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IP/03/717

Brussels, 21 May 2003

Commission fines Deutsche Telekom for charging anti-competitive tariffs for access to its local networks

The European Commission has adopted a decision against Deutsche Telekom AG (DT) for abusing its dominant position through unfair prices for the provision of local access to its fixed telecommunications network (local loops). The Commission has found that DT charges new entrants higher fees for wholesale access to the local loop than what DT's subscribers pay for fixed line subscriptions. This discourages new companies from entering the market and reduces the choice of suppliers of telecoms services as well as price competition for consumers. The Commission's action stems from complaints by numerous new entrants in the German telecommunications market. In line with the gravity and duration of the abuse, the Commission levies a fine of € 12.6 million.

"Since 1998 DT is legally obliged to provide competitors access to its local loops. In spite of this clear obligation, there still is very little effective unbundling of the local loops and DT, with a market share of 95%, remains the dominant provider of broadband and narrowband retail access. Many new entrants have tried to compete with the incumbent operator. None of them has been able to reach significant market share, not least because DT charges competitors higher fees for local loop access than it charges its end users" Competition Commissioner Mario Monti has stated. "This is clearly harmful to consumers, because competition between operators is the best means to bring the overall prices down. That is why we have acted against unfair prices by Deutsche Telekom and are determined to be vigilant on any infringments of this nature" Mario Monti continued.

The Commission found that Deutsche Telekom ("DT") is abusing its dominant position through unfair prices. DT holds a dominant position on both the markets for both wholesale and retail access to the local loop. Regarding wholesale access, DT is the only German network operator having a network with nation-wide coverage. In order to provide a variety of services to end users, new entrants need access to this infrastructure on a wholesale basis. Regarding retail access, even after five years of competition, DT still has around 95% market share and the remaining 5% are divided up between a large number of DT's competitors.

Because of the insufficient spread between DT's local loop access prices and the downstream tariffs for retail subscriptions, new entrants have no scope to compete with DT for end consumers. The Commission's decision compares upstream access to the local loops with a bundle of different types of retail offerings, namely analogue, ISDN and ADSL connections. In order to achieve a coherent comparison, the Commission used a weighted approach taking into account the numbers of DT's retail customers for the different access types on retail level.

The Commission's assessment reveals, for the period 1998 through 2001, that DT charged competitors more for unbundled access at wholesale level than it charged its subscribers for access at the retail level. This constitutes a clear case of margin squeeze, because it leaves new entrants no margin to compete for downstream retail subscribers. As of 2002, prices for wholesale access were lower than retail subscription prices but the difference was still not sufficient to cover DT's own downstream product-specific costs for the supply of the end-user services. Even after the latest reduction of the wholesale prices by the German regulatory authority (RegTP), which became effective on 1 May 2003, this margin squeeze remains in place.

Fine

According to the Commission's Guidelines on the method of setting fines(1), the criteria for determining the amount of a fine are gravity and duration of the infringement, as well as aggravating or attenuating circumstances.

The margin squeeze implemented by DT as an undertaking dominant both at the wholesale and retail levels constitutes a serious infringement. The result of this pricing strategy is that new competitors who need access to the local loops in Germany are seriously impeded. The relevant markets are markets of considerable economic importance. On the other hand, DT has steadily reduced the margin squeeze through tariff adjustments. Therefore the basic amount for gravity was set at € 10 million.

The abuse is found to last from 1.1.1998 until today and the infringement is therefore of long duration. The infringement was however less important in the period since 1.1.2002, due to the reduced scope for price adjustments under the regulatory provisions in Germany. Therefore only the first four years until the end of 2001 account for an increase of the basic amount to 14 million €. Finally, the Commission has reduced the fine to € 12.6 million by assuming mitigating circumstances due to the fact that under the sector specific regulation in Germany there was some degree of legal uncertainty about the tariffs under scrutiny.

Background: Access to the local loop

The « local loop » is the physical circuit between the customer's premises and the telecommunications operator's local switch. Traditionally it takes the form of pairs of copper wires. New entrants on the telecommunications markets need access on fair and non-discriminatory terms to the local loops ("local loop unbundling") to be able to offer retail services to end-customers, as it would be impossible to replicate such a network built over a century.

Effective local loop unbundling is key for the spread of electronic communications services. It was imposed on the incumbent operators by way of legislation at EU level and, in some Member States, such as Germany, also at national level. However, local loop unbundling is not developing fast enough. The regulatory framework is not the only tool available. The conditions of local loop unbundling, such as pricing, are also subject to scrutiny under the EU competition rules.

In Germany, DT offers local loop access at two different levels. Besides the retail subscriptions to end customers, DT also offers unbundled access to the local loop to competitors, which allows them direct access to end-users. DT is thus active on the upstream market for wholesale local loop access to competitors and on the downstream market for retail access services to end-customers. Both markets are closely linked to each other.

DT's local access network is not the only technical infrastructure allowing for the provision of wholesale access services to competitors and of retail access services to end-users. But the other alternatives, which include fibre-optic networks, wireless local loops, satellites, power lines, and upgraded cable TV networks, are not yet sufficiently developed and cannot be considered as equivalent to DT's local loop network.

According to the Commission's 8th Implementation Report of December 2002 (COM(2002) 695), two years after the EU-Regulation on local loop unbundling came in force, only 1 million subscriber lines have been unbundled across Europe. The large majority of them (855.000) are in Germany, where unbundling was mandated by national law already as of 1998, but even in Germany unbundled lines account for less than 5 % of the total.

(1) Guidelines on the method of setting fines imposed pursuant to Article 15 (2) of Regulation No 17, OJ C 9, 14.1.1998, point A.


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