EC points to new analysis of Dutch cable market

Wednesday 13 May 2015 | 17:18 CET | Background

The European Commission has questioned Dutch regulator ACM's analysis of the fixed market. The ACM sent the draft decision to the EC in early April for comment, but the EC has come back with objections. In particular, Brussels is concerned about the competitive balance between KPN and the cable sector. It found the ACM did not explain well enough why cable was not included in the relevant wholesale market. If this market is not correctly defined, this has further consequences, with only KPN named a significant market power.

The ACM has two months to look at the market again and provide more explanation to the EC. This will happen in cooperation with the EU regulator Berec. After that the EC can decide to accept the changes or question the ACM further, in the meantime suspending the new decision. On 30 April, the EC published a statement with details about its opinion on the ACM’s market analysis.

Unbundled access

The draft decision on unbundled access covers the ACM’s analysis of the retail markets for fixed broadband and fixed telephony, both for business and consumer end-users. The ACM concluded that, without regulation, KPN and Ziggo together have significant market power in broadband services. However, only KPN will be required to submit to ex ante regulation. KPN was also named a significant market power in fixed telephony. As a result it faces a number of regulatory obligations, notably opening up its DSL and FTTH networks to competitors.

Joint dominance

The planned merger of UPC and Ziggo was already announced when the ACM started its analysis, and the regulator included this in the process. The ACM found that KPN and the new Ziggo would be inclined to limit the underlying level of competition with each other.

Both are vertically integrated, have a similar product offering and command about the same market share. Furthermore, broadband is a mature market with predictable technological developments. In terms of technology, neither has a distinctive advantage. Cable offers higher speeds in areas without fibre. KPN can offer a quarter of its footprint faster speeds with fibre, but this does not constitute any kind of definitive advantage, the ACM reasoned. If one player decides to attack, the other will respond with promotional discounts.

The ACM concluded that it’s in the two players’ interest to maintain the status quo over the long term, maintaining roughly equal market shares and higher prices. The two companies also have the means to ensure this power balance: if one takes market share, it can raise prices to return to the coordinated equilibrium in the market.

Little can disrupt this kind of market balance, according to the ACM. The barriers to entry for fixed networks are high, and end-users have limited purchasing power. KPN also has no interest in offering competitive terms to wholesale customers, as these alternative providers could put pressure on retail prices.

Questionable market definition

Regulating KPN is the solution proposed. The ACM defined a national wholesale market with MDF, SDF and virtual unbundling (VULA) over the copper network, as well as ODF on the fibre network. KPN is subject to ex ante regulation on this market. Cable is not accounted for in this, mainly because unbundling is technically and/or economically not possible.

This is the European Commission’s biggest concern: not including cable in the wholesale market definition. It’s clear to the EC that cable plays a major role on the Dutch market, and based on the EU directives and regulations, this means cable cannot be excluded from the market analysis.

Market: retail or wholesale

ACM needs to revise its work in some areas, starting with the analysis of retail markets. The regulator did not name any individual market powers on the retail market, only pointing to the risk of joint domination by KPN and Ziggo. The regulation is subsequently applied to the higher wholesale market level.

ACM excluded cable from the wholesale market, mainly due to the difficulties with unbundling over cable. The Commission said that a prospective analyis should have also looked at whether cable unbundling is possible in the future. Especially the development of virtual unbundled access products on cable networks should have received more attention, the EC said. External research by WIK Consult appears to show that there could be interest in such as service.

In addition, there is a near-national cable network in the Netherlands that in principle could be used to create a wholesale market. The Commission assumes that cable and copper/fibre are to a certain extent substitutable. It also pointed to a basis in the Recommendation on Relevant Markets to define a theoretical market. The Commission claimed that theoretically Ziggo may also be working with a system of implicit internal supply, the same as KPN.

Asymmetric regulation

The second point of criticism was the delineation of the wholesale market, based on copper and fibre networks but not cable. The current proposal is asymmetric, regulating KPN but not Ziggo.

If the market were to include cable, it’s very likely the conclusion of the market analysis and remedies proposed would be different. The Commission suggests there are four possible outcomes: significant market power for neither of the operators, one of the operators or both.

