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Contents Summary Annex A Notification A new regulatory regime S.1 A new regulatory framework for electronic communications networks and services will enter into force in the UK on 25 July 2003. The basis for the new regulatory framework is five new EU Communications Directives which are designed to create harmonised regulation across Europe and aimed at reducing entry barriers and fostering prospects for effective competition to the benefit of consumers. S.2 The new Directives require National Regulatory Authorities ("NRAs"), including the Director General of Telecommunications ("the Director") to carry out reviews of competition in communications markets, to ensure that regulation remains proportionate in the light of changing market conditions. Markets considered in this review S.3 The markets considered in this review relate to wholesale international services. Wholesale international services concerns the conveyance of traffic to network termination points which are outside the UK. Wholesale services are services sold and purchased by communications providers rather than end-customers. S.4 This market is not identified in the European Commission's Recommendation on relevant product and service markets {Commission Recommendation on Relevant Product and 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 (11 February 2003)]. S.5 However, the Director has periodically reviewed wholesale international services markets and has previously identified competitive problems and concluded that BT and Cable & Wireless have market power. S.6 Additionally the United Kingdom is one of the largest worldwide markets and the largest EU market, for wholesale international services and acts as a European and worldwide hub for international traffic. S.7 Accordingly the Director believes it is necessary to conduct a review of wholesale international services. In view of the findings of the previous market reviews and the importance of the United Kingdom for global wholesale international services, the Director has considered it appropriate to review UK wholesale international services. S.8 The Director has identified and analysed each distinct market for wholesale international services. Accordingly this market review considered 242 wholesale international services markets. These markets consist of 238 individual country routes and 4 satellite services routes Proposals on findings of Significant Market Power S.9 The Director has considered whether an operator in each market considered has Significant Market Power ("SMP" ). In assessing whether SMP exists, Oftel has taken account of the European Commission [Commission Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services] and Oftel Market Review Guidelines. S.10 The Director’s initial view is that British Telecommunications plc ("BT") has SMP in 121 of the 242 wholesale international services markets. S.11 The Director’s initial view is that Cable and Wireless plc ("C&W") has SMP in 4 of the 242 wholesale international services markets. Regulatory remedies S.12 The Director considers it appropriate to propose a number of remedies on both BT and Cable and Wireless in the markets where the Director is minded to conclude that they have SMP. S.13 The Director proposes the following requirements on BT:
S.14 The Director proposes the following requirements on C&W:
S.15 The Director considers that the proposals in this review represent a proportionate response to the market analysis carried out. Both BT and C&W are dominant in a number of the markets considered. The measures proposed will enable competitors to purchase wholesale services from BT and C&W in order to develop their own retail services to further develop competition and deliver benefits to consumers. Some regulatory obligations have been removed, particularly all sectoral regulation on wholesale international routes which the Director considers to be effectively competitive, and the wholesale charge cap on routes which are not considered competitive. Additionally the number of wholesale international services markets for which both BT is considered to have dominance has reduced from 193 to 121 and for which C&W is considered to have dominance has reduced from 37 to 4. The Director has not considered it necessary to review markets in relation to international backhaul or cable landing stations and accordingly existing sectoral regulation on these associated international facilities will not be continued under the new regime. Consultation S.16 The Director is seeking comments on his proposals by 30 May 2003. Once he has considered all responses, the Director will publish his final proposals and these will take effect from 25 July 2003. Comments should be sent to Alexander Shepherd, Oftel, 50 Ludgate Hill, London EC4M 7JJ, e-mail:alexander.shepherd@oftel.gov.uk and tel: 020 7634 8721. A full list of the questions to which Oftel is seeking responses can be found in Annex G. S.17 The formal notification of the proposed market definition, SMP designation and specific conditions can be found in Annex A. The proposed draft directions and the obligations set out therein can also be found in Annex A.
Chapter 1 A new regulatory regime 1.1 A new regulatory framework for electronic communications networks and services will enter into force in the UK on 25 July 2003. The basis for the new regulatory framework is five new EU Communications Directives as follows:
1.2 The new regulatory framework is designed to create harmonised regulation across Europe and is aimed at reducing entry barriers and fostering prospects for effective competition to the benefit of consumers.
1.3 The Framework Directive provides the overall structure for the new regulatory regime and sets out fundamental rules and objectives which read across all the new directives. As its name suggests, it is the directive that establishes the new framework. Article 8 of the Framework Directive sets out three key policy objectives which have been taken into account in this market review. The Authorisation Directive establishes a new system whereby any person will be generally authorised to provide electronic communications services and/or networks without prior approval. The general authorisation replaces the existing licensing regime. The Universal Service Directive defines a basic set of services that must be provided to end-users. The Access and Interconnection Directive sets out the terms on which providers may access each others’ networks and services with a view to providing publicly available electronic communications services. These four Directives must be implemented in the UK and in other EU Member States on 25 July 2003. The fifth Directive on Privacy establishes users’ rights with regard to the privacy of their communications. This Directive was adopted slightly later than the other four Directives and has an implementation date of 31 October 2003. Implementation 1.4 In the UK, it is intended to implement the four main Directives through a new Communications Act. The Communications Bill was introduced into the House of Commons on 19 November 2002 ("the Bill"). The latest version of the Bill is that which was amended in Committee in the House of Commons on 6 February 2003. It can be found at http://www.communicationsbill.gov.uk. (References to the Communications Bill in this document are references to this version of the Bill). The Bill may be subject to change as it proceeds through Parliament. 1.5 It is intended that the Communications Bill will receive Royal Assent by 25 July 2003. However, in the event that the Communications Bill does not receive Royal Assent by 25 July 2003, the government has acknowledged that implementation will need to occur by Statutory Instruments made under the European Communities Act 1972 for an interim period until the Bill enters force. Further, if the Communications Bill does receive Royal Assent by 25 July 2003, it is expected that Ofcom will not be ready by the summer to assume all of its duties foreseen by the Communications Bill. Should that be the case, the Communications Bill makes specific provision to enable Ofcom’s functions to be carried out by the Director or the Secretary of State for a transitional Period. For these reasons, this document refers to the Director rather than Ofcom. 1.6 Article 16 of the Framework Directive provides that analysis of the relevant markets for the purpose of the new regime should be carried out as soon as possible after the adoption of the European Commission’s Recommendation on markets. The Recommendation was published on 11 February 2003. This market review is the preparatory work required as to the analysis of markets required by the new regime. In the UK, the Electronic Communications (Market Analysis) Regulations 2003 (SI 2003/330)("the Regulations") confirm the Director’s ability to carry out this preparatory work. Pursuant to the Regulations, the Director is consulting on the market identification and analysis, designation of SMP (or not) and the SMP conditions proposed to be adopted on or after 25 July 2003. Regulation 8 enables the Director to confirm his proposals before 25 July 2003. They will then be given effect on 25 July 2003 by the new Communications Act or the interim regime introduced by Statutory Instrument. Market reviews 1.7 The new Directives include the requirement that National Regulatory Authorities (NRAs) such as Oftel should carry out reviews of competition in communications markets, to ensure that regulation remains proportionate in the light of changing market conditions. Oftel already carries out market reviews as part of its long term strategy, focusing on effective competition as the best means to deliver a good deal for consumers. 1.8 Oftel is now conducting a series of market reviews under the Regulations. The reviews need to be completed by 25 July 2003 to ensure that any appropriate and proportionate regulation flowing from them is in place for the commencement of the new regime on that date. 1.9 Each market review has three stages:
1.10 More detailed requirements and guidance concerning the conduct of market reviews are provided in the Directives, the Communications Bill, the Regulations and in additional documents issued by the European Commission and the Director. As required by the new regime, the Director will take the utmost account of the two European Commission documents discussed below in this market review. Recommendation on relevant product and service markets 1.11 The European Commission has identified in its Recommendation on markets , adopted on 11 February 2003 ("the EU Recommendation"), a set of product and service markets within the electronic communications sector, which are to be reviewed by NRAs. The EU Recommendation seeks to promote harmonisation across the European Community by ensuring that the same product and service markets are subject to a market analysis in all Member States. However, NRAs are able to regulate markets that differ from those identified in the Recommendation where this is justified by national circumstances and where the Commission does not raise any objections. Accordingly, NRAs are to define relevant markets appropriate to national circumstances, taking the utmost account of the product markets listed in the EU Recommendation.
