This consultative document sets out Oftel's approach to identifying Significant Market Power (SMP) and explains which operators it proposes to determine as having SMP, in compliance with Article 2 of the EC Voice Telephony and Universal Service Directive (98/10/EC) which is to be implemented in the UK by 30 June 1998. Comments are sought by 29 May on Oftel's proposals.
April 1998
Part I - The Revised Voice Telephony Directive and its Significant Market Power framework
Part II - Identifying the relevant market under the RVTD
Part III - Identification of SMP in the UK
The consultation period will run until Friday 29 May, with comments on comments by Friday 12 June.
Written comments should be submitted to:
Neil Buckley,
Consultation on Significant Market Power and the Revised Voice Telephony Directive, Oftel,
50 Ludgate Hill,
London, EC4M 7JJ.
Written comments will be made publicly available in Oftel's R&I Unit except where respondents indicate that their response or parts of it are confidential. Respondents are therefore asked to separate out any confidential material into a confidential annex which is clearly marked as such. In the interests of transparency, respondents are requested to avoid confidentiality markings wherever possible.
Comments on this document can also be sent to by e-mail using the following e-mail address:
press.office.oftel@gtnet.gov.uk
Oftel intends to set up a link between this document on Oftel's pages and any responses placed on respondents' own Internet pages. Please contact Cate McLaurin at Oftel to organise this.
Confidential responses should not be sent via e-mail.
Copies of the DTI consultation document on implementation of the Revised Voice Telephony Directive are available from:
Mrs Jane Duck
Communications and Information Industries Directorate
Department of Trade and Industry
Room 203, 151 Buckingham Palace Road
London SW1W 9SS
The document is also available on DTI's Web pages at
http://www.dti.gov.uk/rvtd/condoc
1 For the purposes of identifying which UK operators have Significant Market Power (SMP) under the Revised Voice Telephony Directive (Directive 98/10/EC) (the RVTD), the UK National Regulatory Authority (NRA) is Oftel. This document sets out Oftel's proposals for identifying operators who have SMP in the UK for the purposes of the RVTD. The analysis follows similar lines to that carried out to identify operators with SMP for the purposes of the Interconnection and Amending Leased Lines Directives, though it is not identical because the Directives apply to slightly different markets.
2 On completion of the consultation process, the Director General will issue a formal determination, which will be notified by DTI to the European Commission in accordance with Article 25 of the RVTD. DTI is consulting on its proposed measures for implementing the RVTD. These consultation documents are complementary and should be read together. The DTI document is available on the DTI Web pages at http://www.dti.gov.uk/rvtd/condoc, or directly from DTI at the address above.
Part I - The RVTD and its SMP framework
3 The objective of the RVTD is to ensure the availability throughout the EU of good quality fixed public telephone services and to define the set of services to which all users should have access in the context of universal service at an affordable price. The RVTD is a harmonising Directive. Generally the RVTD does not apply to public mobile telephone networks and public mobile telephone services with the exception of Articles 6 and 10 and parts of Articles 9 and 11 (ie provisions on directory services, operator assistance, emergency services, contracts and publication of information). The RVTD replaces the Voice Telephony Directive (95/62/EC). The Voice Telephony Directive did not have a SMP test but required Member States to designate operators to cover the whole of their territory. Under the Voice Telephony Directive, BT and Kingston were designated and are therefore already subject to many of the obligations which now appear in the RVTD.
4 The RVTD creates a framework in which operators who have been determined by Oftel to have SMP are subject to a set of obligations (in addition to those applying to all operators providing publicly available voice telephony services). For example, they must provide certain specified facilities and deal with reasonable requests for special network access, they must offer cost-orientated charges and have certain cost accounting systems. SMP is described in terms of the operator's position and status within a Member State's market for fixed public telephone networks and voice telephony services. The SMP test for the purposes of the RVTD does not require consideration of individual product markets (eg local or long distance calls) as would happen in the case of an investigation under EC or UK competition rules (including licence conditions designed to deal with anti-competitive behaviour).