Hence the problem with the ACM not naming a single significant market power, but suggesting only a “risk” of joint dominance and then only regulating KPN on the wholesale market. According to the EC, the ACM has not explained well enough how this outcome is supported.

There are possible situations in which the incumbent is dominant on the wholesale level but not at the retail level, for example when alternative providers on the network ensure retail competition. However, in this case the competitive pressure is coming from the cable sector, over which KPN has no control. The risk of joint dominance is as such not sufficiently supported, according to the Commission.

The Commission was also unconvinced by the ACM’s argument that neither KPN nor the cable operators will voluntarily agree to wholesale access. The EC noted that KPN is currently in negotiations with alternative operators on the rates for VULA and its FTTH rates are also under the price caps set by the ACM.

In addition, the Commission found it unlikely that the two dominant operators were basing their technical developments on each other. Both have announced network upgrade plans and it doesn’t appear likely that these will somehow be shelved. The equipment is also developed by external suppliers, making it difficult for the roadmaps to align. There is the possibility that a technical innovation could give one of the operators an advantage.

The Commission also noted the importance of bundling TV with other services, an element of the market that was not sufficiently investigated. There is significant room for differentiation on the TV market, and Ziggo could have an advantage here given the company’s broader experience on the market.

New approach in Brussels

The notification from Brussels appears to signal a new approach from the EC. The previous Commission approved the takeover of Ziggo, setting aside the ACM’s objections. The current Commission appears to think regulation of cable internet is possible, but this could also mean that KPN is no longer regulated. An end to asymmetric regulation can go two ways, of course, and in principle, the EC favours deregulation.

Nevertheless, there are still plenty of reasons to look at the consequences of a duopoly. Only next door in Belgium, Belgacom and Telenet have essentially pushed out any alternative operators from the market. The need for fixed-mobile convergence has ended most hope for a fourth mobile operator on the market, and Mobistar appears to be repeatedly hitting a wall with its attempts to expand to the fixed market.

The proposed remedy is opening up Telenet’s cable network to other providers. However, while the process of regulating wholesale access started in 2010, its aim of new service providers on the market is unlikely to happen even this year yet.

Conflicting styles?

The ACM and European Commission will negotiate a compromise in the coming months, with Berec serving as adviser. This can be seen as the first test case for The Hague and the new European Commission.

The ACM appears to be facing a setback in an area where it claimed to be a trend-setter. It has led a risk-driven approach to regulation, started by its predecessor Opta under the leadership of Chris Fonteijn and continued by the ACM.

Repeated budget cuts even before Opta was swallowed up in the larger competition-consumer regulator have left the telecoms watchdog with less manpower for the classic process of research-report-regulation. Its approach now is much more led by preliminary risk analysis. The fixed cycle of market analyses continues, but the assumed coordination between KPN and Ziggo is an example of the risk-analysis method.

There is also the ACM’s pragmatic approach to implementing the regulation. All market players benefit from a quicker completion of the decision-making process, and the ACM is working to support this.

The ACM has assumed that KPN and its competitors are capable of negotiating tariff agreements on their own for the regulated access to the DSL network and related services. If they succeed, the ACM will no longer subject the rates to the usual cost models for price caps (something KPN is required to do, at a not-inconsiderable cost).

The European Commission appears to view this as evidence against the suggested tacit coordination between the two dominant operators. 
A third factor is the ACM has again refrained from regulating the cable sector. The Netherlands appears to be unsuitable ground for testing new forms of regulation. In recent years, the corporate appeals court has overturned or changed nearly all the regulator’s decision. There is little perspective of this changing.

In 2005 and 2008 Opta attempted to intervene on the TV market, but it failed both times. In 2011 and 2014 cable regulation was not included in its market decision. In the 2011 round of market decisions, Opta decided that the TV market no longer required any regulation. In part due to this decision, the multiplay market was not analysed fully on its own merits.

What’s notable is that the Commission now appears to be heading towards a new approach to NG networks, cable in particular. The focus on virtual unbundling is relatively new, for DSL and even more so for cable.

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