SMP Guidelines 1.11 The European Commission has also issued guidelines on market analysis and the assessment of significant market power ("the SMP Guidelines")(see Commission Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services). 1.12 Oftel has produced additional guidelines on the criteria to assess effective competition (see Oftel's market review guidelines: criteria for the assessment of significant market power. These supplement the SMP Guidelines and replace Oftel’s effective competition guidelines issued in August 2000 and the Director has taken these guidelines into consideration whilst undertaking this review. Regulatory option appraisal 1.13 When considering the appropriate level of regulation if a finding of SMP is found, Oftel will also give consideration to its regulatory option appraisal guidelines published in June 2002 (see Oftel’s regulatory option appraisal guidelines: assessing the impact of policy proposals. Market definition under Article 7 of the Access Directive 1.14 The Director has given careful consideration to the markets listed in the EU Recommendation and noted that a market, or markets, relating to wholesale international services is not identified in the Recommendation. 1.15 However, the Director proposes to define additional markets for this review outside the EU Recommendation and has made this consultation document accessible to the European Commission and to the regulatory authorities in other Member States in accordance with the scheme of the Directives. The Director’s analytical basis for the market definition used in this review and the rationale for reviewing these market is fully set out in Chapter 2 together with his justification for defining markets outside the EU Recommendation. Background 1.16 In order to understand wholesale international services, it is important to consider the history of the regulation of these services, the regulation which is currently in place and other factors which are significant to the operation of wholesale international services as a whole. History and initial regulation 1.17 Initially only BT and Mercury Communications Limited (now part of Cable & Wireless plc) were licensed to provide wholesale international services over their own international infrastructure. 1.18 In 1993, with the ending of the fixed "duopoly", wholesale international services were partly opened up to competition by the granting of international simple resale ("ISR") licences allowing ISR on a few limited routes where the destination market was liberalised. 1.19 Full liberalisation of wholesale international services took place in December 1996 from which time all operators could apply for an international facilities licence to offer international facilities. Subsequently, the Public Telecommunications Operator ("PTO") licence was expanded to cover use of international facilities. 1.20 At least 500 operators now offer wholesale international services from the UK (source – TeleGeography 2003) 1.21 BT, and subsequently Concert from 1999 (see BT, Concert and CNS at paragraph 1.42 below, and BT/CNS relationship at paragraph 1.47 below), due to its clear dominance in wholesale international services, was subject to a non-discrimination obligation, 28 day price-publication and price-notification obligations. Additionally it was subject to a safeguard price cap of RPI-0% on each of its wholesale international routes. 1.22 C&W was also subject to regulatory controls (see paragraph 1.37 below). Previous reviews 2000 International Markets Review 1.23 In March 2000, the Director published a statement (see Oftel’s Statement on Competition in International Markets) setting out his views on the state of competition on certain retail IDD, wholesale international and international private leased circuit ("IPLC") routes. For the purposes of that statement, the Director analysed each international route (or country-pair) as a separate market. The Director concluded that competition was sufficient for regulatory controls to be reduced on BT in respect of 23 retail IDD routes and 22 IPLC routes, and on Concert in respect of 26 wholesale international routes, these routes were considered to be "effectively competitive". Those routes which were not determined to be effectively competitive were considered to be "prospectively competitive". 1.24 For wholesale international routes, as the Director concluded that the markets for wholesale international services on each of the 26 routes were effectively competitive, Concert’s charges on those routes would be outside the Network Charge Control regime, no longer subject to the price cap of RPI-0% and only one day’s prior notice of changes to such charges would be required (rather than 28 days previously). 1.25 In addition, the Director confirmed his view that on wholesale international routes which are effectively competitive (i.e. where BT and Concert do not have market influence), any discriminatory offerings are less likely to be interpreted as ‘undue’ under conditions 57 and 66.41 of BT’s and Concert’s respective licences. 2001/2002 International Market Review 1.26 In March 2002 the Director published a further statement (see Statement on Competition in International Markets) as a result of requests from BT and Communications Networking Services (UK) ("CNS"), previously part of Concert (see BT, Concert and CNS at paragraph 1.42 below, and BT/CNS relationship at paragraph 1.49 below), for a review of competitive conditions on the remaining wholesale international routes not determined to be effectively competitive in Oftel’s March 2000 Statement. 1.27 The Director focused on 42 of the prospectively wholesale international routes and determined that 20 of these routes were now competitive. Accordingly regulation on these routes was also reduced as set out in paragraph 1.24 above. Cable & Wireless determination 1.28 In February 1997 the Director determined that Cable and Wireless plc ("C&W")(then Mercury Communications Limited) was a ‘Well-Established Operator’ in retail and wholesale international markets. Having Well-Established Operator status meant that the relevant operator has market power such that it is able to raise prices above the competitive level for a non-transitory period without losing sales to such a degree as to make this unprofitable. Well-Established Operator status has since become known as "Market Influence". Such a determination meant that C&W was obliged to publish prices and was prohibited from either discrimination or preference towards itself or other operators. 1.29 On various occasions over the following four years, the Director has determined that C&W no longer has market influence on certain routes. 1.30 In April 2001 the Director determined that, as a result of increased competition for IDD services, C&W only had market influence in relation to 37 retail and 38 wholesale IDD routes. Therefore presently C&W remains subject to non-discrimination and 28 day charge publication obligations in relation to these routes (although consent has been given by the Director that C&W currently does not need to publish its wholesale IDD charges). Route designation 1.31 For the purposes of the 2000 and 2001/2 IDD Reviews, the Director designated those routes which are considered to be "effectively competitive", and thus subject to reduced regulation, as "Category A routes". The Director has designated those routes that were considered to be "prospectively competitive", upon which BT has significant market power and is subject to full regulation, as "Category B routes". 1.32 A cumulative list of Category A routes is set out in Annex C. A list of all Category B routes is set out in Annex D. 1.33 A list of all routes for which C&W is determined to have market influence is set out in Annex E. 1.34 These Annexes summarise the Director’s wholesale IDD determinations as at 26 March 2002. Current regulation 1.35 Currently Category A routes (in Annex C) are subject to:
