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1.1 The two basic approaches to regulation of market power -ex ante v. ex post

1.1.1 Ex ante v. ex postregulation

It was said in the introduction to this thesis that the notions ofex anteandex post are used to describe the two basic approaches to regulation of market power. General competition rules applyex postand within the context of this thesis cover the analysis of Article 82 EC in the EU and of refusal to deal in Japan. Sector-specific rules apply ex ante and can be sub-divided

466_{The importance of this interrelation was recognised in the 1998 Access Notice, supra note1. Part I of that Notice}

focuses exclusively on the interrelation between competition rules and sector-specific rules.

467_{See in particular the last section of this chapter which analyses the future relationship between general competition}

between ‘public interest’ type rules (which are not specifically studied in this thesis) and ‘preparatory’ rules which are analysed in this thesis.468_{Within the context of this thesis the} significance of the distinction between ex ante and ex post regulation is closely linked to the legal analysis conducted in this chapter which shows why there is a policy trend in the EU to move towards less ex ante regulation in favour of moreex post regulation. This trend is itself closely linked to the convergence phenomenon (analysed below) that makes regulation by inflexible predetermined rules inappropriate in the rapidly changing technological environment.

1.2 Convergence of electronic communications and access to telecommunications networks

1.2.1 The concept of convergence

The end of the 1990s has seen the emergence of new technologies and new services at accelerating speeds and on a global scale. Convergence is initially a purely technologically driven phenomenon which will eventually lead to convergence of markets and therefore directly affect the competition analysis of market power in this sector.

(a) Convergence of technology

Convergence initially takes place at the technological level. It can be defined as the coming together of the telecommunications, audio-visual and information technology sectors.469_{The key} feature driving this development is the digitalisation of virtually all networks and services. Digital technology unifies the previously distinct technologies by converting any type of information (audio or visual) into a sequence of binary digits (0 or 1). This means that any form of content be it still or moving picture, sound, text or data can be stored and made available by common transmission mechanisms.470

(b) Convergence of networks

Technological convergence is leading to a convergence of networks. Networks that were previously dedicated to the transmission of a specific type of data can now transmit any type of information. For example, telecommunications networks now have the ability to transport broadcast services while cable networks can be used to provide telecommunications services,

468_{See Section B of Chapter 1 and Chapter 2.}

469_{I.Walden and J.Angel, supra note 6, Chapter 12, p.408.} 470_Ibid.

including voice telephony, in addition to their traditional business of television programming distribution. Network convergence also means that electricity and gas providers can install fibre optic lines within their controlled public-rights-of-way, and then use or lease these services fibre lines to provide competitive long-distance, high speed data, and video services.471

(c) Convergence of services

Technological and network convergence is itself leading to convergence of services, with the creation of “hybrid services” as a result of the cross-fertilisation between telecommunications, broadcasting and information technology and the development of entirely new services.

Three major trends (analysed below) have been identified:472

 internet-based services will eventually encompass text and image based services (e.g. e- mail, file-transfer, etc.), ‘traditional’telecom services (e.g. voice telephony and faxes), and audio-visual services (e.g. video-on-demand and live broadcasting);

 mobile (and satellite) communications will converge with fixed communications;

 the digital television platform will also be used for interactive multimedia services, such as tele-shopping, tele-banking and video on demand.

(d) Convergence of markets

Convergence is also progressively changing market structures. This is best exemplified by the fact that companies that were previously active in separate markets are now seeking to enter these new and converging markets as a result of technological convergence.473_{The trend} towards vertical integration, for instance of content and infrastructure providers, is particularly

471_{Lipschitz, Regulatory treatment of network convergence, in Media Law & Policy, volume VII, number 1, p.14 to 26.} 472_{Robert Verrue, Director General DGXIII, Telecoms Liberalisation “Future Key Issues from the European Point of}

View”, Verband Alternativer Telekom-Netzbetreiber (VAT), Third Forum, Vienna, January 27, 1999, p.7, http://europa.eu.int/comm/information_society/speeches/verrue/telecomlib_en.htm.

indicative of the convergence environment, where mergers are necessary in order to acquire the skills or resources necessary to compete in the converged environment.474

(e) Convergence of principles

Despite what was said above, it is quite likely that convergence of markets will take some time. At EU level, the Commission believes that markets remain substantially different at present and that a competition analysis of the current market situation would show a wide array of separate markets in both the media and telecommunications field.475_{As a consequence, the Commission} believes that at present we are faced with a convergence of principles (i.e. an increased application of competition law principles, exemplified in the EU by the use of the concept of dominance as the definition of the new SMP test)476_{that prepares an ultimate convergence of} markets in the years to come.477

1.2.2 The internet as a driver for convergence

The internet is undoubtedly the most significant and the most unanticipated market development in the telecommunications services sector of the last ten years. Its strong and continuing growth presents a number of challenges to regulators as market players move rapidly into this new business:

 the internet has become an important driver of demand for faster access. New entrants now require much easier access to the local loop (i.e. unbundling of the local loop). Their objective is to introduce technologies (known as xDSL) which multiply by one hundred the capacity of technology traditionally used in the local loop;

 the demand for fast access is also a major driver of backbone investments, potentially stimulating the wide-scale deployment of Asynchronous Transfer Mode (‘ATM’) switching.

