Commission suspects KPN of abusing its dominant position for the termination of calls on its mobile network

IP/02/483

Brussels, 27 March 2002

Commission suspects KPN of abusing its dominant position for the termination of calls on its mobile network

The European Commission has sent to Dutch incumbent telecommunications operator Koninklijke KPN NV a statement of objections alleging that KPN, through its subsidiaries KPN Mobile (mobile traffic) and KPN Telecom (fixed traffic), has violated the competition rules of the EC Treaty. Specifically, the Commission suspects KPN of abusing its dominant position regarding the termination of telephone calls on the KPN mobile network through discriminatory or otherwise unfair behaviour. The case stems from a complaint by MCI WorldCom, a USbased fixed telecommunications network operator who is a new entrant in the European Union market. Studies show that fixed to mobile termination rates in Europe can be ten times higher than the average charge for fixed to fixed interconnection. This results in undue barriers for newcomers to the market and high prices for consumers. Originally, WorldCom's complaint also concerned mobile operators in other EU countries, namely Sweden and Germany, but the complaint against Germany was withdrawn after the German operators reduced their termination rates by 50% and in Sweden the national competition authority is dealing with the issue.

Call termination in mobile networks

There is a general concern in the EU regarding the competitiveness of mobile call termination markets. Already in May 2000, an OECD report on pricing structures in the mobile sector⁽¹⁾ queried: "Why….is it more expensive to call from a fixed to a mobile network in off-peak times than to make a call in the opposite direction?" and also noted that users making calls from fixed to mobile networks during business hours appear to be "meeting a very steep additional cost."

More recently, in its annual report on the state of the telecommunications sector⁽²⁾, the Commission identified the mobile call termination market as a source of concern.

Despite a decrease of around 10% over 2001, average peak time rates charged by EU mobile operators for terminating telephone calls on their respective networks remain approximately ten times higher than the average charge for fixed to fixed interconnection.

The specificity of the mobile market in The Netherlands

In The Netherlands, unlike in all other EU countries, all telecommunication traffic to all mobile network operators, not just to KPN Mobile, must at present pass through the fixed network of KPN Telecom. This is because so far only KPN Telecom appears to have direct interconnection with the mobile networks in The Netherlands. Despite requests from WorldCom and other telecoms operators over the last few years, KPN Mobile has not, until now, entered into any kind of direct interconnection agreement with other network operators than KPN Telecom. An offer for direct interconnection that was made at the end of 2000 contained terms which were unacceptable for the other market parties, and was subsequently withdrawn by KPN.

This absence of direct interconnection significantly reduces the scope of services that WorldCom and other operators can offer to their customers. WorldCom complained to the Commission at the end of 1999.

After a thorough analysis, the Commission has come to the preliminary conclusion that the provision of terminating access services on KPN Mobile's public mobile telecommunications network constitutes a separate product/services market:

• At retail level (demand side), users who wish to call a subscriber A of mobile network operator A, cannot at present choose an alternative mobile operator for terminating their calls to subscriber A.

• At wholesale level (demand side), all public network operators are under a regulatory obligation to offer calls to other networks. To do so, they must purchase wholesale terminating access services on each network, for which there are no substitutes: for a call to reach a subscriber of network A, the originating or transit operator must purchase terminating access services from network operator A.

• On the supply side, only the individual mobile network operator can offer terminating access on its own network, so that there is no substitution between network operators. Furthermore, mobile network operators are found not to compete for termination services. In general, price elasticity is found to be very low and there appears to be no competitive responses to significant price changes.

For these reasons the Commission has concluded in its preliminary assessment that there is a separate market for the termination of calls on each mobile network; and that) given the absence of countervailing market power, KPN Mobile holds a dominant position on the market for the termination of calls on its network.

In its statement of objections, the Commission states that it believes KPN abused its dominant position through:

• Discrimination by KPN Mobile on the terms for direct termination in favour of KPN Telecom

• Unfair pricing practices amounting to a margin squeeze between KPN Mobile's wholesale terminating services offered to other network operators and the retail prices of KPN Mobile/Telecom for certain mobile/fixed services offered to business customers in The Netherlands.

• (Constructive) refusal by KPN Mobile to provide direct interconnection for call termination on its network

The Commission can use Article 82 of the EC Treaty to prohibit abuses of dominance. KPN now has two months to present arguments contesting this preliminary analysis and may also expand on those arguments at an oral hearing. It is only after this has happened that the Commission will form a final position.

Technical background information

Terminating access is the wholesale network service that consists of the termination by a network operator of traffic that originates on another network, i.e. completing a call for another network operator, which allows users of the respective networks to communicate with each other.

Diagram 1 Terminating access service

[Graphic in PDF & Word format]

Both mobile and fixed operators provide these services each on their individual network.

Based on comparative data collected by the Commission, the EU average rates for terminating access services on all fixed networks are 1.23 € cents/minute (single transit) respectively 1.86 € cents/minute (double transit). The average charged by mobile operators in the EU is 18.16 € cents/minute, i.e. ten times as high. There is no technical explanation for such a large difference.

Transit is the wholesale service that consists of the conveyance (transport) by a transit operator over its network of traffic that neither originates nor terminates on its network;

Diagram 2: Transit service

[Graphic in PDF & Word format]

^{(1) Cellular Mobile Pricing Structures and Trends, OECD Working Party on Telecommunication and Information Services Policies, DSTI/ICCP/TISP(99)11/Final, Paris, France}

^{(2) Seventh Report on the Implementation of the Telecommunications Regulatory Package, Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions, COM(2001)706, HYPERLINK http://ec.europa.eu/information_society/topics/telecoms/implementation/annual_report/7report/index_en.htm http://ec.europa.eu/information_society/topics/telecoms/implementation/annual_report/7report/index_en.htm}