Brussels, 22nd February 2006
Competition: Commission sends Statement of Objections to Telefónica concerning provision of broadband Internet access
The European Commission can confirm that it has decided to open formal proceedings against Spanish telecoms operator Telefónica and has sent a Statement of Objections explaining why it takes the view that Telefónica has been abusing its dominant market position in contravention of EC Treaty rules (Article 82) in the form of a so-called ‘margin squeeze’ in the Spanish broadband Internet access markets since 2001. The sending of a Statement of Objections does not imply that the company concerned is necessarily guilty of breaking EU anti-trust rules. The Commission will adopt a decision on whether or not Telefónica has indeed been abusing a dominant market position in the light of the response from Telefónica.
At the present stage of its investigation, the Commission’s assessment reveals that, since 2001, the spread between Telefónica’s prices for wholesale broadband access requested from its competitors and the downstream tariffs for broadband Internet access to be paid by the consumers has been insufficient to cover Telefónica’s own costs for the supply of such retail services. This means that Telefónica would have incurred substantial losses if it had had to pay the wholesale tariffs it has been imposing on its competitors. This constitutes a so-called ‘margin squeeze’, as Telefónica leaves new entrants, which need access to a network infrastructure, an insufficient margin to compete for downstream retail subscribers. Telefónica is the only Spanish network operator having a network with nation-wide coverage.
Retail broadband prices in Spain are high and well above EU average. Also, the roll out of alternative infrastructures in Spain is far behind the EU-average: although local loop unbundling took off at the end of 2004, its use remains behind of that in most EU countries.
Experience from other Member States has shown that actions of competition authorities tackling abuses in the form of unfair prices can boost competition resulting in lower prices and more choice for consumers.
A statement of objections contains the Commission´s preliminary conclusions subsequent to the analysis of a complaint under Article 82 of the EC Treaty which prohibits abuses of dominant position. Telefónica has now two months to present arguments contesting the Commission's preliminary analysis and may also expand on those arguments at an oral hearing. After having heard the company’s defence the Commission can take a final decision. If the formal proceedings confirm the Commission’s preliminary assessment, Telefónica runs the risk of being fined for its anti-competitive behaviour.
2. The markets for wholesale and retail broadband access in Spain
Broadband Internet access is crucial to the development of the information society. It allows download speeds much faster than those possible with low speed Internet access, thereby increasing the ease of Internet use and the volumes of data exchanged. The main technology used in Spain to provide broadband internet access services is ADSL (asymmetric digital subscriber line), which provides high speed Internet access using a telephone line. Cable modem technology is an alternative to ADSL technology only in those areas which are served by cable networks.
In order to provide broadband Internet services to end-users, new entrants have no other option, save the building of an alternative local access network, but to contract (one of) the three types of wholesale products available to them, all of which are built on Telefónica’s nation-wide local access network (ranked according to the network deployment requirements, depending on the level of capillarity of Telefónica's network at which new entrants interconnect): (1) local wholesale access or local loop unbundling , (2) regional (bitstream) wholesale access and (3) national wholesale access.
3. Margin Squeeze
A margin squeeze occurs because there is insufficient spread between Telefónica’s prices for wholesale access and Telefónica’s tariffs for retail broadband access to end users.
The Commission’s assessment reveals that new entrants have not been able to compete in the retail broadband access on the basis of Telefónica’s national and regional wholesale products.
Due to its network roll-out requirements, local loop unbundling – which took off in Spain since the end of 2004 – is unlikely to be an economical option in the whole of the Spanish territory. Therefore new entrants cannot, on the basis of the current wholesale prices, replicate Telefónica’s retail prices in the whole of the national territory.
 Telefónica rolled out its local access infrastructure over significant periods of time protected by exclusive rights and was able to fund investment costs through monopoly rents from the provision of voice telephony infrastructure and services.
 Local loop unbundling requires the most extensive network roll-out and investment on the part of the new entrant (which has to roll out a network enabling it to connect to nearly 7000 main distribution frames).
 “Regional” means that new entrants interconnect to regional points of interconnections. It is necessary to interconnect to 109 regional points of interconnection (one or two per province in Spain) in order to have a national coverage. New entrants that contract this service have to incur significant network roll-out and investment cost.
 “National” means that new entrants need to connect to one point of interconnection (in Madrid) in order to have a national coverage. New entrants that contract this service do not have to incur any network-roll out investment.