Operators with Significant Market Power for the application of detailed rules under purposes of the EC Voice Telephony and Universal Service Directive
Statement
Issued by the Director General of Telecommunications
October 1998
Contents
SummaryChapter 2 – Response from Energis
Chapter 4 – Response from Kingston
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Summary
- In April, Oftel issued a consultation document on operators with Significant Market Power (SMP) for the purposes of the European Parliament and Council Directive of 26 February 1998 on the application of open network provision (ONP) to voice telephony and on universal service for telecommunications in a competitive environment (98/10/EC) (the Revised Voice Telephony Directive – ‘RVTD’).
- After full consideration of Oftel’s initial analysis (explained in the consultation document) and the responses to it, the Director General concluded that BT and Kingston have SMP under the RVTD.
- No other operators have SMP.
- The Director General therefore determined BT and Kingston (plus Hull City Council as dual licensee) to be SMP operators under the RVTD.
Chapter 1
Introduction
1.1 The SMP test for the RVTD is set out in Article 2.2 (i). The relevant markets are the market for fixed public telephone networks and the market for voice telephony services, in the area in which the organisation is authorised to operate. A presumption of SMP will arise when an operator has a share of 25% or more of the relevant market. Nevertheless, Oftel is given discretion to determine, on the basis of the other factors (listed below), that an operator with a market share less than 25% has SMP, or conversely that an operator with a market share of more than 25% does not have SMP. The other factors listed in the Directive which the regulator must take into account when considering whether an operator has SMP are:(a) an operator’s ability to influence market conditions (market power)
(b) turnover, relative to the size of the market
(c) control of the means of access to end-users
(d) access to financial resources; and
(e) experience in providing products and services in the market.
1.2 A SMP determination is not a comment on the operator's position or behaviour in a particular telecommunications service or product market nor does it have any bearing on its position in an individual market under EC or UK competition rules.
1.3 In the consultation document, the market shares of BT, Kingston, Cable and Wireless Communications (CW) and other operators (including cable companies) were examined. Two companies had market shares in excess of 25% of the relevant market – BT and Kingston – giving rise to a presumption that they were SMP operators. The other factors were then examined. For BT and Kingston the other factors did not counter the presumption that they were SMP operators. For other operators, who did not meet the 25% market share test, the other factors supported the presumption that they should not be determined to be SMP operators. The consultation document therefore proposed that BT and Kingston should be determined to be SMP operators under the RVTD.
1.4 There were three responses to the consultation document, each is
briefly summarised in this Statement together with Oftel’s comments.
Chapter 2
Response from Energis
2.1 Energis had two concerns, both relating to CWC. First, that for CWC's cable franchises, Oftel should be aggregating those companies' market shares with the share of the national market held by CWC under the Mercury licence. Second, that CWC has a 'dominant' position on certain international routes and therefore should be determined to be an SMP operator on those routes.Oftel’s comments
2.2 The response from Energis is based on a misunderstanding of how CWC is licensed, and of the rules relating to SMP. All CWC's telephony operations (both those it offers as CWC and those of its subsidiary cable operators) are run under the Mercury national licence. The relevant markets for assessment of CWC's market power are the national markets, not those in individual cable franchises. The relevant markets are the markets for fixed public telephone networks or fixed public voice telephony services, or both, not individual product markets such as international routes.
2.3 Nationally, CWC does not meet the 25% market share test. In relation to the other factors, Oftel considers that:
(a) the narrow scope of CWC's power in the remaining international markets in which it has market power is insufficient to outweigh the 25% market share test in the market for fixed public networks and services as a whole.
(b) although CWC has a substantial turnover this factor does not have decisive weight.
(c) there are no other factors which would lead Oftel to determine CWC
as an SMP operator.
Chapter 3
Response from BT
3.1 BT has: “major concerns about the way it is proposed to apply the SMP test and the proposed determination”. BT contend that: there is a lack of information; assumptions have been made about market share leading to possible inaccuracies; undue weight is accorded to factors other than market share for cable operators; the use of the number of exchange lines is not a good determinant of market share; it does not have market power; if it does have market power so have other operators; the number of exchange lines is not a good measure of an operator's control of access to customers; the parent companies of other operators also have long experience; SMP should be reviewed before 1999.Oftel’s comments
3.2 A great deal of information is collected by Oftel from operators at a national level. However, as stated in the consultation document, the estimates on a regional basis “may be slightly less robust than market shares calculated on a national basis”. This is because the information that Oftel has for cable operators is penetration rates which are higher than their actual market share.
3.3 Oftel considers that the assumptions made about market share do give an accurate picture. Penetration rates are higher than the market share of the cable companies because such rates represent the number of customers taking services as a percentage of the number of homes capable of being served by that company. However, the total number of homes within the licensed area is higher than this figure. Penetration rates also do not relate just to telephony services: they include cable television. As some customers only take cable television, the penetration rates overstate the share of telephony customers.
