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SPEECH/01/375

Speech by Mr. Mario Monti

European Commissioner for Competition Policy

Defining the boundaries competition policy in high tech sectors

UBS Warburg Conference Europe 20/20

Barcelona, 11 September 2001

With so many experienced and professional investors in the room, as well as industry leaders from around the globe, I will focus my speech on the subject of the boundaries of competition policy in the high-tech sectors.

The technology markets in which you invest are dynamic and fast moving ones. They also involve a high level of risk. For example, we have seen the shares of mobile telecom companies rise 110% between January 1999 and March 2000; and then fall by 52% in the following 12 months.

I would like to define a first boundary of competition policy. Competition law is not regulated by the stock market. If the Dow falls below 10,000, we cannot suspend Article 81 of the Treaty and permit cartels. If the FTSE goes under 5,400 we cannot say that any company with a dominant position is allowed to abuse that position until the index recovers. Our actions are ultimately and primarily designed to benefit consumers who need protection whatever the stock market does. We want consumers to benefit from lower prices, greater choice and new and innovatory products. Much of the time you share our wish - it is the times when you don't that makes the lives of all of us more interesting!

Therefore, I have a certain duty to be transparent and clear with you about the broad lines of competition law and policy. To achieve that, I would like to cover three main topics today:

    The boundary between applying competition law to the new economy and leaving it alone.

    The boundary between competition law and regulation in the telecommunications sector.

    And finally, I would like to discuss some key issues on mobile telecoms and the progress of competition in the local loop.

Competition law and the new economy

I will start by saying that I firmly believe that the new economy is an ally of the competition authorities. This point is a straightforward one, but it is all too easily forgotten. This is because competition authorities by their very nature are confronted with market failures and competition problems. Even when we are looking at Internet and E-Commerce markets we will often have complainants coming to us and highlighting potential competition concerns.

However it is important for competition authorities to remember the enormous benefits brought about by new economy developments. The main such benefits are:

  • an increase in transparency, both in terms of the goods and services available, and the price of those goods and services (although as we shall see a little later when I touch on mobile roaming, this price transparency is a double edged sword)

  • the growth in the size of markets: the availability of the Internet lowers the barriers to entry for companies, allowing them to compete in wider geographic areas than would otherwise be possible. This does not necessarily mean that all markets are becoming global - factors such as consumer demand and regulatory considerations may lead to national markets. Nevertheless, it will increasingly be the case that companies from different geographic areas will be allowed to compete in these national markets;

  • a reduction in transaction costs: I have seen some estimates that the use of a B2B exchange could cut transaction costs by 90% for some businesses. Even allowing for a degree of caution with respect to such a figure, there is clearly an enormous potential for cost reductions in many areas of business. This will bring tremendous benefits to the economy and, ultimately, to consumers.

These technological developments therefore point the way towards more competitive markets: costs will go down; producers will have improved access to customers; and customers will have greater information, greater choice of producers, and lower prices.

These are all clearly positive developments. So do the competition rules still have a role in these new markets?

The answer to that question is clearly yes. Nevertheless, I have occasionally heard it said that the traditional competition rules should not be applied to certain new economy markets. Proponents of this view argue that the pace of change that we are seeing renders the role of regulators, including competition authorities, both unnecessary, because the market will correct itself, and impossible to fulfil, because the change is too rapid for a competition authority to make timely decisions.

In other words, the argument goes that competition does not occur so much "within the market", but occurs as a result of dynamic innovation, and should therefore be characterised as "competition for the market." As a result, no one firm will have entrenched market power, because any monopoly it has is only temporary, and is constantly at threat of completely being displaced through innovation from competitors. The critique of the traditional competition rules that follows is simple if firms do not possess entrenched market power, it is irrelevant to apply rules regarding anti-competitive behaviour towards them.

I do not subscribe to this view. The general nature of the competition rules gives them an important advantage over most other legal rules, because they apply to the factual circumstances of a particular case, no matter how quickly industries develop or change. This allows them to keep pace with technological developments, in a way that more specific regulatory frameworks cannot.

The competition rules stay the same, but the application of these rules is remarkably adaptable to changing circumstances.