Obligations imposed by the RVTD on operators who have SMP
5 Operators who have SMP will be subject to the obligations set out in Articles 12, 13, 15, 16, 17, 18 and 19. These are as follows:
The SMP Test
6 The SMP test is set out in Article 2.2 (i) of the RVTD. It lists various factors which the NRA must take into account when considering whether an operator has SMP. No single factor has decisive weight, although, given that the objectives of the Directive are to ensure the availability of good quality fixed public telephone services, Oftel will give particular attention to an operator's ability to control access to customers. A presumption of SMP will arise when an operator has a share of 25% or more of the relevant market. Nevertheless, the NRA is given discretion to determine, on the basis of the other factors, 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 are:
Part II - Identifying the relevant market under the RVTD
7 Article 2(2) of the RVTD sets out the SMP test:
"Organisation with significant market power" means an organisation authorized to provide fixed public telephone networks and/or voice telephony services in a Member State which, for the purpose of this Directive, has been designated by the national regulatory authority in that Member State as having significant market power and notified to the Commission.
An organisation shall be presumed to have significant market power when it has a share of more than 25% of the relevant market in the geographical area in a Member State within which it is authorised to operate.
National regulatory authorities may determine that an organisation with a market share of less than 25% in the relevant market has significant market power. They may also determine that an organisation with a market share of more than 25% in the relevant market does not have significant market power. In either case, the determination shall take into account the organisation's ability to influence market conditions, its turnover relative to the size of the market, its control of the means of access to end-users, its access to financial resources and its experience in providing products and services in the market."
The geographic boundary of the market
8 For the purpose of identifying whether an operator has SMP, the RVTD specifies that the geographic boundary of the market is the area within which an organisation is authorised to operate. This means that the limits of an organisation's licence authorisation define the limits of the geographic market which the NRA must look at when considering whether an operator has SMP. This is not necessarily the same as the geographic market identified for the purposes of competition investigations, which is defined according to demand and supply conditions.
The product market
9 The RVTD makes no provision for sub-dividing the relevant markets into specific networks, products or services. There is no presumption of SMP if an operator has market power in some individual product markets but does not meet the general SMP test, which must be determined across the whole of the relevant market or markets.
10 The reference in the RVTD to "an organisation authorised to provide fixed public telephone networks and/or voice telephony services" suggests that there are two relevant markets: the fixed public telephone network market, and the fixed public voice telephony services market. (The draft UK regulations implementing the Directive use the term 'system' rather than 'network', to be compatible with the use of the word 'system' in the Telecommunications Act. In describing relevant markets, however, the term 'network' is a more familiar and comprehensible concept).
11 The term fixed public telephone network is defined in Annex 1 of Directive 97/33/EC on Interconnection as the public switched telecommunications network which supports the transfer between network termination points at fixed locations of speech and 3.1 kHz bandwidth audio information. Access to the end-user's network termination point is via a number or numbers in the national numbering plan.
12 Voice telephony services are defined in Article 2 of the RVTD as services available to the public for the commercial provision of direct transport of real-time speech via the public switched network or networks such that any user can use equipment connected to a network termination point at a fixed location to communicate with another user of equipment connected to another termination point.
13 Oftel proposes to define SMP under the RVTD in relation to two markets: the fixed public telephone network market and the fixed public voice telephony services market. An organisation may be deemed to have SMP in one or both of these markets.
Part III - Identification of SMP in the UK
The geographic market
14 Consistent with the UK government's implementation of other EC Directives to date, Oftel proposes to take an 'organisation' to be the licensee rather than an 'undertaking' ie a group of companies including wholly owned subsidiaries.
15 The UK markets for fixed public telephone networks and services have been liberalised for some considerable time and there are now many operators, offering a diverse range of services, with an ever-increasing re-distribution of market share.
16 Where a licensee reaches or approaches 25% market share in either of these markets within the geographic limits of its licence, Oftel will consider whether it should be deemed to have SMP. In such cases, the relevant geographic area would have to be decided on the basis of the individual licence.
17 In any exercise examining the relevant geographic market, Oftel looks closely at all the factors set out in Article 2.2 (i) and where several factors were compelling - particularly the operator's ability to control access to end-users or its economic market power - Oftel considers exercising its discretion under the RVTD to determine an operator as having SMP even though it had a market share in the relevant licensed area or areas which was less than 25%.
