EU fines Telefonica for unfair competition in Spanish broadband market

By Esme Vos on July 4, 2007 in WiFi News

The European Commission has imposed a fine of 151 million Euros on Spanish incumbent telco, Telefonica, for abuse of its dominant position in the Spanish broadband market. The fine is the second highest ever levied by the Commission (the highest is 497 million EUR against Microsoft). The European Commission has imposed a fine of 151 million Euros on Spanish incumbent telco, Telefonica, for abuse of its dominant position in the Spanish broadband market. The fine is the second highest ever levied by the Commission (the highest is 497 million EUR against Microsoft).

The Competition Commission found that “the form of a margin squeeze between the wholesale prices it charged to competitors and the retail prices it charged to its own customers . . . weakened its competitors, making their continued presence and growth difficult: competitors were forced to make losses if they wanted to match Telef??nica’s retail prices. With high wholesale costs and weakened retail competition on the broadband market, Spanish consumers pay 20% more than the EU-15 average for broadband access. The Spanish broadband penetration rate is 20% below EU-15 average, and its growth is nearly 30% below that of the EU-15.”

Competition Commissioner Neelie Kroes commented: Spanish consumers are paying far more than the average for high-speed Internet access and many have chosen not to pay that price. The margin squeeze that Telef??nica imposed on its competitors not only raised their costs, but also harmed customers significantly. When consumers and businesses are harmed in such a major market, the entire economy suffers. I will not allow dominant companies to set prices that undermine telecoms liberalisation.

Excerpt of the Commission’s decision to impose a heavy fine on Telefonica:

ADSL ‚Äö?Ñ?¨ the provision of high speed internet access using a fixed telephone line – is the main technology used in Spain to provide broadband internet access services, with 80% of broadband connections at the end of 2006. As the only Spanish telecommunications operator that has a nation-wide fixed telephone network, Telef??nica controls the entire ADSL value chain in Spain. It is uneconomical to duplicate Telef??nica’s local access network so alternative network operators wishing to provide retail broadband services have no option but to purchase wholesale broadband access products from Telef??nica: namely local loop unbundling, regional wholesale access and national wholesale access. The Decision does not concern local loop unbundling, which is not a substitute to the other two wholesale products.

Telef??nica was at all times free to end this margin squeeze by lowering its wholesale prices on its own initiative. Its national wholesale prices ‚Äö?Ñ?¨ which in 2006 accounted for around 70% of the prices covered by this decision – were not regulated and its regional wholesale prices ‚Äö?Ñ?¨ around 30% of the prices in 2006 – were only subject to maximum prices set ex ante by the Spanish regulator on the basis of forecasts provided by Telef??nica in 2001.

Telef??nica was in any event in a position very soon ‚Äö?Ñ?¨ if not immediately ‚Äö?Ñ?¨ to realise that those estimates were not matched by its actual data. Telef??nica’s business plan and cost accounts show that the company could not have been unaware that it was engaging in a margin squeeze.

Following the Commission’s opening of formal proceedings in February 2006, the Spanish regulator analysed the broadband markets under the new regulatory framework in June 2006, which led it to significantly decrease Telef??nica’s regional and national wholesale prices in December 2006. This intervention put an end to the abuse identified in the Commission’s decision.

In view of its gravity and duration, Telef??nica’s abuse warrants a severe sanction. The abuse had a very negative impact, in the form of obstacles to the entry of competitors in this important market. The associated harm for customers was considerable.

Today’s decision should deter other incumbents from similar conduct, not only in the broadband internet access market, but also as concerns Telef??nica’s and other incumbents’ positioning in the launch and development of new services, in particular triple play (telephony, internet and TV over broadband) offers.

From September 2001 to December 2006, the margin between Telef??nica’s retail prices and the prices for wholesale broadband access at both the national and regional levels was insufficient to cover the costs that an operator as efficient as Telef??nica would have to incur to provide retail broadband access.

Wholesale access at national level allows alternative operators to offer retail broadband services throughout the Spanish territory without having to roll out any (or hardly any) network by connecting to a single, “national” access point. Wholesale access at the regional level requires that alternative operators roll out a costly network reaching up to 109 “regional” access points. Telef??nica is dominant in the provision of both types of access.

The margin squeeze that Telef??nica imposed on its competitors is a very serious infringement of Article 82 of the EC Treaty, which outlaws the abuse of a dominant position on a market. The impact of the abuse in the form of obstacles to the entry of competitors in this growing market of great importance for society as a whole, and the accompanying harm caused to domestic and business customers was considerable.