Therefore, assessing new economy issues as a competition authority requires an understanding of the underlying technology and a close following of market developments. Of course when the circumstances fit, we must recognise if a firm does not have a position of entrenched market power because its product is likely to be displaced, or rendered obsolete by technological innovation. Nevertheless, we must also recognise that there are also circumstances where there are potential positions of entrenched market power because for example, a network effect has a lock-in effect of such significance that it outweighs the force of potential displacement of market power through technological change.

Of course, this does not mean to say that we should condemn the mere fact that one firm has entrenched market power in a particular industry. To take such a position would be perverse it would damage incentives to innovate, and would constitute a denial of the realities of market preferences. Nevertheless, the finding that entrenched market power can exist in the new economy by definition means that the way that market power may be used should be subject to the normal rules of competition analysis.

As regards mergers, if parties are proposing a merger or a joint venture, then we do not have the luxury of being able to see how the market develops in the future. We have to take a view on the basis of what we know today. Similarly if we are faced with a complaint, we must assess the complaint in light of current knowledge of course allowing for the pace of development in the sector: but we cannot simply reject the complaint because it is a new economy case.

The boundary between competition and regulation

I would now like to consider my second boundary - that between competition and regulation. In particular, I would like to speak about the ongoing project of the new regulatory framework for electronic communications.

Regulation and competition are not conflicting concepts - the two approaches go hand-in-hand. This is because the overall aim of regulation and competition rules is the same, i.e. to create and secure competitive industries to the benefit of consumers. The process of liberalisation of the telecom sector in Europe has been driven by a combination of sectoral regulation and implementation of competition rules. In the first phase sectoral regulation mostly under the control of 15 independent national regulators has played the major role. Now that the liberalisation process has made good progress, the general nature of the competition rules gives them an important advantage, because they apply to the factual circumstances of a particular case, no matter how quickly industries develop or change. This allows them to keep pace with technological developments, in a way that more specific regulatory frameworks cannot.

This link between intervention by regulators and application of competition rules becomes even more clear-cut within the current review of the regulatory package for electronic communications. One of the main shifts in the new framework will be the replacement of the current threshold for significant market power (based on a market share of 25%) with the dominance criterion, as it is defined by Commission practice and the case law of the European Courts under competition law.

Technological change and new emerging activities (like those linked to the Internet) require us to constantly review market developments and update our criteria of assessing cases. The correct definition of the relevant product and service markets and of their geographical scope is a key element is this respect, as it will determine the application of both regulation and competition law. That is the reason why we are consulting on draft "Guidelines" which are intended to provide further guidance to all concerned players about how these principles apply to electronic communication services.

To ensure a thorough implementation of both regulation and competition law, we will continue to co-operate closely with the national authorities and only intervene in cases of particular interest for the whole of the European Union, or at least for a major part of it. This will allow for the most flexible approach, which, we believe, is best suited to this fast moving communications industry. So, we seek to use the more flexible and durable framework of competition law wherever possible, relying on tried and tested economic principles.

For all the reasons I set out earlier, I favour the maximum application of competition law. However, in considering the new electronic communications legislation, I am not blind to the need for regulation to extend to other areas where the competition rules are not yet effective. For example, local loop unbundling has now been mandated across the EU, following agreement at Community level for a Regulation which applies directly in the member states. The local loop unbundling had been imposed under competition law as a condition for the Telia/Telenor merger (which the Commission authorised in 1999 and which was subsequently abandoned by the parties), that applied to only two markets. In contrast, the regulation applies right across the whole EU - which increases the possibilities for competition in the local loop everywhere, and not just in markets where there is a competition case.

Development of competition in the local loop

I would now like to focus more specifically on the local loop. The regulation illustrates very clearly that competition over the local loop is a priority for the EU: the local loop is the infrastructure which delivers traditional telephone calls but also internet communications. Competition is essential because we do not want the development of the information society to take place under a de facto monopolistic regime.