1.36 Currently Category B routes (in Annex C) are subject to:
1.37 Currently routes for which C&W have been determined to have market influence (in Annex E) are subject to:
Developments in international markets 1.38 During recent years, international traffic to and from the UK has continued to grow substantially. The volume of outgoing wholesale international services call minutes has grown from 3.5 billion minutes in 1994/5, to 6 billion minutes in 1998/1999 to almost 8 billion minutes in 2001/02 (source - Oftel analysis). This growth is substantially more than that for UK local or national calls. 1.39 At the same time, UK revenues from wholesale international services as a whole have fallen, although at a slower rate and initially they showed a slight increase – down £1.36 billion in 1994/5, peaking at £1.43 billion in 1997/8 and dropping to £1.12 billion in 2001/2 (source - Oftel analysis). 1.40 The graph below illustrates the comparative trends in wholesale international services volumes and revenues. Figure 1 - volume and revenue trends
Source, figure 1: Oftel research, Office of National Statistics 1.41 A number of competitors have entered the market for the provision of wholesale international services. This increase in competition has provided an incentive for carriers to reduce prices at the wholesale level. As a result, wholesale charges are becoming closer to costs, although the reduction in prices is considerably less rapid in relation to less competitive routes. The decline in prices and increases in traffic can also be linked to a dramatic increase in cable capacity in the past four years. BT, Concert and CNS 1.42 In July 1998 BT announced the formation of a joint venture with AT&T Corporation of the United States ("AT&T") to offer a combined international telecommunications service to their respective customers. Concert Communications Company ("Concert") acquired the international facilities of both BT and AT&T and provided those international facilities to BT and AT&T’s customers and wholesale and retail businesses. The joint venture offered its first services to customers in the first quarter of 1999 and became operative as a legal joint venture in January 2000. 1.43 In October 2001, BT announced that Concert was to be dissolved and that BT and AT&T would each take direct ownership of substantially the same businesses and assets that they had originally contributed to the Concert joint venture. Each company assumed direct ownership of the customer and supplier contracts that they had originally contributed to Concert. On 1 April 2002 Concert was formally closed. 1.44 As part of the dissolution of Concert, the assets and business that would otherwise have been returned to BT were placed in a separate company called Communications Networking Services ("CNS"). 1.45 CNS is a wholly owned subsidiary of BT. As stated above CNS owns BT’s entire international infrastructure for wholesale international services. At the time of this consultation document CNS operates under its own PTO licence (i.e. not under BT’s PTO licence). 1.46 CNS provides wholesale international services via interconnection at the Digital International Switching Centre ("DISC"). These services are currently set as "Standard Services" in the CNS Reference Interconnect Offer ("RIO"). 1.47 BT also provides wholesale international services. However BT offers these services via interconnection either at the CNS DISC (acting, in effect, as CNS’ reseller) or via any of BT’s Digital Main Switching Units ("DMSU") for onward conveyance via BT’s national network to the DISC. These services are set out as "Standard Services" in BT’s RIO. 1.48 BT additionally offers retail IDD services to end-users. Details of these services are set out in BT’s Retail Price List (available at http://www.bt.com/index.jsp). However retail IDD services are not being considered in this review and are addressed in Oftel’s Retail Market Review. Relationship between BT and CNS 1.49 Under CNS’s PTO licence CNS cannot, amongst other things, unduly discriminate between operators (including BT). 1.50 CNS is BT’s exclusive provider of wholesale international services. BT in turn provides wholesale international services that it has obtained from CNS to both its wholesale customers and its retail business. 1.51 As stated above wholesale customers may interconnect with CNS or with BT at either the DISC or at one of BT’s DMSUs. CNS’s published wholesale international services charges are for interconnection at the DISC. 1.52 BT mirrors these prices for interconnection at the DISC and additionally offers equivalent DMSU prices by means of adding the appropriate standard service charge for an ‘inter-tandem conveyance for IDD’ for outbound IDD traffic (or an ‘inter-tandem transmission for IDD’ for inbound IDD traffic) between the DISC and the DMSU. Wholesale transit markets are not addressed in this market review but are addressed in Oftel’s Review of the fixed narrowband wholesale exchange lines, call origination, conveyance and transit markets. 1.53 Currently operators have the option to interconnect with BT or with CNS although for practical reasons almost all operators contract and interconnect with BT. As stated above BT mirrors CNS’ prices. As both operators are subject to interconnection obligations in relation to Category B routes that oblige them to convey traffic, practically BT is compelled to match CNS’s prices – if it were to charge a margin on CNS’s wholesale charges, operators could simply interconnect with CNS. Accordingly there is little financial or other advantage for providers in interconnecting at the DISC with CNS. Treatment of CNS in the market reviews and under the new regime 1.54 As stated in paragraph 1.45 above CNS currently operates under an individual PTO licence. As a result of vertical integration between CNS and BT, the licence conditions that are relevant to wholesale international services in their respective licences are similar to one another. 1.55 Under the new regime, any specific conditions that are placed on a ‘dominant provider’ (i.e. a provider determined as having SMP) will be applicable to that provider’s subsidiaries as well. Accordingly for the purposes of this market review, BT and CNS are considered as part of one undertaking. 1.56 Where the Director’s conclusion from this market review is that either BT or CNS should be subject to sectoral regulation within a particular wholesale international services market, such regulation will be placed on BT and accordingly shall apply to both BT and CNS because CNS is a wholly owned subsidiary of BT. Therefore for convenience in this document, unless indicated to the contrary, BT plc and Communications Networking Services shall both be referred to simply as BT. General market uncertainty 1.57 The Director is aware that there is some uncertainty within the telecommunications business sector at present due to the slow down in the anticipated growth in the sector. The Director is also aware that wholesale international services traffic and consequently derived revenues have been affected by this slow down. 1.58 Additionally any consolidation involving wholesale international services operators would be likely to increase those operators’ market shares and would potentially affect competition within wholesale international services markets. Any such consolidation could affect the Director’s views on this market review. Forward looking approach 1.59 The markets considered in this review may be subject to a degree of change as a result of additional cable capacity being made available to wholesale providers and the knock-on effect this has both to barriers to entry and wholesale charges. Additionally changes in international calling patterns at the retail level affect the demand for, and price of, wholesale international services. 