18 Similarly, where a licensee has more than 25% of the relevant market within the geographic area within which it is licensed to operate, Oftel considers the other factors in the Directive when deciding whether a determination of SMP is justified in all the circumstances.
Measuring market share
19 A market share of 25% or more of the fixed public network or voice telephony services gives rise to a rebuttable presumption that an operator has SMP. It is important to use consistent and reliable indicators of market share as the starting point for identifying operators who have SMP. The method of calculating market share depends to some extent on the availability of reliable data. A great deal of information is collected by Oftel from operators at a national level. However, because of the difficulty of collecting consistent information from all operators without imposing undue burdens on the operators, only limited information is available for areas defined by certain regional licences.
20 In the same way as Oftel considered that retail revenues were the most appropriate measure for calculating market shares for the relevant markets under the Interconnection Directive, Oftel also proposes to use retail revenues as the principal basis for calculation of market share under the RVTD. This gives a reasonably reliable indicator of market share in particular for the voice telephony services market. On a national basis, retail revenue data is readily available and can be used to calculate the market shares of those operators who are nationally licensed for the purposes of determining whether an operator has SMP. For operators who are licensed regionally, Oftel will use available information, such as number of exchange lines, to estimate market share. Given that these estimates on a regional basis may be slightly less robust than market shares calculated on a national basis, Oftel will pay particular regard to the other factors (set out in the definition of operators with SMP) which must be taken into account when determining SMP.
21 Retail revenues for BT, Kingston and all other operators combined, have been calculated over a 12 month period between April 1996 and March 1997. For the calculation of revenue market shares, the relevant sectors are defined in terms of services provided to end-users to produce a reliable indicator of shares in the voice telephony services market.
22 Shares calculated in this way will not necessarily produce a reliable indicator of shares in the network market. In theory at least, a systemless service provider could build up a share in the services market of over 25% (using indirect access to customers) without having any share in the network market at all. Conversely, a network operator might decide, or be forced by market conditions, to concentrate almost entirely on network operations, leaving others to provide services to customers over its network. In the UK, however, such theoretical constructs do not represent the normal pattern in the fixed public markets: operators who have a strong market position in networks tend to be (almost) equally strong in services, and there are no substantial players in the public voice telephony services market who are not also strong in the network markets. The market share figures in the services market will tend to underestimate slightly the incumbent operators' shares in the network market.
Measuring BT's market
23 BT is currently licensed to operate everywhere in the UK except the Hull area. For the purposes of calculating BT's market share in terms of revenues, the total from which BT's share is calculated is all UK operators' revenues less revenues from the Hull area (ie broadly Kingston's revenues - see below).
Measuring Kingston's market
24 Kingston has historically been the sole or main supplier of telecommunications in the Hull area. Kingston's licence only allows it to operate in the Hull area (although its subsidiary Torch has a national licence). Kingston still faces in practice virtually no local access competition (save for a few large businesses directly connected to an operator such as CWC) and thus controls access to almost 100% of customers. Kingston's share in the voice telephony services market is measured in retail revenues from the Hull area.
Regional operators
25 The market share for those other operators with regional licences will follow the approach outlined above. The relevant geographic market is bounded by the scope of the licence(s) under which they are offering telephony services. The telephony operations of the former Mercury, plus that of cable operators such as Nynex, Videotron and Bell Cablemedia are all run under a single national licence (the Mercury licence). The relevant market for CWC is therefore the national market.
