Margit Vanberg, The present regulatory framework in Europe in:

Margit Vanberg

Competition and Cooperation Among Internet Service Providers, page 153 - 156

A Network Economic Analysis

1. Edition 2009, ISBN print: 978-3-8329-4163-5, ISBN online: 978-3-8452-1290-6

Series: Freiburger Studien zur Netzökonomie, vol. 14

Bibliographic information
153 works from January 1998 onwards. In the meantime, the provision of satellite services and satellite equipment was liberalized in 1994. In 1995 the Cable Directive allowed Cable-TV companies to enter the market for telecommunications services to closed user groups and value-added services.145 Most EU member-states fully liberalized telecommunications services and infrastructure provision on January 1, 1998. Regulation initially focused on competition by interconnection at non-discriminatory, reasonable and transparent conditions. The interconnection charges of providers of public telecommunications services with a dominant market position were to be regulated ex-ante and were additionally required to be based on costs.146 All incumbent carriers were assumed to have such a dominant market position. The more invasive instrument of network element unbundling for access to the local loop, including line-sharing, was enacted by the Commission on January 2001. As an EU regulation, this enactment immediately became national law in all member-states.147 9.2.2 The present regulatory framework in Europe Fast technological developments in the market as well as the trend towards the convergence of telecommunication, Internet, and media services led the EU to adopt a new regulatory framework for electronic communications in March 2002. The framework consists of five directives, among these the Framework Directive148, the Access Directive,149 and the Universal Service Directive,150 and several accompanying documents.151 This framework was implemented into the national law of the member-states by October 2003. 145 The EU directives that were issued until the 1998 liberalization of most telecommunications markets in the EU are subsumed under the term “1998 regulatory package.” The European Commission has an informative, archived site on the 1998 regulatory package at:; site last visited on Feb. 15, 2008. 146 At the time, the Commission suggested that market shares above the threshold of 25 percent are indicative of market power (Knieps, 2000: S94). 147 Directives, in contrast, need to be implemented into national law by the member-states, in order to become effective. 148 Directive (2002/21/EC available at:; site last visited on Feb. 15, 2008. 149 Directive 2002/19/EC available at:; site last visited on Feb. 15, 2008. 150 Directive 2002/20/EC available at:; site last visited on Feb. 15, 2008. 151 The two other directives are the Authorisation Directive and the Data Protection Directive. 154 The 2002 regulatory framework pursues two main objectives. First, it seeks to offer a consistent framework for different electronic communications platforms. Second, it strives to harmonize the regulation of electronic communications in the EU member-states. To achieve the first objective, the framework is formulated neutral towards the technology employed for the provision of electronic communications. The European answer to network convergence has therefore not been, as in the U.S., to curtail sector-specific regulation in telecommunications markets, but rather to extend regulation to new communication technologies such as Internet, cable, and satellite. To harmonize regulatory measures in the member-states, the framework draws from the principles and methodology of competition law, which are already common to all member-states. The close accord with competition policy also serves to emphasize the transitory character of regulation and is meant to facilitate the transition to an oversight by general competition law only, once sector-specific regulation is deemed unnecessary. List of recommended markets Probably the most influential of the accompanying documents to the framework directives is the Recommendation on relevant markets.152 In this document, the EU has defined a set of product and service markets, which may warrant sector-specific ex-ante regulation. Legally, the list is not a binding part of the framework. National regulatory authorities (NRAs) are, however, expected to critically appraise the competitiveness of the markets on the list for their respective countries. The criteria used by the Commission to identify markets that may not tend to effective competition without regulation are subsumed in a so-called “three-criteria test”: The first criterion is the presence of high and non-transitory entry barriers whether of structural, legal or regulatory nature. …the second criterion admits only those markets the structure of which does not tend towards effective competition within the relevant time horizon. …The third criterion is that application of competition law alone would not adequately address the market failures concerned (C(2003)497: §9). The list of recommended markets is continuously reviewed by the Commission. In theory, all of the three criteria must be fulfilled for a market to be added to the list. If one of the criteria fails, then a market will be taken off the list (C(2003)497: §16). Currently the Commission’s list includes 18 markets.153 Seven of these are on the retail level, as for instance telephone access for residential customers, the provision of local calls and the provision of international calls. The remaining eleven markets are on the wholesale level, as for instance unbundled access to the local loop, call origination and call termination. The list does not include Internet retail markets or 152 C(2003)497 available at: men.pdf; site last visited on Feb. 15, 2008. 153 The Appendix to this thesis includes the complete Annex of the Commission Recommendation, which lists the markets recommended for analysis. 155 Internet transport services. The wholesale product markets on the list, which are relevant to Internet service provision are: “call origination on the public telephone network provided at a fixed location” (market 8 on the list); “wholesale unbundled access (including shared access) to metallic loops and subloops for the purpose of providing broadband and voice services” (market 11); “wholesale broadband access” (market 12); and “wholesale terminating segments of leased lines” (market 13). Significant market power (SMP) The three-criteria test is only a first step in the identification of markets warranting sector-specific regulation. The confirmation that a relevant market exists in a national context is not yet considered sufficient for the identification of market power. Only a separate analysis of significant market power (SMP) in this market can justify the imposition of ex-ante regulatory measures. The Framework directive of 2002 defines SMP as “a position of economic strength affording an undertaking the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers.”154 This definition corresponds to the definition of market dominance used in EU general competition law. In practice, NRAs analyze the markets suggested by the EC (and any additional markets added by the NRA which pass the three-criteria test) using the principles and methodology of general competition law. They consider “the power of the undertaking concerned to raise prices by restricting output without incurring a significant loss of sales or revenues” (EC, 2002: §73). On the one hand, the Commission guidelines emphasize the criterion of market shares to establish whether a firm has SMP (EC, 2002: §75). Market shares below 40 percent of sales value (or sales volume) are considered to be uncritical, while a market share which exceeds 50 percent of sales value is considered sufficient evidence of significant market power.155 On the other hand, the Commission recognizes that the market power of a firm can be constrained by actual as well as by potential competitors (EC, 2002: §74). The Commission therefore advises NRAs to also consider the development of market shares over time and to interpret stable market shares as evidence of dominance and fluctuating market shares as evidence of a lack of market power. Further criteria that NRAs are to consider when assessing SMP include, among others, “control of infrastructure not easily duplicated,” “economies of scale,” “economies of scope,” and “vertical integration” (EC, 2002: §78). 154 EC, 2002: §5. 155 SMP is defined differently from the concept of market dominance, which was used in the previous regulatory framework of 1998. A firm used to be designated as having market power that justifies ex-ante regulation when its percentage share of sales volume exceeded 25 percent. 156 Regulatory remedies Once an NRA has defined a relevant market and assessed SMP the NRA is obliged to impose appropriate regulatory remedies as suggested in the Access Directive (for wholesale markets) and Universal Service Directive (for retail markets). While the NRAs can independently choose and implement regulatory remedies, they must be justified in relation to the objectives of the regulatory framework and must be proportionate to the problem to be solved (EC, 2002: §117). Regulatory remedies are, for instance, transparency obligations and accounting separation, non-discrimination requirements, access obligations, and price control (with or without cost orientation). When SMP is not found, any existing regulations are to be removed. Article 7 procedures Article 7 of the Framework Directive extends supervisory powers to the European Commission with regard to the notifications made by the NRAs. Within a onemonth period the Commission can either approve of a notification or issue a veto. The veto power applies to the market definition of an NRA as well as to the SMP analysis. A veto right does not exist for the remedies proposed by an NRA. Should the Commission require more time for an in-depth investigation into the NRA analysis, it can append two months of further investigation. 9.2.3 Local access regulation relevant to Internet service provision Of the wholesale markets on the European Commission’s list, the markets most important as wholesale products for Internet service providers are: • unbundled access to the local loop (market 11), • call origination (market 8) and • wholesale broadband-access (market 12). Experience so far shows that in their SMP analysis, NRAs tend to confirm the assumption that these markets warrant sector-specific regulation. All of the 20 countries that have notified market 11, the market for unbundled local loops and sub-loops, have found the incumbent operator to have SMP. The NRAs base their analysis mostly on high market shares and the existence of barriers to entry into the market. Almost all of the notifying NRAs impose the entire catalogue of possible remedies (from transparency, non-discrimination, accounting separation to access, price-control, and cost orientation) (Kiesewetter, 2006: 42). The market for callorigination, which encompasses the dial-up connections to service platforms of independent ISPs, has been notified by 21 European countries. All found the incumbent operator to have SMP, based mainly on high market shares and control over not easily duplicated infrastructure. Most of the notifying countries imposed the whole catalogue of possible remedies suggested by the Commission (Kiesewetter, 2006: 31). 18 countries have notified the market for wholesale broadband-access, which includes bitstream access for independent ISPs. All notifying countries find at least