1.60 However the majority of markets and routes for which the Director’s initial view is that there is a dominant provider in that market have low traffic volumes and in total all markets for which the Director proposes to make an SMP determination constitute less than 5% of the total of outbound wholesale international traffic (Source – Oftel Analysis). Accordingly the chance of these markets becoming competitive in the short to medium term is low due to the small traffic volumes for which wholesale providers would be competing. 1.61 Unless there is a significant change in market conditions or traffic volumes on these routes increases dramatically, it appears unlikely that an additional review of these markets will be required in the next 18 – 24 months. 1.62 The Director will continue to review developments in the wholesale international services markets and will take appropriate action in the future aimed at achieving the objective of the new regime including the promotion of competition and protection of consumers. Market operation – types of traffic carriage 1.63 There are six basic ways in which wholesale international services are carried:
1.64 A summary of each is set out below: Direct conveyance 1. The customer dials an international
number. 1.65 In this case, an agreement exists between the originating operator and its correspondent operator in the destination country. The agreement between operators for direct conveyance is often referred to as a "correspondent agreement" or a "bilateral agreement" and the route to which these agreements relate is often referred to as a "bilateral route". Simple
transit 1.66 In this case, a three party agreement exists between the originating, transit and terminating operators for settlement purposes. Refile 1. The customer dials an international
number 1.67 International refile exploits the fact that international accounting rates, which are the rates at which international operators account to each other for the calls they originate and terminate, are negotiated on a bilateral basis between countries, and can therefore differ significantly depending on the partner. 1.68 For example, the combined accounting rate between country A and country B, and country B and country C can be less than the single accounting rate between country A and country C. In this case, operators would have a financial incentive to route – or refile – country A to country C traffic through country B. Switched bypass/international simple resale (ISR) 1. The customer dials an international
number. 1.69 Switched bypass exploits the fact that in a number of cases international accounting rates are well above the cost of local termination in the destination country. Depending on the telecommunications legislation in the destination country, this practice may be prohibited in that country. Global operator’s internal network 1. The customer dials an international
number. 1.70 Many operators in the global international services marketplace have a presence in more than one country. In the case of each of these overseas operations, there will exist a market for delivery of international services traffic. 1.71 Each of the overseas operations will be able to buy and sell international services delivery. In such circumstances an operator may choose to route traffic originating in country A to its presence in country B (a transit country) in order to buy call termination to the final destination. 1. The customer dials an international
number. 1.72 Even in the absence of an internal network, carriers may route traffic via an international private line to a third country to buy international services delivery in that third country. This is similar to "Switched bypass" above, but the destination country is not limited to that in which the private line terminates. VoIP bypass
1.73 VoIP bypass relies on IP backbone networks not being used to their full capacity and so allowing operators to carry voice traffic at lower rates than could be achieved over switched networks. Additionally in destination countries where international termination rates are high and national termination rates are lower, as the voice traffic re-enters the PSTN at a national switch rather than an international switch, the operator is able to avoid the high international termination charge paying only the national charge. 1.74 In some countries VoIP bypass is prohibited as it avoids the international accounting rate mechanism (though its use is often very hard to detect). VoIP bypass is often of particular importance for the introduction of competitive international services conveyance to such countries despite being prohibited. In certain countries, it has expedited the liberalisation of that country’s international telecommunications market. Trading Exchanges The customer dials an international number. The call is routed to a trading exchange where delivery to the destination is purchased via the exchange’s trading mechanisms. (This is usually via an ‘anonymous’ transaction between the buyer and seller managed by the trading exchange.) The "seller" delivers the call to the destination however it chooses. Examples of trading exchanges are Arbinet and Band-X. 1.75 Whilst the trading exchanges have a physical presence in a country (i.e. their switch), the markets in which they operate effectively transcend national boundaries as operator from many countries will be connected to the exchanges via international private lines for both buying and selling. 1.76 As some trading exchanges are perceived by some providers to offer lower call quality than that offered by other carriage methods, they may not be perceived as attractive conveyance methods in certain circumstances. 1.77 Although the trading exchanges are believed to be small currently, they provide evidence of a wider competitive market operating above and beyond national boundaries. Implementing Oftel strategy 1.78 The Director’s goal is to obtain the best deal for consumers and to achieve this, the Director seeks to regulate only where it is necessary to bring benefit to consumers and, to keep regulation to the minimum necessary to obtain appropriate outcomes. The Director believes that:
1.79 Competition in the provision of both retail and wholesale international services has continued to grow since Oftel’s Statement on Competition in International Markets published in March 2002. The Director is concerned that the present controls on each of BT, CNS and C&W may be hindering the further development of competition in these markets by restricting their ability to compete effectively. In carrying out the present review and in coming to the initial conclusions and proposals set out in Chapter 4, the Director has focused on acting in accordance with Oftel’s strategy and the regulatory principles set out in the previous paragraph. In particular the Director has examined whether the present regulatory controls continue to be appropriate given the current state of competition and having carried out this review in accordance with the new regulatory framework. Outline of rest of document 1.80 The rest of the document is structured as follows:
Notification 1.81 Annex A contains the formal notification of the proposals made by the Director as a result of the review, including the market(s) defined, the designation of SMP and the conditions proposed as a result of the market analysis. This implements the provisions of Regulations 5 and 6 of the Regulations. 1.82 This document, including the formal notification in Annex A has been made accessible to the European Commission and to the regulatory authorities in other Member States in accordance with the scheme of the Directives.