3.4 Market share represents a percentage of the combined residential and business market. Penetration rates exclude business premises. Cable companies have a relatively low share of the business market. When assessing their share of both residential and business customers, the higher penetration rate for residential customers has to be combined with a low penetration rate amongst business customers. With a small proportion of business customers, the market shares of cable operators are below the 25% threshold. The presumption therefore was that regional cable operators do not have SMP on the basis of market share.
3.5 In relation to the other factors, cable operators do not have market power; control of access to end users is limited; turnover/access to resources does not have decisive weight in any individual case and their experience in the relevant markets is limited.
3.6 For the assessment of market share for BT, share of retail revenues (including revenues from indirect access) was the relevant consideration not the number of exchange lines. BT's share of retail revenues was 84%, well above the 25% threshold. The number of exchange lines was considered separately in relation to control of means of access.
3.7 Oftel believes that BT has market power. Market power is considered as one of the five factors which may outweigh the initial presumption. BT has 84% of the retail revenues for the fixed telecommunication sector and just under 90% of exchange lines. In EC competition law terms, BT is a dominant operator. Oftel also examined market power for other operators; Kingston was the only other UK operator with market power.
3.8 Although increasing numbers of people have access to a second local loop operator, the number of exchange lines is the current best indicator of control of means of access. As BT has 90% of exchange lines in the relevant markets, this factor supported the presumption that BT is an SMP operator.
3.9 Both BT and Kingston (or their predecessors) have been supplying telephony services continually since the early part of this century. Mercury began to offer telephony services to the public in 1984, the cable companies and other operators followed in 1992. In comparison to BT and Kingston, other companies only have limited experience in the relevant markets.
3.10 A review was not ruled out before 1999. However, there would
need to be significant changes in market conditions to necessitate a review
before then. Unless there is such a change, there would seem to be no reason
why a review would be necessary before 1999.
Chapter 4
Response from Kingston
4.1 Kingston commented that the SMP designation had serious implications. It contended that: SMP obligations are unduly burdensome; there are no separate Hull telecommunication markets; Kingston’s Hull activities should be looked at in a national context analogous to CWC; much of its turnover is not derived from the Hull market and its access to additional funding is limited; the DG is not forced to designate any operator as having SMP and Kingston does not have SMP.Oftel’s comments
4.2 BT and Kingston are already subject to the requirements of the VTD, which are virtually identical to those applied to SMP operators under the RVTD. BT and Kingston are therefore already compliant with the main obligations of the RVTD. Oftel does not consider that the SMP requirements should have a negative impact on Kingston.
4.3 The relevant markets under the RVTD are the Hull markets because that is the area in which Kingston are licensed. CWC's activities are looked at on a national basis because they operate under a national licence.
4.4 Turnover and access to resources has to be considered with reference to the relevant markets (in Hull). Kingston's turnover is high compared with other operators' turnover in the Hull markets. Also, Kingston does have access to resources.
4.5 Although there is discretion not to determine an operator with a
market share in excess of 25% as an SMP operator, there is a presumption
of SMP at 25%. Kingston’s market share within its licensed area is well
in excess of 25%. The discretion to overturn the presumption is based on
five factors which, in Kingston’s case, reinforce the view that Kingston
has SMP. The SMP requirements on Kingston do however have to be applied
in a manner which is proportionate to its size and scale of operations.
Glossary
Cable PTOs – The companies licensed to provide telephony and broadcast television servicesCWC – Cable and Wireless Communications.
Fixed Public Telephone Networks – The telecommunications networks of the major operators, on which calls can be made to all customers.
Kingston – Kingston Communications (Hull) PLC.
Penetration rates – The number of residential customers of a cable PTO that are taking service (whether cable television or cable telephony or both) from the company as a percentage of the number of homes capable of being served by that company.
Public Telecommunications Operator (PTO) – Network operators with powers granted by the Secretary of State for Trade and Industry under the Telecommunications Act 1984 to enable them to install their systems on public and private land, property etc.
Relevant markets – The markets for fixed public telephone networks and/or voice telephony services.
Revised Voice Telephony Directive (RVTD) – the European Parliament and Council Directive of 26 February 1998 on the application of open network provision (ONP) to voice telephony and on universal service for telecommunications in a competitive environment (98/10/EC). EC Directive establishing a basic level of Universal Service throughout the EC.
Significant Market Power (SMP) – A concept adopted by the EU in relation to a number of Directives. SMP is intended to relate to activities of specific operators across broad market sectors (the relevant markets).
Universal Service – The basic level of telecommunications services which should be available to all customers.
Voice Telephony Directive – European Parliament and Council Directive
of 13 December 1995 on the application of open network provision (ONP)
to voice telephony (95/62/EC).
EC Directive that preceded the RVTD.