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Die Konvergenz der Netztechnologien, die dem Internet, der Telekommunikation und dem Kabelfernsehen zu Grunde liegen, wird die Regulierung dieser Märkte grundlegend verändern. In den sogenannten Next Generation Networks werden auch Sprache und Fernsehinhalte über die IP-Technologie des Internets transportiert. Mit den Methoden der angewandten Mikroökonomie untersucht die vorliegende Arbeit, ob eine ex-ante sektorspezifische Regulierung auf den Märkten für Internetdienste wettbewerbsökonomisch begründet ist. Im Mittelpunkt der Analyse stehen die Größen- und Verbundvorteile, die beim Aufbau von Netzinfrastrukturen entstehen, sowie die Netzexternalitäten, die im Internet eine bedeutende Rolle spielen. Die Autorin kommt zu dem Ergebnis, dass in den Kernmärkten der Internet Service Provider keine monopolistischen Engpassbereiche vorliegen, welche eine sektor-spezifische Regulierung notwendig machen würden. Der funktionsfähige Wettbewerb zwischen den ISP setzt jedoch regulierten, diskriminierungsfreien Zugang zu den verbleibenden monopolistischen Engpassbereichen im vorgelagerten Markt für lokale Netzinfrastruktur voraus. Die Untersuchung zeigt den notwendigen Regulierungsumfang in der Internet-Peripherie auf und vergleicht diesen mit der aktuellen Regulierungspraxis auf den Telekommunikationsmärkten in den Vereinigten Staaten und in Europa. Sie richtet sich sowohl an die Praxis (Netzbetreiber, Regulierer und Kartellämter) als auch an die Wissenschaft.