Market Definition Market definition – wholesale international services Approach used to define markets 2.1 There are two dimensions to the definition of a relevant market: the relevant products to be included in the same market and the geographic extent of the market. Oftel’s approach to market definition follows that used by UK competition authorities (see Office of Fair Trading Market Definition Guideline, OFT 403, March 1999, and is in line with those used by European and US competition authorities. 2.2 Market boundaries are determined by identifying constraints on the price-setting behaviour of firms. There are two main competitive constraints to consider: how far it is possible for customers to substitute other services for those in question (demand- side substitution); and how far suppliers could switch, or increase, production to supply the relevant products or services (supply-side substitution) following a price increase. 2.3 The concept of the ‘hypothetical monopolist test’ is a useful tool to identify close demand-side and supply-side substitutes. A product is considered to constitute a separate market if a hypothetical monopoly supplier could impose a small but significant, non-transitory price increase (SSNIP) above the competitive level without losing sales to such a degree as to make this unprofitable. If such a price rise would be unprofitable, because consumers would switch to other products, or because suppliers of other products would begin to compete with the monopolist, then the market definition should be expanded to include the substitute products. Relationship between the wholesale and retail markets 2.4 This consultation document will define the relevant markets both at the retail and the wholesale level. Consideration of the relevant retail markets logically precedes the analysis of the wholesale markets, since the demand for wholesale services is derived from the demand for retail services. 2.5 The purpose of this exercise is to assess whether a provider has SMP in a wholesale market and to identify appropriate remedies in that market to counter the existence of market power. Given this objective, it is necessary for the definition of retail markets to be undertaken on the basis of an assumption of no regulation of the wholesale services being considered. To do otherwise would mean that the wholesale market power assessment would depend on a retail market definition that relied on a wholesale remedy arising from the finding of wholesale market power. This would be a circular and incorrect approach to market definition. Therefore, the demand side and supply side substitution possibilities at the retail level will be considered only if they are viable in the absence of regulated wholesale inputs. 2.6 Throughout this consultation document, markets will be defined first on the demand side. The analysis of demand side substitution will be undertaken by considering if other retail services could be considered as substitutes by consumers, in the event of the hypothetical monopolist introducing a SSNIP above the competitive level. 2.7 Supply side substitution possibilities will then be assessed to consider whether they provide any additional constraints on the pricing behaviour of the hypothetical monopolist which have not been captured in the demand side analysis. In this assessment, supply side substitution will be considered as a low cost form of entry which could take place within a relatively short period of time (The OFT Guidelines on Market Definition, OFT 403, March 1999, consider the relatively short period to be within a year). That is, for supply side substitution to be relevant, there would need to be additional competitive constraints arising from entry into the supply of the service in question, from suppliers who are able to enter quickly and at low cost, by virtue of their existing position in the supply of other services. As discussed earlier, only those supply side substitution possibilities that are viable in the absence of unregulated wholesale inputs will be considered as relevant to the analysis. 2.8 There might be suppliers who provide other retail services but who might also be materially present in the provision of demand side substitutes to the service for which the hypothetical monopolist has raised its price. However, such suppliers are not relevant to supply side substitution since they supply services already identified as demand side substitutes. As such their entry has already been taken into account and so supply-side substitution cannot provide an additional competitive constraint on the hypothetical monopolist. However, the impact of expansion by such suppliers can be taken into account in the assessment of market power. 2.9 A third factor that is sometimes an additional consideration is whether there exist common pricing constraints across customers, services or areas such that they should be included within the same relevant market even if demand- and supply-side substitution are not present. Relationship between this market definition and the Recommendation 2.10 As stated in Chapter 1, the Director has given careful consideration to the markets listed in the EU Recommendation, being bound to take utmost account of these when defining the relevant market in the UK. 2.11 The markets in this review have not been identified in the European Commission's Recommendation on relevant markets. 2.12 The Director has periodically reviewed wholesale international markets and has previously identified potential competition problems, and concluded that BT and C&W have market power. The reasons why he considers it particularly important to define these markets in the UK, even though they are not set out in the EU Recommendation, are outlined below. The analytical case underpinning the Director’s market definition is outlined in subsequent sections of this chapter. 2.13 The United Kingdom is the largest EU and second largest worldwide international telecommunications market with total international traffic in 2001/2002 of approximately 20 billion switched minutes (source - TeleGeography). The UK originated 23% more minutes of international traffic than the next highest European country, Germany (source - TeleGeography), in 2001/02 despite Germany having a 39% (source - The Economist, The World in Figures 2003) larger population. Indeed, compared to the other 15 EU countries, the UK originated 73% (source - The Economist, TeleGeography, Oftel analysis) more international traffic per capita than the average of the others. 2.14 This situation is due in part to the existence of the large English-speaking communities of interest that have evolved due to historical factors. Accordingly outgoing international traffic from the UK is more evenly spread amongst a wider range of destinations than in comparable countries. In 2001/02, 25% of international traffic originated in the UK went to destinations other than the twenty largest markets, a figure significantly above the EU average (source – TeleGeography, Oftel analysis). 2.15 BT is the largest EU carrier and third largest world carrier of international traffic (source - TeleGeography). C&W is the fourth largest EU carrier and seventh largest world carrier of international traffic (source - TeleGeography). 2.16 The United Kingdom is the main European landing point of transatlantic, African and Asian submarine telecommunications cables. 2.17 Paragraph 61 of the SMP Guidelines states that: "For the purposes of ex-ante regulation, in certain exceptional cases, the relevant market may be defined on a route-by-route basis. In particular, when considering the dimension of markets for international retail or wholesale electronic communications services, it may be appropriate to treat paired countries or paired cities as separate markets." 2.18 The Director believes that evidence of potential competition problems in previous reviews, coupled with the overall size of the UK wholesale international services and the reliance that providers in other EU Member States have on UK providers demonstrates a national circumstance which justifies the review of wholesale international services. 2.19 The Director believes that the factors set out in paragraphs 2.13 – 2.16 above mean that the importance of the UK wholesale international services market, both to the UK and to other EU member states (due to the UK’s significance as an international hub), gives the Director justification for reviewing the wholesale international services markets despite those markets not being separately identified in the EU Recommendation. 2.20 The Director further believes that the markets for wholesale international services should be considered, in accordance both with previous reviews undertaken and with paragraph 61 of the SMP Guidelines, on a route-by-route basis. The Director has set out his analytical justification for this market definition below. 2.21 Oftel has based its analysis in this review on a wide range of sources, including responses to questionnaires sent to operators, Oftel’s own market research and regular market information collected from industry. 2.22 Accordingly the Director proposes to define markets for this review outside the EU Recommendation and has made this consultation document accessible to the European Commission and to the regulatory authorities in other Member States in accordance with the scheme of the Directives.
