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4.11 Our starting point for assessing SMP is to take account of the SMP Guidelines, in accordance with section 79 of the Act. In addition, we take into account the European Regulators Group (now BEREC) working paper on SMP (‘the ERG SMP Position’) that builds on the SMP Guidelines.118

4.12 The SMP Guidelines state that:

“Market shares are often used as a proxy for market power. Although a high market share alone is not sufficient to establish the possession of significant market power (dominance), it is unlikely that a firm without a significant share of the relevant market would be in a dominant position.”

4.13 The SMP Guidelines set out other criteria relevant to an assessment of SMP, in addition to market share.119 We have focussed our assessment on what we see as the four broad areas most pertinent to the markets under consideration, namely:

117

Section 78 of the Act, Article 14(2) of the Framework Directive, and paragraph 70 of the SMP Guidelines.

118

See SMP Guidelines, paragraphs 75 to 82

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2002:165:0006:0031:EN:PDF

See Section 3, paragraphs 7 to 23 of the ERG SMP Position

http://berec.europa.eu/doc/publications/public_hearing_concept_smp/erg_03_09rev3_smp_common_ concept.pdf

119

Paragraph 75 of the SMP Guidelines notes that persistent and high market share is a strong indicator of a dominant position. The SMP Guidelines state that the following criteria can be used to measure the ability of an undertaking to behave to an appreciable extent independently of its competitors, customers and consumers: overall size of the undertaking, control of infrastructure not

• market shares;

• barriers to entry;

• countervailing buyer power; and

• pricing.

4.14 Whilst pricing is not listed as one of the criteria in the SMP Guidelines, excessive pricing is listed in the ERG SMP Position.120 In particular, “...the ability to price at a level which keeps profits persistently and significantly above the competitive level is an important indicator for market power.”

4.15 When assessing whether SMP exists with respect to a particular market, we need to consider how to account for the effects of both existing and proposed regulation. This is known as the ‘modified Greenfield approach’. Without taking this step, our market analysis could fail to identify SMP where a CP’s behaviour is constrained by existing regulation (or the threat of regulation). The modified Greenfield approach was endorsed by the Court of Appeal when assessing countervailing buyer power (CBP) in the context of H3G’s appeal against our 2007 MCT Market Review (‘the H3G Judgment’).121

4.16 Specifically, the modified Greenfield approach involves assessing SMP in the relevant market in a hypothetical scenario where there is an absence of any

regulation in the proposed market - whether current or potential - that arises or would arise from a finding of SMP. However, this assessment would still take into account any regulation that will continue to exist throughout the period being assessed in this market review and which is independent of an SMP finding in the market concerned. 4.17 In this review, we have taken into account the following relevant regulation:

• BT’s end-to-end (E2E) connectivity obligation, as the most directly relevant ex ante regulation binding on BT’s negotiation of MTRs;122

• obligations relating to other regulated fixed voice services. For instance, the fact that BT and other Fixed Communication Providers’ (FCP’s) fixed termination rates are themselves regulated; 123

easily duplicated, technological advantages or superiority, absence of or low CBP, easy or privileged access to capital markets/financial resources, product/services diversification, economies of scale or scope, vertical integration, a highly developed distribution and sales network, absence of potential competition and barriers to expansion. A dominant position can derive from a combination of these criteria which taken separately may not necessarily be determinative.

120

See the ERG SMP Position, paragraph 20. 121

See paragraphs 53 and 64, Hutchison 3G UK Ltd v Office of Communications [2009] EWCA Civ 683, 16 July 2009 http://catribunal.org/files/CofA_Judgment_1083_H36_16.07.09.pdf

122

BT has a regulatory obligation to purchase (on reasonable terms) wholesale narrowband (fixed and mobile voice and narrowband data) call termination services from any provider of public electronic communications networks (PECN).

123

Regulatory conditions imposed both on BT and on other FCPs constrain the exercise of SMP in fixed network call termination markets and prevent them from setting excessive charges in those markets. See paragraphs 6.65 to 6.74 of our 2013 FNMR Statement.

• BT’s obligations to provide services which support interconnection, namely interconnection circuits;124

• wholesale call origination125, local loop unbundling (LLU)126, wholesale line rental (WLR)127 and leased lines obligations;128 and

• Ofcom’s dispute resolution powers concerning the above regulation.

4.18 This approach is consistent with the approach we took in our three previous MCT market reviews.129 We considered all of the other criteria listed in the SMP Guidelines and the ERG SMP Position in our 2007 MCT Statement130. However, we concluded that these other criteria had less relevance to an assessment of SMP in wholesale MCT markets. Our approach takes account of the ERG SMP Position and relevant case law as well as the impact of relevant regulation. It also considers the

commercial context in which MCT is sold and the relative strength of any CBP.

2013 FNMR

4.19 In the 2013 FNMR we assessed market power for wholesale fixed geographic call termination. The reason for noting this review is that the market power and

competition considerations that arise in fixed call termination are similar to those which arise in MCT. Reflecting the two-way access nature of termination services, fixed CPs are purchasers of MCT and mobile CPs are purchasers of fixed call termination.

4.20 We found that each CP has SMP in wholesale fixed geographic call termination within the relevant market applicable to that CP. In reaching this conclusion, we noted that each CP had 100% market share in its respective market and that barriers to entry were high in these markets. We also rejected CBP as an effective constraint on the market power of CPs in their relevant fixed termination markets.131

124

See Section 10, pages 238 to 278 of our 2013 FNMR Statement. 125

See Section 5, pages 40 to 143 of our 2013 FNMR Statement. 126

Full LLU is the process where BT makes its local access network (the cables that run from customers’ premises to the telephone exchange) available to other CPs. These CPs are able to offer voice and, broadband using their own infrastructure.

127

WLR is the regulated service which allows CPs to rent access lines from BT, but where there is not full control of the access line; in contrast to full LLU. With WLR CPs must use the BT network for voice services and broadband (although partial LLU coupled with WLR allows CPs to take greater control of the broadband service).

128

MCPs use large volumes of leased lines to carry mobile voice and data traffic between their radio base stations and switching centres. BT is obliged to sell leased lines to MCPs in compliance with a charge control. See for example: Ofcom, Business connectivity market review – final statement, 28 March 2013 http://stakeholders.ofcom.org.uk/consultations/business-connectivity-mr/final-statement/ 129

Ofcom, Wholesale Mobile Voice Call Termination, Statement, 1 June 2004

http://stakeholders.ofcom.org.uk/binaries/consultations/mobile_call_termination/statement/Statement_ on_Wholesale_Mobi1.pdf See also the March 2007 Statement and the MCT 2011 Statement.

130

See paragraphs 4.25 - 4.63, pp. 57 – 65. 131

See Ofcom, 2013 FNMR Statement, Section 6, pages 152 to 159.