474_{See for example the merger of AOL/Time Warner where the combination of Time Warner and AOL brought together}

a unique range of content (films, TV programming, news, magazines and music) with the world’s leading Internet Service Provider, European Commission, Case No COMP/M.1845, 11.10, 2000.

475_{The European Commission recently stated the test it applies in order to define the relevant product/service market}

for electronic communications networks and services in its Guidelines on market analysis and the assessment of significant market power under the Community regulatory framework for electronic communications networks and services, 8 July 2002, COM(2002), paragraphs 44 to 54.

476_{See in the section of this chapter below on the interrelation between the new SMP test and dominance.}

477 _{H.Ungerer, Convergence in regulatory and competition law paradigms, 17 September 2001, p.4 and 5,}

Over time, the percentage of data traffic on networks is likely to substantially overtake the volume of voice traffic;

 The internet has the potential to become the competitive platform for many traditional services, be they public voice telephony or broadcasting. The main reason is that the use of the Internet Protocol (‘IP’) allows the integration of different services on the same network, which is much cheaper than running in parallel several networks (for example, voice telephony and cable TV network) and brings clear marketing advantages (i.e. package of services, one-stop-shopping etc.). In response to new entrants strategies, many European telecommunications operators are now offering internet-based voice telephony services, in competition with their own telephony business. Similarly, an increasing number of telecommunications operators are also investing in digital TV platforms. In Japan, already back in 1996 the TC had noted the convergence of telecommunications and broadcasting. 478 _{Subsequent to this, a new Act - the Broadcasting Using} Telecommunications Act 2001479_{- has been enacted to take into account of the possibility} to offer broadcasting services by using in part or in whole telecommunications services. The main targets of the new Act are satellite and cable operators that provide broadcasting via (broadband) telecommunications equipment. In addition, ISPs480_{and websites that offer} broadcasting type services are also covered by the new legislation. Under the new Act one licence will be required rather than the two licences required under the present regime (one for telecommunications and one for broadcasting).481_{Still in Japan it was reported that the} seven largest Japanese ISPs are considering joining forces to offer improved IP telephony services. This would allow about 2 million subscribers of broadband communications services to call each other free of charge via the IP phone network.

1.2.3 Convergence of mobile (and satellite) communications with fixed communications

The continued growth of mobile communications in Europe, with a total of approximately 199 million cellular subscribers and an average penetration rate of 73% in the 15 EU Member States

478_{Telecommunications Council, Report, Status of Nippon Telegraph and Telephone Corporation, Towards the creation}

of dynamism in the info-communications industry, February 29, 1996, http://www.yusei.go.jp/policyreports/ english/telecouncil/NTT/Council-NTTs.html.

479_{Law No. 85 of 29 June 2001.}

480_{It was reported that the seven largest Japanese ISPs are considering joining forces to offer improved IP telephony}

services. This would allow about 2 million subscribers of broadband communications services to call each other free of charge via the IP phone network; Nikkei Weekly, Access providers courting IP callers, 18 November 2002.

in 2001, reflects a huge business and policy success in the EU.482_{In Japan, mobile telephony} has been a great success with over 77 million cellular subscribers as of September 2002.483

The emerging third-generation mobile-system, the universal mobile telecommunications system (UMTS), will further accelerate the penetration of mobile communications for business and residential use. Mobile communications is beginning to challenge fixed telephony in some areas, notably as wireless local loop can offer a cost-efficient alternative to existing copper wire, and will in the future offer broadband access. The fixed-mobile network convergence should allow users to access a consistent set of services from any fixed or mobile terminal via any compatible access point. As a consequence, it will become increasingly difficult in the future to justify the different treatment of fixed and mobile communications. In addition to mobile communications based on cellular technology, personal satellite communications services will be offering increased global mobility.

1.2.4 Using Digital TV as a platform for Interactive Multimedia Services

Convergence, in parallel with the increasing bandwidth of networks, allows the distribution of many more channels over the same infrastructure (cable TV, satellite transponders, terrestrial spectrum) by using digital compression rather than existing analogue transmission. As a result, new digital television services are appearing on the market which consist mainly of thematic channels, near video on demand (NVOD) and pay-per view. In the same time the digital television platform is increasingly being used for interactive multimedia services such as tele- shopping and tele-banking.

1.2.5 Impact of convergence of electronic communications on the analysis of access to telecommunications infrastructure and network facilities

(a) Effect of convergence of electronic communications on the competition analysis

From the competition law point of view, the convergence of electronic communications has significant implications for the traditional competition analysis as applied to the telecommunications industry.484_{As the convergence of markets increasingly becomes a reality,}

482_{European Commission, Seventh report on the implementation of the telecommunications regulatory package, COM}

(2001) 706, p.2.

