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European Commission

MEMO

Brussels, 15 October 2014

Antitrust: Commission decision on abusive conduct on Slovak broadband markets by Slovak Telekom and Deutsche Telekom - frequently asked questions

(See also IP/14/1140)

What are the EU antitrust rules and what do they say?

Article 102 TFEU prohibits the abuse of a dominant market position. This article exists unchanged since the Treaty of Rome was signed in 1957. It is part of the 'acquis' endorsed by countries that become members of the EU. But similar provisions exist in competition laws in a vast majority of countries around the world, including Slovakia.

The Commission may impose a fine to sanction an infringement of Article 102 TFEU and ensure a deterrent effect. A Commission decision finding an infringement is a proof that the illegal behaviour took place and may be used by persons or firms affected by such anti-competitive behaviour to bring the matter before a national court and seek damages.

Have these rules been applied to the telecoms sector before?

Yes, Article 102 TFEU has been applied in a number of cases: Wanadoo, a subsidiary of France Telecom, was fined for predatory pricing (IP/03/1025); Deutsche Telekom was fined for charging unfair prices (margin squeeze) in the German broadband market (IP/03/717); Telefonica was fined for the same conduct in the Spanish broadband market (IP/07/1011); Telekomunikacja Polska (IP/11/771) was sanctioned for having applied unfair terms and conditions and hindered competitors in accessing its network infrastructure (refusal to supply) in order to provide broadband retail services in Poland. Furthermore, Article 101 TFEU, that prohibits anti-competitive agreements, has been applied to a non-compete clause included in a cooperation agreement between Telefonica and Portugal Telecom (IP/13/39).

What did exactly Slovak Telekom (ST) and Deutsche Telekom (DT) do to infringe EU competition rules?

ST is the owner of the only nation-wide telephone metallic access network and is the only supplier of wholesale access to its unbundled local loops (ULL) in the Slovak Republic. In 2005, the Slovak telecoms regulator (TUSR) decided that ST, as a dominant company, must grant alternative operators remunerated access to its network to allow for effective competition on the downstream markets. In implementing this obligation, ST on 12 August 2005 published a Reference Unbundling Offer (RUO), i.e. a set of detailed terms and conditions under which it would offer access to its ULL.

ST's abusive behaviour includes the following elements:

1. Refusal to supply access to its ULL

  1. withholding from alternative operators network information necessary for the unbundling of local loops, such as information relating to the availability of the local loops; other information, such as information on the physical access sites and their coverage areas was incomplete, or given late in the process.

  2. reducing the scope of its obligations regarding unbundled local loops, therefore reserving for itself potential xDSL customers, by for instance excluding from the offer all local loops over which no service was provided (so called "passive" lines). ST also limited the access to only 25% of the lines included in a cable without any technical justification for such a limitation;

  3. setting other unfair terms and conditions in its Reference Unbundling Offer (RUO) regarding collocation, qualification, forecasting, repairs and bank guarantees. In particular, ST rendered the collocation process, whereby alternative operators place their equipment within ST's network, unnecessarily burdensome and expensive and refused to provide upfront pricing information on collocation. ST also imposed penalty fees if an alternative operator failed to meet the forecasts communicated to ST and rendered mandatory a separate "qualification" procedure, whereby ST verified whether a particular local loop was fit for unbundling, , even when not needed. Moreover, ST applied unclear conditions for repairs and service maintenance in case of "planned", "unplanned works" and "defaults" and requested a bank guarantee whose amount was out of proportions with ST's risks and costs for providing access and which could be easily multiplied by ST.

2. Margin squeeze

  1. applying unfair tariffs which do not allow an equally efficient competitor relying on wholesale access to Slovak Telekom's unbundled local loops to replicate the retail broadband services offered by Slovak Telekom without incurring a loss.

DT, as the parent company of ST, is part of the same undertaking as ST and therefore shares the liability jointly and severally with ST (see further below).

What is a local loop and what does "unbundling" the local loop mean?

The local loop (also referred to as subscriber line or "the last mile") is the metallic (mostly copper) cable pair that connects a customer's premises with a telephone exchange in the network of the incumbent telecommunications service provider, in this case in ST's network.