Measuring the market for fixed public telephone networks and services
26 For fixed network and services, Oftel considers that the most appropriate measure of market share is share of the combined retail revenues for exchange line rental, exchange line set up/connection charges and call charges. Including all three types of charges ensures consistency across operators as each individual operator may choose to set its prices, and hence revenues, differently between connection, rental and call charges. Using this data gives the following market shares:
| 1996/97 Retail Revenues for the Fixed Sector | ||
| Revenues (£million) | Share of relevant market | |
| Total UK | 10,702 | 100% |
| BT | 8,960 | 84% |
| All other operators combined | 1,687 | 16% |
| Kingston | 50 | almost 100% |
| Source : Oftel Market Information | ||
27 BT and Kingston both have a market share of more than 25% within their respective licensed areas - and in both cases it is considerably more. Kingston has close to 100% of revenues for the Hull area. Even after deducting payments made to BT, Torch and CWC (the three operators who provided national and long distance calls up to 1.4.98), Kingston's revenues are at least three times the 25% market share threshold. All other national operators (including CWC) together have well below 25% share in the relevant market. Information is not readily available to provide an accurate breakdown of these figures between the fixed network market and the services market. But as explained in paragraph 22 above, there is not a wide divergence between BT's and Kingston's position in the network market and their position in the services market: their share of the services market alone is likely to be a little lower than the figures above, but not very substantially so.
Measuring regional markets: Cable Operators
28 Oftel is aware that several regionally licensed cable television and telephone operators (who, unlike CWC, do not run their operations under a national licence) have penetration rates that are approaching, or in some cases are greater than, 25% of premises currently passed. The highest rate known to Oftel is Central Hertfordshire where CableTel (part of the NTL group) have a penetration rate of 47.2% of the 74,000 homes that they have passed. Comcast also have two franchises where the penetration rate is above 25% (Birmingham with a 27.9% penetration rate of the 454,000 homes passed and Teeside with a 30.5% penetration rate of the 151,000 homes passed). However, penetration rates within a particular area do not give a fully accurate picture of market shares, still less of market power. Indeed, they give an exaggerated picture of the market position of the cable operators, for the reasons explained below.
29 Firstly, the percentage of homes passed by a cable company is substantially higher than the percentage of customers in the licensed area as a whole. Secondly, penetration rates do not relate just to telephony services: they include the other service offered by cable companies, namely cable television. The published penetration rates refer to homes that take one, or both, of these services. As some customers only take the cable television service, the penetration rates overstate slightly the share of telephony customers.
30 Further, the mix of customers that the cable companies have is an important factor in assessing their true share of the services market. Of the 3.4m cable telephony lines installed in the UK as a whole (as at January 1998), only 12% of these were business lines. The penetration rates quoted above are expressed as a proportion of residential homes passed only. A more accurate penetration rate would be one that was expressed in terms of residential homes and business premises passed. Because the total number of business premises is excluded from the calculation of the penetration rate, the rates give a significantly overstated picture of the cable operators' share of all telephony customers in their licensed area.
31 The relatively small number of business customers is also important as the call revenues from business lines is on average about three times the call revenue of residential lines. With such a small proportion of business customers, the market shares in terms of retail revenues of all the three cable operators identified above will be well below the 25% threshold.
Other factors
32 The RVTD does not require Oftel to base SMP determinations solely on market share - indeed in some circumstances the further factors specified in the Directive may outweigh it. These factors and their application are discussed below.
Ability to influence market conditions (Market power)
33 Market power is "the ability of an operator to raise and sustain prices above the competitive level". Oftel believes that BT has such power in the market for fixed public telephone networks and services in the UK (outside Hull) and that Kingston has such power in these markets in the Hull area. In particular, Oftel believes that the Hull telecoms market is a distinct economic market in which Kingston's control of access gives it market power (this view is explained in Oftel's March Consultation Document Delivering the Benefits of the Information Age to Customers in Hull).
34 For the purposes of the RVTD, Oftel considers that 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. Nor does Oftel consider that any other cable PTO or any other UK licensed operator has the ability to influence market conditions to the extent necessary to justify an SMP determination. To take an example from the top end of market penetration, Oftel does not consider, therefore, that CableTel has market power within the markets for fixed public telephone networks or services within its licensed area of Central Hertfordshire. Like all other cable operators, CableTel faces a competitive constraint from operators based outside its licensed area, to which customers could readily switch. Oftel does not consider that CableTel is in a position to raise and sustain prices above the competitive level.
