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In this chapter, the characteristics of the products and services that the

Commission included in its original recommendation in relevant markets 1 and 3 are compared with the different categories of IP-based telephony and mobile telephony.

The main outline of this comparison is summarised in the table below.81 Characteristics that distinguish the products/services in markets 1 and 3, according to the Commission’s original recommendation, can be found in the column furthest to the left.

This comparison is justified by the assumption that products that are comparable from a consumer’s point of view, on the basis of, among other things, their characteristics, might be regarded as substitutes. It has also been taken into consideration whether the products may be viewed as equivalent on the basis of their production costs and last mile network infrastructure. This is a characteristic that rather should be associated with a supply perspective. This refers to whether

81 _{Cases where PTS has found it difficult to assess whether the features ought to be viewed as}

the products of one operator may be viewed as substitutes through it being possible to offer something that the customers may perceive as substitutes within a relatively short period of time and with low adjustment costs.

Access and telephony services according to the original recommendation IP-based telephony A IP-based telephony B IP-based telephony C IP-based telephony D Mobile

Speech, fax, data Equivalent Equivalent Equivalent

(except for fax)

Equivalent, however not fax

Equivalent

Two-way communication Equivalent Equivalent Equivalent Equivalent Equivalent

Real time Equivalent Equivalent Equivalent Equivalent Equivalent

Reach/be reached Equivalent Equivalent Equivalent in

some cases. Not equivalent in others, with computers having to be switched on.

Not equivalent Equivalent

Emergency number Equivalent Equivalent Not equivalent Not equivalent Equivalent

Telephone number from the Swedish numbering plan

Equivalent Equivalent Equivalent in

some cases, not equivalent in others

Not equivalent Equivalent

Service tied to location/person Equivalent (to location) Nomadic, but does not exclude location- orientation. Nomadic, but does not exclude location- orientation. Not equivalent, nomadic Not equivalent, mobile

Service functionality Equivalent Equivalent Equivalent Not equivalent Equivalent

Price/pricing structure Equivalent Equivalent Equivalent Not equivalent,

free Not equivalent (?) Sales methods/service/ marketing

Equivalent Equivalent (?) Equivalent (?) Not equivalent Equivalent

Production costs Equivalent or

lower

Equivalent or lower

Equivalent or lower

Lower Higher (in

most cases) Last mile network

infrastructure

Equivalent Not

equivalent

Not equivalent Not equivalent Equivalent

Figure 6:2. Summary of the comparison between the characteristics of the various types of telephony.

The comparison analysis conducted below proceeds from whether the respective products have characteristics that are such that residential customers may consider using them to fulfil the same needs as those fulfilled by traditional fixed

telephony. For this reason, the starting point was the assumption, in terms of competition law, that products may be viewed as substitutable if customers perceive them as having the same intended area of use. Residential customers are able to conduct a two-way conversation in real time using all the telephony services studied. Consequently, these characteristics cannot be used to separate the different products from an intended use perspective.

Mobile and IP-based telephony in Categories A and B are equivalent to traditional fixed telephony as regards the possibility of the user reaching emergency number 112. Users of IP-based telephony in Categories C and D do not have this

possibility.

Another distinguishing characteristic is whether or not residential customers are using a product that has been allocated a telephone number from the Swedish numbering plan. The market descriptions in previous chapters can be used as an argument for this. A residential customer who uses a telephone number from the Swedish numbering plan may, on account of virtually all Swedish residential customers having (at least) one subscription with anȧordinary’ telephone number, reach anybody in Sweden. On the other hand, a residential customer who uses IP- based telephony in Category D or certain types of IP-based telephony in Category C can in comparison only reach a very small proportion of the Swedish

population. The intended area of use for this type of IP-based telephony cannot therefore be viewed as equivalent to the intended area of use for traditional fixed telephony, mobile telephony and IP-based telephony in Categories A and B. A corresponding reasoning applies to service functionality. The description of the different products shows that, like the other products, the service functionality of IP-based telephony in Category D differs from the service functionality of traditional fixed telephony. According to this characteristic, the intended area of use for IP-based telephony in Category D should therefore not be viewed as equivalent to the intended area of use for traditional fixed telephony. However, as regards other types of telephony, service functionality is not a characteristic that results in the intended area of use differing (substantially) from the intended area of use for traditional fixed telephony.

Only IP-based telephony in Category A can be assessed as being equivalent to traditional fixed telephony as regards the criterion that the service/product should be tied to a certain location. This assessment is based on the assumption that the majority of residential customers demanding IP-based telephony in Categories B, C and D and mobile telephony, probably do not wish to be limited to a certain location determined in advance in order to use the service. In other words, they are demanding and purchasing the opportunity to be nomadic and mobile by using these telephony services. However, note the argument in Section 6.4 on TeliaSonera’s Fastmobil product and the individual access of single households to their mobile telephones.