Retail market The product market 2.23 The starting point for the Director’s analysis of the retail IDD market definition is the narrowest feasible market definition. This is the market for IDD calls from fixed lines on a city pair basis, such as a call from London to New York. The SSNIP test is applied to assess this type of narrow market in the paragraphs below. Customer type 2.24 It may be possible to define separate markets for different groups of customers, for example, by distinguishing between business and residential customers, or on the basis of spend levels. 2.25 The Director proposes to adopt the EC’s recommended distinction between residential and business fixed telephony markets. These two types of call appear not to be subject to a common pricing constraint, and suppliers have demonstrably been able to price discriminate between these two broad groups. What may be less clear is whether it is possible to narrow these definitions further, i.e. to distinguish between different types of residential and different types of business customers. The Director considers that this single distinction remains appropriate. (See http://www.oftel.gov.uk/publications/eu_directives/2003/eu_retail for details). Demand-side substitutability Are calls to and from different cities demand side substitutes? 2.26 The "city pair" approach is not broadened by demand side substitution following an SSNIP test. A caller making calls from London to New York is unlikely to respond to an SSNIP from a hypothetical monopolist supplier of such calls by substituting a call from for example, Manchester to New York or from London to Washington in place of the call from London to New York. Are calls from fixed lines and mobiles demand side substitutes? 2.27 In considering whether a call from a mobile to a fixed line or to another mobile is an adequate substitute for a call from a fixed line, a number of issues arise. In the first instance, substitution is more likely if the caller already has a mobile and therefore bases their decision on the marginal call price. Oftel’s quarterly residential survey published in August 2002 indicates that the proportion of households with both a fixed and a mobile phone is estimated at 73%. The same survey reports that about two-thirds of consumers with both fixed and mobile phones find occasions on which they use their mobile instead of their fixed telephone. (This proportion is virtually unchanged from two years ago.) This means that just less than one third are not substituting mobile usage for fixed to take advantage of lower prices at certain times, or for convenience. 2.28 However, only a minority of consumers with both fixed and mobile phones use a mobile instead of a fixed phone either at certain times of the day or to call certain numbers on the basis of price differences. The relevant figures are 10% and 9% of consumers, respectively – see Oftel’s quarterly residential survey published in August 2002. 2.29 The size of the price differential between calls from fixed and mobile phones depends on a number of factors, including whether the caller’s mobile tariff package provides an allowance of "free" calls in return for a fixed fee. Where users purchase an allowance of free calls with their subscription, the marginal call price may be regarded as zero and this may encourage use of the mobile in preference to the fixed phone. However, the possible scale of substitution of calls from the fixed line may be limited if the allowance of free calls is small relative to the volume of fixed line calls (as is usually the case with international calls). In addition, whilst some off-peak mobile tariffs are now comparable to some prices for calls on the fixed network, the general price premium for making calls from a mobile (which in many cases is particularly marked in the case of international calls) suggest that mobile prices do not constrain the prices of calls from a fixed line. Are other means of international communication demand side substitutes for international calls? SMS 2.30 For those with a mobile, it might also be argued that Short Messaging Service (SMS) is a demand-side substitute for fixed calls. Oftel’s October 2002 consumer surveys Consumers' use of fixed telephony and Consumers' use of mobile telephony (available at http://www.oftel.gov.uk/publications/research/index.htm ) indicated that the most significant reason for using SMS over fixed voice telephony was convenience. The next most frequently cited reason was that it was generally perceived as cheaper than making fixed voice calls. 2.31 However, the Director does not believe that SMS would constrain the pricing of fixed voice calls. The consumer survey referred to above indicated that only 17% of mobile customers frequently use text messages as a substitute for fixed voice calls. Use of SMS requires not only that the calling party has a mobile phone, but also that the recipient has such a phone. 2.32 In any case, SMS is an imperfect alternative to voice and does not afford sufficient opportunity for immediate conversation and interaction to be an adequate demand-side substitute for voice calls. 2.33 Moreover, it is not obvious that sending a text message is a cheaper alternative to a voice call. In particular, constant exchanges of SMS to hold a "conversation" would cost a significant amount. The Director has not undertaken a comparison of the pricing of SMS relative to voice calls in the context of calls and messages made/sent to international destinations. However, calculations based on domestic calls and messaging show that SMS based conversations is in general an expensive option. See http://www.oftel.gov.uk/publications/eu_directives/2003/eu_retail for details. 2.34 For the above reasons, SMS is best seen as an adjunct to fixed voice telephony and does not form part of the same market. 2.35 The issue of the competitive constraint from e-mail was considered in the context of IDD calls in Oftel’s consultation document Competition in International Markets (November 2001). It was noted that, as with SMS, Oftel did not accept that e-mail offers a close enough substitute to voice conversation to constrain the pricing of a hypothetical monopolist of IDD calls from fixed lines to the competitive level. 2.36 This view is supported by Oftel’s latest customer research which shows that only 27% of adults with internet access frequently use e-mail instead of fixed voice calls (Consumers' use of fixed telecoms services January 2003. The evidence from this research suggests that the primary reason for using e-mail over voice is in order to request information or for enquiry purposes. For international communications, cost was nevertheless a significant factor, although time differences were also important. 2.37 Evidence from Oftel’s latest SME customer research suggests similar results (Business use of fixed telephony Oftel small and medium business survey January 2003). 2.38 The primary reason for using e-mail over fixed voice calls is to attach files/documents, although for international communications cost was also significant, but this time less so than time differences. 2.39 Overall for residential consumers and SMEs, around 40% (36% for the former and 40% for the latter) of respondents in these surveys identified cost as a reason for using e-mail in place of fixed voice calls. Taken alone, this figure would appear to suggest a strong degree of substitutability of e-mail for voice calls in response to price considerations. However, as noted previously, there were significant responses to other reasons for using e-mail over fixed voice calls. These factors would tend to suggest that e-mail is an adjunct to fixed voice telephony. Moreover, cost was not the most frequently cited reason by survey respondents for using e-mail over fixed voice calls. 2.40 Although e-mail may be less expensive than SMS and might allow greater detail to be incorporated into communications, like SMS it does not afford sufficient opportunity for immediate conversation and interaction to be a full substitute for voice calls. Oftel therefore remains of the view that demand-side switching to e-mail would not represent a sufficient constraint on a hypothetical monopolist of fixed voice calls to price at the competitive level. Calls over the Internet 2.41 It has also been suggested that calls over the Internet could form an effective substitute to retail IDD calls. However, it must be noted that such calls would only act to constrain the pricing of a hypothetical monopolist supplier of IDD calls at the retail level if callers themselves were to switch to making calls via the Internet in response to prices above the competitive level. For such substitution to occur requires that callers have access to a personal computer ("PC"), together with an appropriate software package and Internet access. These requirements in themselves could be enough to prevent sufficient substitution to constrain IDD prices to the competitive level. In addition it must be noted that there are significant issues of quality in relation to Internet telephony at the retail level. The Director believes that the two issues of voice quality and access to facilities are, at present, sufficient to prevent widening the market definition of retail IDD calls to include Internet telephony. Initial views on demand side substitution 2.42 The Director’s view is that the "city pair" retail IDD market definition approach set out in paragraph 2.23 is not broadened by demand side substitution following an SSNIP test, either by calls to other destinations, or by forms of communication other than calls from fixed lines such as text messages or e-mail. Supply-side substitutability 2.43 The Director’s view is that supply side substitution broadens the "city pair" definition above. This can be seen by the way in which indirect access operators offer calls priced on a national basis, i.e. calls from any city in the UK are, with the possible exception of certain discounts (the offering of which the Director does not believe to be widespread), charged at the same level. 2.44 The potential for further substitution (beyond the above route by route definition) on the supply side is of considerable importance in defining the market for retail IDD calls. For supply side substitution to be considered, then, for example, an operator offering retail calls to the US would need go be able to switch easily to begin the provision of retail calls to Australia. The ease of such substitution is described below. 