Control of the means of access to customers
35 For fixed services the means of access to customers is an exchange line. The number of exchange lines (including ISDN lines) is a good measure of an operator's control of access to customers. This gives the following shares:
| Fixed Service Sector: Number of Exchange Lines as at 31/3/97 | ||
| Lines (thousands) | Share | |
| Total UK | 30,678 | 100% |
| BT | 27,554 | 90% |
| Kingston | 183 | almost 100% |
| All other operators (together) | 2,941 | 10% |
| Source: Oftel Market Information | ||
36 Analysis of the share of exchange lines reinforces the conclusions resulting from the application of the services market share test. BT has a greater share of customer exchange lines than its share of retail revenues and Kingston controls almost 100% of access to end customers in the Hull area. It also confirms that, collectively, other regional operators' control of access to end users is limited, even though some regional operators have penetration rates of more than 25% in limited areas..
Turnover/access to resources
37 Kingston and BT both (in their own right or through associated companies) offer a range of services other than the services in the relevant market. BT and Kingston have had access to capital sufficient to enable them to invest significantly in the UK and in businesses offering services outside the UK (although BT's investment is on a far larger scale than that of Kingston). The BT group has a large turnover (£14.9 billion) relative to the relevant UK market. The turnover of the Kingston group, at £108 million, is small in the context of the UK as a whole, but large in the context of the Hull market.
38 Many other operators in the UK are members of groups with substantial turnover either in UK or overseas telecommunications businesses. This could materially affect the balance in identifying SMP should any of these operators be close to meeting the 25% market share threshold, or if other market factors also indicated that conclusion. Oftel considers that in the present circumstances of the UK market, this factor does not have decisive weight in any individual case.
Experience in the market
39 Both BT and Kingston (or their predecessors) have been supplying telephony services continually since the early part of this century. Kingston has been and continues to be the dominant operator in Hull, since Kingston has direct access to almost 100% of customers in the Hull area. BT and Kingston both have considerable experience of providing services (and entered the market well before their UK competitors).
40 CWC (through Mercury) has only been offering services in the UK since 1984. Regionally licensed operators, such as cable operators, and other national PTOs, have all entered the direct access telephony market since 1992. The majority of these operators are still in the process of rolling out their networks.
Conclusion
41 On the basis of these texts set out above, Oftel proposes to nominate BT and Kingston as having SMP in the market for fixed public telephone networks and in the market for fixed public voice telephony services.
42 Oftel does not propose to nominate any other fixed operator as having SMP. It considers that it would be inappropriate to impose SMP obligations on operators who are relatively new to the market, whose networks are, in many cases, not fully rolled out, and whose market power is very limited. In particular, no cable operator has a market share approaching those of BT and Kingston. Cable operators' control of access to customers is still limited and is outweighed by BT's, even in areas where they have been comparatively successful.
Part IV - Other Issues
Decisions about SMP under other Directives
43 This document sets out Oftel's proposed approach to identifying SMP for the purposes of the RVTD only. Determinations made under the RVTD will not be decisive for determinations under other Directives with an SMP regime. Decisions about SMP under Directives are made on a case by case basis, considering the tests set out in the Directives in question and based on such information as is best suited to the purpose.
Future Developments
44 The European Commission has said it will review the RVTD before 31 December 1999. Oftel does not expect that it will be necessary to review its SMP determinations before 1999, unless there are significant changes to market conditions in the UK.
Relationship between SMP nominations and other Market Power Controls
45 Oftel has made it clear in a number of recent consultations and in its February Consultation Document Effective Competition Review that SMP is different from the usual approaches to competition analysis in competition cases. A determination that an operator has SMP is a reflection of the nature and status of that operator across the relevant market within the geographical limits of its licence. A SMP determination is not a comment on the operator's position or behaviour in a particular telecommunications service or product market. Conversely both EC and UK competition rules are generally applied by reference to an undertaking's position in specific service or product markets. Accordingly, a determination that an organisation has (or does not have) SMP has no bearing on its position in an individual market under EC or UK competition rules. Likewise, use of UK or EC competition rules in terms of behaviour in a particular product market - such as the exercise of the Fair Trading Condition in licences of operators providing services in the UK or an action under Article 85 or 86 of the EC Treaty - does not imply that an operator has SMP in the sectors of activity set out in the Directive.