Unbundling the local loop means that the incumbent telecommunication network operator, in this case ST, gives other operators access to any local loop within its network against a fee and under certain conditions. Granting access means that the local loop is disconnected ("unbundled") from ST's network in the relevant exchange and connected to the other operator's network, which has been rolled out to that exchange.

What is the advantage of access to unbundled local loops (ULL) as compared to building an own local access network?

Incumbents have rolled out their metallic telephone network, which also includes the local loops, when they still had a monopoly. Building a new additional local loop network, be it a metallic or fibre network, is very costly due to the need to dig a trench for the new cables connecting each house to the network. New market entrants will normally not dispose of the resources needed to carry out such an investment or can only do so in densely populated areas with mainly multi-storey houses. This can also be observed in Slovakia where UPC has rolled out a TV-cable network in densely populated areas and covers 22% of all households, whereas Orange has rolled out a fibre local access network covering less than 17% of the Slovak population by 2010. Nevertheless, as these operators are not dominant, the Slovak telecoms regulator does not oblige them to grant access to their networks to other operators. Moreover, they only cover geographically limited areas. Therefore, ST's local loop network remains a very important infrastructure for alternative operators as it is the only one that extends to the whole territory of Slovakia and has a much larger broadband service coverage (75% of all households).

How will this decision help to improve the Slovak telecommunications market?

ST hindered other operators in accessing its network through its abusive conduct. During most of the period investigated i.e. until the end of 2009, no alternative operator was able to get access to ST unbundled local loops. Only in December 2009 one operator got access to very few of ST's local loops and only for business customers. The decision orders ST and DT to terminate the infringement should it still be ongoing. ST must thus review its Reference Unbundling Offer (RUO) and pricing to ensure that alternative operators have timely access to ST's local loop network at fair terms and conditions. It also has to review its pricing to ensure that there is no margin squeeze if alternative operators access ST's unbundled local loop (ULL).

Why is the Commission acting when access to ST's local loops is being mandated by national regulation?

The existence of national sector specific regulation does not preclude the application of EU competition rules. Companies must in all sectors comply with these rules. In the case at hand, despite the regulatory mechanisms put in place by the Slovak telecoms regulator obliging ST to give access to its network, ST managed to restrict competition through the unfair conditions at which it offered access to its network. The Commission's intervention does not relate to specific infringements of regulatory obligations but concerns ST's abusive behaviour over more than five years, which breaches Article 102 TFEU.

Did the Commission co-operate with the Slovak telecoms regulator?

Yes, the Commission and TUSR have co-operated on and regularly exchanged information essential for the case.

Why is DT involved in this case?

The Commission's investigation found that DT is liable for the infringement as the parent company of ST. Under EU rules, parent companies exercising decisive influence are liable for antitrust infringements committed by their subsidiaries, because they form a single undertaking – in other words a single economic entity. According to the established case law of EU Courts, a parent company is liable when it (i) is able to exercise decisive influence over a related company, and (ii) actually has exercised such influence. Concerning the first element, the Commission found that DT is ST's majority shareholder with 51%, while the Slovak State, which owns the remaining 49%, has no particular minority rights. Moreover, DT can nominate the majority of ST's board of directors. Regarding the second aspect, the investigation showed overlaps in senior management personnel between DT and ST, evidence of DT’s influence over the decision-making process at ST's management board by means of members in that body which are nominated by DT, and also upstream reporting from ST to DT. All this together constitutes a body of consistent evidence establishing the existence of a single economic unit between DT and ST.

How does the Commission calculate fines for a breach of EU competition rules?

The calculation is based on 2006 Guidelines on the method for setting fines (see IP/06/857). The Commission takes into account, inter alia, the company's value of sales to which the infringement relates and the gravity and the duration of the infringement. Mitigating or aggravating circumstances are also assessed on a case by case basis. Under EU law, a fine cannot exceed 10% of the total turnover of the companies concerned in the preceding business year.

How does payment of the fine work?

The fine must be paid within three months of the date of notification of the decision. In case of an appeal, it is normal practice that the fine is paid into a blocked bank account pending the final outcome of the appeal process. Any fine that is provisionally paid will produce interest based on the interest rate applied by the European Central Bank to its main refinancing operations.

Once a final judgment has been delivered in any appeal before the EU courts, the money goes into the EU’s general budget, thus reducing the contributions that Member States pay to the EU.


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