483_{MPHPT, Prompt report on the number of subscribers of cellular telephone and PHS (Personal Handy-phone}

System) at the last day of September 2002 in Japan.

the traditional analysis of market power in the telecommunications industry as well as the doctrine of essential facilities in the EU will have to be revisited to take into account that there is in parallel to the existing standard telecommunications infrastructure, the cable network and mobile telephony network which perform the same plus other additional services such as sending image with speech (e.g. video-conferencing) or broadband internet coupled to telephony.

In the EU the traditional analysis of dominance provides that supply and demand substitution must be at low levels for a dominant position to be found. Continuing on the example of convergence between traditional telephony and internet telephony, the possibilities for voice telephony offered by the internet will mean that demand substitution could be altered in a very significant way. The SSNIP test485_{used by the Commission of a hypothetical small (in the range} of 5% to 10%), lasting change in relative prices in order to evaluate the likely reactions of customers to that increase could prove that consumers will readily switch to internet telephony if traditional telephony prices were to increase. In addition, the analysis of the dominant position could further be altered by a change in the supply substitution analysis. The test here is similar to the one for demand substitutability, only it is the ability of the supplier to switch production to the relevant products and market them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices that is the main factor. It is quite likely that because some traditional telephony companies have already started providing internet telephony they do not need to incur significant additional costs or risks to provide the new services (this is an example that is specifically mentioned by the European Commission in its guidelines on market analysis and the assessment of significant market power).486_{As a result, it is becoming increasingly difficult to argue that traditional telephony,} mobile telephony, the internet as well as digital television are not all providing communications activities which are substitutable both from the demand and the supply side. The phenomenon of convergence therefore means that the assessment of market power in the telecommunications industry will increasingly need to take into account that there is, in parallel to the existing standard fixed telecommunications services, other electronic communications services which perform the same plus other additional services by using alternative networks to

485_{The Small but Significant Non-transitory Increase in Price test was developed in the USA and introduced in EC}

competition law through merger control cases: see B.Bishop, The Modernisation of DGIV, ECLR, 1997, p. 481. It has been pointed out that there is much misunderstanding about the SSNIP test. It is not really a method for market definition. It asks a different question, which is the question of knowing if there is market power; Mark Williams, Speaking Notes for the second Oxford Antitrust Law & Economics Conference, Hertford College, Oxford, 17 March 1999, p. 7.

486_{European Commission, Guidelines on market analysis and the assessment of market power under the Community}

the traditional telecommunications networks and facilities. The practical effect of this change in demand and supply substitution would be the enlargement of the relevant market for telephony to a wider market that includes all electronic communications thereby reducing the dominant position of the big telecommunications operators which do not offer internet telephony or have a very small market share in that new service.

In Japan, the traditional analysis of whether or not a refusal to deal constitutes a prohibited practice is also directly affected by the convergence phenomenon. In the JFTC’s guidance on the criteria it will consider when analysing whether or not a refusal to give access to a facility substantially restrains competition in the market, it was clearly provided that one of the elements that is taken into consideration is the market structure as well as the characteristics of the facility.487 _{The same principles as in the EU therefore apply to Japan and the increasing} substitutability (both from the point of view of supply and demand) between all electronic communications will have to be taken into account by regulators. In a paper published in June 2000, the JFTC recognised the impact of the convergence phenomenon and as a result is actively promoting the goal of network competition as a way to bring more competition to the market. In time, the JFTC believes that new networks (such as cable TV circuits and DSL services) could replace the networks of users’ circuits owned by the NTT regional companies.488

As to the relation between the effects of convergence and the EU doctrine of essential facilities, the whole idea of the doctrine has to be re-visited if a new entrant can provide telephony services through the internet at a similar or even lower cost than leasing lines from the incumbent operator. The telephony network will not be considered as essential anymore if other means for providing the same service exist. As a result of recent jurisprudence from the European Courts,489 _{the application of the doctrine has been restricted to cases where the} following three conditions are met:

 the refusal of the service comprised is likely to eliminate all competition in the relevant market on the part of the person requesting the service; and

 such refusal be incapable of being objectively justified; and

487_{OECD, roundtable on the essential facilities concept, supra note 320.} 488_{JFTC, Competition Policy in the Telecommunications Sector, supra note 414.} 489_{European Night ServicesandOscar Bronner, supra notes 153 and 156 respectively.}

 the service in itself be indispensable to carrying on that person’s business, inasmuch as there is no actual or potential substitute in existence for that service.

It is clear from the above test that, in the light of the technological revolution brought about by the internet, the third condition especially is very unlikely to be satisfied. Following theOscar Bronner490_{case this is even if the alternative way to provide the service (here through the} internet) is not as economically beneficial as if there was no refusal to access the telephony network. Therefore, the doctrine of essential facilities already restricted by the ECJ in its application looses even more relevance for the telecommunications industry in the light of the technological revolution created by the internet.

(b) The impact of convergence on the interrelation between general competition rules and sector-specific rules

Convergence is first of all a technological and market driven phenomenon. However, the increasing convergence of markets that it leads to makes it necessary to adjust the existing sector-specific regime of access to telecommunications infrastructure and network facilities to the new market environment failing which the sector-specific regime will be inefficient and act as