IP-based telephony in Categories A, B and C is viewed as equivalent to traditional fixed telephony in the national call services market as regards the criterion of price and pricing structure; however, it is doubtful if this applies to the access market. Using the same criterion, there is no reason to regard mobile telephony and IP- based telephony in Category D as equivalent to traditional fixed telephony in the markets that have been investigated. The intuitive line of argument on the price sensitivity of residential customers and interrelated markets indicates that it may henceforth be an issue of whether residential customers choose to substitute traditional fixed telephony with a combination of mobile and IP-based telephony, rather than with only one or the other.

The argument for viewing IP-based telephony in Categories A, B and C as being equivalent in the call market is based on the fact that the majority of IP-based calls today are transmitted and terminated in fixed networks on the grounds of low level penetration, which means that residential customers using IP-based telephony are generally charged according to the cost structure used in traditional telephony. Consequently, the preliminary assessment is that residential customers, in any event not for cost reasons, intend to use call services to a different extent than they had previously done with fixed telephony if they migrate to IP-based telephony in Categories A, B or C.

In summary, it may be concluded that it is not the technology used that is decisive when determining whether or not the services constitute a substitute. Like IP technology, mobile telephony technology can be used to produce services with characteristics that mean that they may be viewed as a substitute, even if not all of the services provided via these technologies constitute a substitute. It is

consequently the design and characteristics of the services that are crucial for whether they may be viewed as a substitute for the access product defined by the Commission, and not the underlying production technology.

As regards interchangeability on the supply side, production costs for IP-based telephony appear to be lower than the corresponding costs for traditional telephony. There is also a belief in the sector that IP technology will become increasingly cost effective. According to PTS’s LRIC models for fixed and mobile telephony, the average production cost for an average customer is higher for providing a service via mobile telephony than the corresponding service via fixed telephony. This does not exclude production costs being lower for mobile telephony than for fixed telephony in some cases, for example in sparsely populated areas and for customers with low call volumes. The extent to which supply substitution is taking place between the different production technologies will need to be assessed when market analyses are carried out in the future.

7

Developments during the next three-year period

7.1 Introduction

Within the framework of this substitution analysis, PTS had a number of

companies interviewed that offer IP-based telephony.82 _{These stakeholders share} the vision that IP-based telephony is the telephony service of the future.

However, the incentives to counter or stimulate such a development differ

between the stakeholders. On the one hand, IP development is being held back by both fixed network operators and mobile network operators having an incentive to limit traffic to speech instead of data, since speech generates higher revenues. On the other hand, new technology and new services, such as Triple Play and IP- based telephony in Category D, are pressing operators to upgrade their networks so that they can offer these services themselves. There is considerable growth potential, both for services linked to the access and for services without this link, and it is still difficult to determine which form will most appeal to end users. The market for electronic communications services is characterised by a large number of stakeholders that differ greatly from each other in terms of size and operational focus. Over the years, the market arena has also changed continuously and certain periods have been characterised by extensive consolidation. Since economies of scale and advantages of joint production will be a precondition for profitability, the number of present stakeholders is likely to exceed future needs. It is likely that the consolidation trend has not yet come to an end, but will probably continue in the next three-year period and also encompass stakeholders offering access to IP-based telephony. With the current assumptions (low

impediments to establishment and a broad customer base), the market for

electronic communications shows good development potential. At the same time, however, the price relationship between PSTN and local loop unbundling may serve as an impediment to such development.

The technical and financial possibilities characterising the market will probably lead to there being potential for intensified competition through the establishment of new and varying types of stakeholders during the coming three-year period. The tougher competition, combined with increased interest from end users, means that it is likely that more residential customers will decide to use IP-based telephony in the future.

Residential customers' decision to substitute an access product is also likely to be affected by the operators' trend of integrating mobile telephony and wireless communication in their offerings. There are already existing packages including

82_{A-focus, Utredning avseende IP-telefoni ur ett konkurrensperspektiv [investigation regarding IP} telephony from a competition perspective] for PTS, February 2006.

mobile telecommunications services but these will be promoted by operators (package providers) having access to all communication services. It remains to be seen whether end users will choose to purchase packages containing all

communication services or certain separate services instead. Regardless of what end users find interesting and attractive, the package providers will nevertheless have a greater possibility to adapt their services to market needs and thus be competitive.

Obviously, it is difficult to predict the future, particularly for the electronic communications market, which is an area undergoing rapid development. On the other hand, a substitution analysis should contain a forward-looking perspective. The reasoning in this chapter concerning the degree of substitution and which factors accelerate or delay it is based on the situation as described in earlier chapters of this report. The forward-looking assessments have a time perspective of three years in the future.