2.45 For companies already offering calls from the UK, it is necessary to look at whether they switch resources into the provision of calls to any other destination at short notice. In order to undercut a hypothetical monopolist charging excessive prices, potential suppliers would need to be able to switch both quickly and at low cost, and not to be at a material competitive disadvantage vis-à-vis the monopolist in terms of its cost base. 2.46 For retail IDD routes where the corresponding (in terms of destination) wholesale markets are competitive, such substitution would be possible at the retail level, because of the availability of a cost-based wholesale input. However, this would not be the case on retail IDD routes that are not effectively competitive at the wholesale level, because the wholesale input would not be available at a competitive price. See the Director’s November 2001 consultation Competition in International Markets for a more detailed discussion of this line of argument. 2.47 Supply side substitution at the retail level is therefore likely to be possible on routes where wholesale inputs are available to all retailers at cost-based levels. 2.48 Where wholesale markets are effectively competitive, cost based interconnection is freely available to retailers who wish to provide services on any particular route. It can therefore be argued that the ease with which retailers can switch into provision of services on routes which are effectively competitive at the wholesale level is such that, for all those markets where competition at the wholesale level is effective, there is a single retail market. 2.49 However, where competition at the wholesale level is not effective, cost based interconnection cannot be relied upon as being freely available. A retailer wishing to switch into the provision of services on a route that was not effectively competitive at the wholesale level would therefore face a barrier to entry in that it faces higher costs than incumbents (including the "hypothetical monopolist"). It is therefore not appropriate to depart from a route by route market definition at the retail level for those routes where wholesale competition is not effective. Thus, the Director proposes to define a single retail market for all those routes where competition at the wholesale level is effective. Other markets remain (as previously) defined on a route by route basis. 2.50 Accordingly, the Director’s initial view is that there are in fact two groupings of routes for the purposes of retail market definition. This identifies two sets of markets at both the residential and business level, namely:
2.51 The above "Category A" and "Category B" naming convention has been used previously by the Director. A full list of Category A and Category B routes is provided in Annexes B and C respectively. The Geographic Market 2.52 BT’s retail prices for (retail IDD) calls are geographically uniform, so BT responds to competitive pressures on a national basis. This would support the existence of UK-wide markets for retail IDD calls (on a route by route basis), with the exception of those calls originating in the Hull area (where BT does not offer call services). 2.53 Furthermore, some of the suppliers of calls to customers in one part of the UK would find it relatively easy to supply such services to customers in another area in response to a price increase in that area. IA operators may use their own long-distance networks and buy in wholesale call origination and termination from direct access operators. Supply-side substitution between areas exists for IA operators, given the availability of wholesale call origination and termination throughout the UK (at geographically uniform charges in the case of BT). 2.54 Given the current requirements on Kingston to offer Carrier Pre-Selection ("CPS"), should a competing operator request it, and the availability of IA in the Hull area, one could further argue a case for supply-side substitution from the rest of the UK into the Hull area. 2.55 However, at present Oftel has limited evidence of other operators offering calls to retail customers in the Hull area. To the extent that Kingston’s wholesale origination charges currently differ from BT’s, this would make it difficult to argue that prices in the Hull area will be subject to a common pricing constraint at the retail level (since IA operators would not offer uniform tariffs across the country). 2.56 Evidence from consumer surveys (Consumers' use of fixed telecoms services and Internet in the Hull Area and Business use of fixed telecoms services and Internet in the Hull Area to be published by Oftel in March 2003) suggests that Kingston’s retail prices have been broadly in-line with BT’s. Rather than being due to a common pricing constraint deriving from the threat of supply-side substitution, this could be due to an implicit regulatory threat. That is, Kingston may believe that if on average it priced persistently above BT, a price cap would likely be justified. Evidence from BT’s pricing suggests that the price-cap remains a binding constraint on its prices, implying that despite actual competition from IA and CPS operators, such competition has thus far not been as effective as price controls in bringing down BT’s prices. Therefore, applying analogous reasoning to Kingston would suggest that if one were to find Kingston’s prices broadly in line with BT’s, the likely explanation would be the implicit regulatory threat of price control rather than the threat of supply-side substitution by IA or CPS operators. 2.57 Finally, switching into the Hull area will involve sunk costs such as developing brand awareness among long-standing Kingston customers and contractual negotiations with Kingston (e.g. for CPS and wholesale call origination). The presence of such sunk costs, coupled with the relatively small number of customers that a competitor might expect to sign up, would further make supply-side switching into the Hull area unlikely in practice. 2.58 Therefore, while Oftel would recognise that in theory supply-side substitution from suppliers of calls in the rest of the UK into the Hull area may be possible in response to a SSNIP by a hypothetical monopolist of calls in the Hull area, evidence to date suggests that a UK-wide market definition is not appropriate. Summary of retail market definition 2.59 The Director’s initial view is that there are in fact two groupings of routes for the purposes of retail market definition, split between Category A and Category B routes as outlined above. (See Oftel’s Review of Fixed Narrowband Markets available at for a more detailed discussion of the generic issues relating to the definition of the product and geographic markets for all call types from fixed lines. 2.60 The above text relates to the market in the UK except for Kingston upon Hull. He has also considered the product market in the Hull area, and in particular whether the Category A and Category B distinction remains appropriate in Hull. 2.61 Oftel is not aware that IA operators are supplying international calls to customers in the Hull area, although it is possible that there may be some using 0800 numbers. This means that it may be difficult to rely on supply-side substitution at the retail level in order to justify the grouping of IDD routes which are competitive at the wholesale level into a single retail market, as was done in the UK market outside Hull. In the absence of supply-side substitution possibilities, it might then be argued that all retail IDD routes originating in the Hull area should be regarded as separate markets since calls to different destination countries are not demand-side substitutes. An alternative argument would be that all retail IDD routes from the Hull area could be grouped together on the grounds that competition conditions in their supply are homogeneous. The key point however is that Oftel's assessment of whether Kingston has SMP in markets for retail IDD calls from the Hull area is not affected by which of the three possible alternatives (route by route, routes which are competitive at the wholesale level grouped together, all routes grouped together) are adopted. For consistency and ease of presentation, Oftel has therefore adopted the same product market definition in the Hull area as in the rest of the UK. Wholesale market 2.62 Wholesale international services possess distinct characteristics that have a twofold influence on the application of the SSNIP test. Both result from the fact that markets are often defined on a route by route basis. 2.63 Firstly, the distinction between demand and supply side substitution may not always be clear cut in the case of markets defined narrowly on a route-by-route basis. Retail IDD suppliers are in many respects indifferent between a call routed between a pair of countries in many different ways, including via any number of intermediate countries, subject to minimum quality standards being satisfied. This means that, when assessing whether alternative routings of a call are substitutes, the distinction between demand and supply side substitution may become blurred. The Director has previously characterised such substitution in terms of the supply side, and, whilst this may remain the most appropriate description, he considers that it useful to analyse it also on the demand side. The distinction is not a key one in this context since it is unlikely to change the Director’s market definition or assessment of market power. 2.64 Secondly, product markets must be defined with a geographical element in mind (e.g. "calls from the UK to the US"), meaning that the need for a distinct analysis of the product and geographic markets is less clear than for many products. 2.65 What remains important in defining such markets is that all relevant competitive constraints are captured. The Director believes that his analysis outlined below has achieved this. The product market 2.66 The Director has previously defined the relevant wholesale market as being the market for wholesale international services, on a route-by-route basis, where a route is defined as being from one country to another. This is a relatively narrow market definition, and as such could be suitable as a starting point for the application of the hypothetical monopolist test. Since this definition follows from the retail market definition described above, the Director has therefore used such a definition as a starting point for his analysis. As noted above, this definition should be read to refer to wholesale international services from (for example) the UK to the US by any route, direct or indirect, subject to a minimum call quality.