Given the importance of this issue, we are closely monitoring the progress of unbundling, both from a regulatory point of view, under the authority of my colleague Erkki Liikanen, and from a competition point of view. DG Competition services are presently collecting the replies to an enquiry sent this summer to new entrants in the context of the ongoing sector enquiry on the local loop. What I can tell you at this stage is that the pace of progress in opening the local loop is by no means satisfactory and the incentives for new entrants to provide services over the local loop are currently low. In spite of an active supervision by national regulatory agencies, telecom incumbents are delaying as much as they can the delivery of unbundled lines, which is extremely slow, or proposing non competitive access conditions and procedures. This is a serious matter of concern since they are at the same time taking advantage of their control of the local loop to roll out their new ADSL broadband services. I shall revert to this issue when the outcome of our enquiry is made public.

Mobile telecommunications

I would now like to speak about mobile telecommunications. And, in particular about two specific issues about which there has been much public interest in recent months. These issues are mobile roaming and network infrastructure sharing for third generation networks.

    Mobile roaming

I said at the beginning of my speech that our primary driver is the interest of the consumer. This is never more clearly demonstrated than in the case of mobile roaming charges within Europe.

Mobile telephony has been a great European success story over the past few years. The GSM standard has led to a high level of inter-operability between mobile networks in Europe and much of the rest of the world. As more licences were granted in EU member states, competition has increased and prices for many services have come down significantly.

However, roaming prices have not come down in the same way. As we found in the Sector Inquiry into roaming last year, prices for roaming remain high, among other reasons because of the lack of incentives to reduce prices in the current system. Indeed, prices have in some cases increased since the conclusion of the Sector Inquiry. I remain concerned about roaming markets.

That is why we recently conducted inspections at the premises of the mobile operators in the UK and Germany on the basis that the mark up from wholesale to retail prices was a uniform 35% in the UK and 25% in Germany for roamed calls. In addition, we had suspicions that excessive prices were being charged in Germany both at wholesale and retail level.

Our cases are ongoing, so I will not comment further on them at this stage. However, I still see problems in roaming markets, which are not being solved by the new single rate schemes that are currently being introduced. I said earlier that we prefer to apply the competition rules where possible. If it is not possible to apply them effectively to roaming, then we may need to take steps to ensure that roaming is regulated, and becomes cost-orientated - which it is manifestly not at the moment.

A final thought: consumers are clearly concerned by mobile roaming prices judging by my postbag since we conducted our inspections.

    Third generation mobile network infrastructure sharing

I would now like to comment briefly on mobile network infrastructure sharing for third generation of mobile phones. There has been a lot of speculation about this subject in the press in recent months, not all of it accurate.

In March, the European Commission at the initiative of Commissioner Erkki Liikanen published a communication on the state of play with the introduction of third generation communications. In that communication, we said:

    "The issues to be addressed include the conditions to be met in order to permit network infrastructure sharing, which the Commission considers in principle positively due to its potential economic gains, on the condition that the competition rules and the provisions of other relevant Community law are respected."

We have been addressing those issues. We have been listening to the interested market players - the operators and the equipment suppliers. We understand that new technologies are available to enable networks to be shared at a number of different depths - sometimes through physical solutions such as site sharing, others through software based solutions.

So I would like to make it clear that, contrary to some press reports, we are not planning to prohibit network sharing through new legislation. We will assess any proposals by companies on a case-by-case basis under the competition rules. Clearly we will have to examine each of these schemes against a number of criteria including the duration of the network sharing and its geographical extent as well as the market position of the companies in 2G markets. We have to scrutinise carefully arrangements whereby companies co-ordinate their services through the sharing of infrastructure and the specific modalities envisaged. If consumers do not suffer from these types of arrangements, we will not oppose them. However, the converse also applies: we will not authorise forms of co-ordination which would lead to co-ordinated behaviour that would damage consumers.

Conclusion

Even though there is much talk of doom and gloom about the technology sector at the moment, I still believe that there is much potential growth. We have seen in the past the success of the most unlikely services - few predicted the consumer impact that SMS messaging has had. There will be other similar products and services in the future.

You have complex and difficult jobs in running your businesses and making investment decisions. All the more so as macroeconomic circumstances and the financial environment become more difficult. However, my primary job as competition commissioner is to take decisions on the basis of microeconomics and to protect the interests of consumers. This, I am convinced, is also a key ingredient for the success of the industry itself and this task remains unchanging.


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