULL were lower than retail access tariffs, however the ULL tariff plus product-specific cost was higher than the average weighted retail subscription

The Commission’s decision of May 2003 is pending before the CFI

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Procedural issuesThe EU Commission has exceeded its jurisdiction

No jurisdiction to act as a Super-Regulator

All of DT‘s relevant tariffs were subject to price regulation:

Access: approved by RegTP within Price-Cap

ULL: set by RegTP (cost based)

RegTP decisions: "no price-squeeze in Germany"

Commission’s decision undermines regulation by the RegTP and puts legal certainty at risk

If the RegTP or the Price-Cap-regime contravenes EU law, the Commission must take infringement action against Germany

The Commission’s decision infringes principles of good faith

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Substantive issues DT has no discretion to set wholesale prices for ULL

DT is bound by RegTP’s approved wholesale rates

RegTP would not have approved lower wholesale rates

EU law: ULL access rates to be cost-based

Cost of efficient service provision is determined by RegTP via its own cost model

Result: DT could only have restricted competition by charging too low retail tariffs

Dumping-test would have been the correct method

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Substantive issues DT has no discretion to set retail subscriber line prices DT is bound by the RegTP’s approved retail rates. RegTP approval

is needed for any price-adjustment. RegTP considerations:

Tariffs have to be based on cost of efficient service provision

Tariffs have to be in line "with other legal provisions" (e.g. Art. 82)

The 2002/2003 price caps precluded DT from increasing subscriber line prices

RegTP rejected DT's application for an increase in excess of the price cap margin for 2003

Local loop price squeeze cannot be based only on DSL charges

No proof for low price elasticity

No causal link between DT not increasing DSL charges and the alleged price squeeze

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Substantive issuesEU Commission fails to prove Price Squeeze (1)

Comparison between unbundled access charges and subscriber line fees is economically unsound

Commission compares weighted retail prices for various types of sub-scriber line access with weighted one-off and monthly wholesale charges

Economic analysis is solely based on Commission's market definition without taking into account the reality of the market place

Failure to consider competitor's incremental revenue opportunities is economically unsound

Telecommunication service providers compete on bundles of access and individual call services

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Substantive issuesEU Commission fails to prove Price Squeeze (2)

US Regulator FCC also includes other revenue in its local loop price squeeze analysis (Verizon New Hampshire & Delaware Order 2002)

Differences in regulatory approaches to unbundled access and subscriber rates

Inconsistent application of the Commission’s own approach due to the inclusion of inefficiency costs

Commission ignores the prospect of positive margins by focussing only on average calculations

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Lack of market-analysisEU Commission fails to prove a hindrance to competition

ECJ (Hoffmann-La Roche): Hindering "maintenance or growth of competition" is prerequisite for application of Art. 82

Focus of DT's competitors on attractive market segments creates lively competition

“Mixed calculation" possible

Regional areas as origin of competition

Wholesale charges in Germany are clearly below EU average

New entrants into the German local loop market account for more than 85% of all unbundled subscriber lines in Europe

Germany accounts for half of all European local loop operators

More than 30% of the German population have access to two or more operators; 22% have access to three to five operators

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The success of competitors is measurableIn comparison with other EU countries, Germany plays leading role

Retail subscriber market Wholesale market

0

100000

200000

300000

400000

500000

600000

700000

800000

900000

1000000944941

155844061

350001043

1509

82100

1882878002810

1181

Germany is the unchallenged leader for unbundled local loop access

77% of all subscriber lines can be served by competitors.

The market conditions in certain areas of Germany demonstrate that current ULL charges allow extensive competition.

Source: EU-Commission Implementation Report Dec. 2002