Demand-side substitutability 2.67 The demand side analysis considers the reactions of purchasers of the wholesale hypothetical monopolist’s product to an attempt to implement a SSNIP (see details of the SSNIP test set out in paragraph 2.3 above). If such an attempt would result in purchasers substituting other products for the product of the hypothetical monopolist, these other products are included in the product market definition. It is clear that, on the demand side at least, a wholesale call from the UK to any destination other than the US is not a substitute for calls from the UK to the US. 2.68 Perhaps the most obvious potential substitute for a call between different countries at the wholesale level would be the use of an IPLC. IPLCs are readily available and allow the purchaser a direct connection with dedicated capacity between the two points. However, IPLCs are only economically viable for a relatively large-scale purchaser of calls between the two points (due to the need to incur relatively high fixed costs). The Director therefore does not believe that they are sufficiently close substitutes to be considered as part of the same economic market as wholesale international services calls between two cities. The threat of switching on the demand side would not constrain a hypothetical monopolist supplier of calls to price at the competitive level, since a large number of retail operators would be unable to switch to the use of IPLCs as a wholesale input. 2.69 The Director has carefully considered the question of indirect routing, notably "hubbing", in his market definition. It appears that, from a consumer (and hence retail operator) perspective, a call routed to, for example, the UK to Jamaica via the US is in many cases, subject to voice quality being equivalent, a substitute for a call routed direct from the US to the UK (note that similar arguments apply on the supply side, as is discussed below). 2.70 However, the Director has been unable to gather information regarding the nature and extent of hubbing and the relative cost to retail operators of using direct and hubbed routes. He has discussed the possibility of doing so with operators, but was led to the conclusion that obtaining reliable information along these lines would be prohibitively difficult. Additionally, the cost of obtaining such information, both for the Director and for operators, would be likely to be disproportionate to the benefit such information would provide. For example, the Director’s review of international markets uses data on wholesale traffic volumes to over 200 international destinations. Any attempt to determine the extent of hubbing between all of these countries would involve the review of over 40,000 worldwide country pairs and therefore would clearly create a prohibitively onerous data gathering requirement. 2.71 The Director is of the view that hubbing is likely to provide a competitive constraint on pricing of wholesale international services calls from the UK to a number of countries, notably countries with liberalised regimes (see the chapter on the assessment of market power for why) and those countries with substantial traffic inflows from major markets such as the US (due to the ability of carriers in the US to negotiate favourable terms for the termination of traffic). However, in the absence of more detailed information, he is inclined to take account of the likelihood of indirect routing in his assessment of market power (see Chapter 3), in his assessment of barriers to entry, rather than in his assessment of market definition. An advantage of this approach is that it does not rely heavily on the market share data made available to the Director by wholesale providers on a route by route basis, which has been of a poorer quality than the available evidence on barriers to entry. 2.72 It has similarly been suggested to the Director that the increasing use of bandwidth trading exchanges might have the effect of widening the relevant (product or geographical) market definition for wholesale international calls. However, he is at present unconvinced that the use of such arrangements is sufficiently widespread to justify widening the market definition for wholesale international calls to a global market. Such bandwidth exchanges may have the potential to constrain prices on a direct route to a competitive level, but the Director does not have evidence that bandwidth exchanges are being used in this way at present. 2.73 In summary, the Director considers that demand side substitution does not widen the product market beyond one defined on a route by route basis. The impact of refile traffic has been analysed in his assessment of market power. Supply-side substitutability 2.74 The supply side analysis considers the reactions of other producers to the wholesale hypothetical monopolist’s attempt to implement a SSNIP. If such an attempt would result in other producers switching into the supply of the hypothetical monopolist’s product, such that the firm would not be able to profit from the SSNIP, these other suppliers are included in the product market definition. 2.75 A hypothetical monopolist supplier of wholesale international services from the UK to the US could be constrained to charge the competitive level by credible threats of entry from other suppliers. 2.76 A potential source of supply side substitution into the provision of IDD calls at the wholesale level would be existing suppliers of IDD calls at the retail level. However, the Director believes that retailers would face significant barriers to entry into the wholesale market, including the costs involved in acquiring a switch and a transmission network, and the need to establish relationships with operators in destination countries. Thus, it is unlikely that retail suppliers of IDD calls could easily enter the market for wholesale international services, and it remains appropriate to separate the provision of international services into wholesale and retail markets. 2.77 It is additionally important to consider the impact of hubbing, as outlined in the analysis of demand side substitution above. For example, in the example used above, the question is whether operators offering services from the UK to the US could easily switch into providing services from the UK to Jamaica, thus making calls from the UK to the US and calls from the UK to Jamaica part of the same market. Such substitution, as discussed under the demand side, is likely to be feasible in certain markets. As with demand side substitution, the Director has again decided to take account of such substitution in his assessment of market power. Product market – summary 2.78 The Director believes that on the basis of the information available, the most appropriate definition of the product market is that for wholesale international services, on a route-by-route basis. Geographical market 2.79 To the extent that a hypothetical monopolist supplier of a product in "market A" would be constrained in its ability to implement a SSNIP by purchasers substituting products from other areas or by producers in other areas switching into supply in this area, these other areas are included in the relevant geographical market. The Director does not consider that it would be appropriate to define a narrower market than the UK. The issues relating to the position of Kingston of Hull outlined in the Director’s proposed retail market definition are not relevant to wholesale markets since retail operators in Hull, including Kingston Communications, purchase wholesale international calls from the national wholesale international services operators. 2.80 In the case of the markets for wholesale international services, there is an argument that the relevant geographic market is broader than that for the UK. This is because of the presence of indirect routed traffic, as described in the product market definition above (assuming that an operator selling to overseas customers, i.e. retailers, could easily begin selling to UK based ones). This might lead to routes being grouped together according to where indirect routing was feasible. However (and see paragraph 2.71), as described in the Director’s analysis of the product market, such indirect routing has been taken into account in the Director’s assessment of market power, and hence all such competitive constraints have been taken into account in his analysis. 2.81 Another way in which the geographic market might be broadened is via the consideration of "callback" from, for example the US back to the UK. Such substitution would be unlikely to occur from non-liberalised markets given the likelihood of call origination being more expensive at the far end. Callback between liberalised routes would have a similar impact to hubbing, which, as discussed above, the Director has taken account of in his assessment of market power. Initial conclusions on the relevant market(s) 2.82 In the light of the above discussions of the relevant product and geographic markets, the Director is of the view that the relevant market is that for wholesale international services, on a route-by-route basis for the UK as a whole.
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