Vj-22/2002/61

VJ-22/2002

MOBILE OPERATORS

(Restrictive agreements, dominant position)

Summary

The Hungarian Competition Authority (HCA) launched a sector inquiry in the mobile sector in May 2001, because it perceived market failures that might have been the result of the anticompetitive practices of the market participants. The sector inquiry covered the period of 1998-2001. The report about the sector inquiry was published in November 2002 [1] .

The HCA also initiated competition supervision proceedings in February 2002, while the sector inquiry had been in the pipeline. The aim of the competition supervision proceedings was to detect whether mobile operators determined their mobile-to-mobile termination fees by concerted actions and at an unfairly low level and whether they determined their fixed-to-mobile termination fees and calling tariffs and mobile-to-fixed calling tariffs by concerted actions and at an unfairly high level. The HCA examined the same time period as in the mobile sector inquiry.

The HCA also initiated competition supervision proceedings in February 2002, while the sector inquiry had been in the pipeline. The aim of the competition supervision proceedings was to detect whether mobile operators determined their mobile-to-mobile termination fees by concerted actions and at an unfairly low level and whether they determined their fixed-to-mobile termination fees and calling tariffs and mobile-to-fixed calling tariffs by concerted actions and at an unfairly high level. The HCA examined the same time period as in the mobile sector inquiry.

As a result of the competition supervision proceedings, the Competition Council (hereinafter: CC) stated in its decision that the four mobile operators concluded and implemented agreements that were suitable for distorting competition. The CC imposed a fine of HUF 360 million (EUR 1.44 million) in total on two of the operators (Westel Mobile Rt., Pannon GSM Rt.). [2] The abuse of dominant position of the parties could not be proved.

The undertakings concerned

Westel Mobil Rt. (hereinafter: Westel900), Pannon GSM Távközlési Rt. (hereinafter: Pannon GSM) and Vodafone Rt. (hereinafter: Vodafone) are mobile operators. They provide, inter alia, mobile telecommunication services by using GSM (digital) technology. Westel Rádiótelefon Kft. (hereinafter: Westel450), another mobile operator provides, inter alia, mobile telecommunication services by using NMT (analogue) technology. Magyar Távközlési Rt. (hereinafter: Matáv) provides telephony services, within which it primarily offers local, domestic long distance and international fixed-line telephony services.

Relevant market

The investigation showed that the demand side substitution between fixed-line and mobile services is limited. It was also found that no supply side substitution existed between them, since the entry on the market was possible only by means of concession agreements and the government undertook not to give new concession rights until January 2003. Consequently, the CC considered that mobile and fixed-line services formed separate markets.

It was also found that the mobile telecommunication services could be divided into two distinct markets: to the retail services consumed by end-users and to the wholesale services consumed by telecommunication operators.

The CC found that NMT (analogue) and GSM (digital) services are not in the same market within retail services and therefore Westel450 could not be considered as a competitor of the three other mobile operators. It was also pointed out that mobile operators provided their services in packages to end-users and primarily these service packages competed with each other and not the single services themselves. Within the service packages three different elements could be distinguished, which could be examined separately, namely the on-net service package (mobile access and on-net calls), the off-net mobile calls and the mobile-fixed calls. In the investigator`s report, it was pointed out that prepaid and postpaid services were in the same market within retail services and the CC agreed with this opinion.

The wholesale market comprises those services which are offered by operators to each other and to other telecommunications companies. There are various distinct services within the wholesale market, one of which is the market of termination of calls. It is essential that users of different networks are able to communicate with each other. This requires the interconnection of the networks. One of the forms of interconnection services are termination services which establish the connection between the telecommunication company of the calling party and the telecommunication company of the called party. The market of termination of calls comprises mobile-to-mobile and fixed-to-mobile termination services. As far as mobile-to-mobile termination service is concerned, mobile operators pay fees to each other in exchange for using the network of the other mobile operator. As regards fixed-to-mobile termination services, it should be mentioned that the subscribers of fixed-line services pay fees to their fixed-line operators who pass on the sum directly to mobile operators after having subtracted the regulated fees of fixed-line initiation and transit services. The CC found that fixed-to-mobile termination services were not part of the mobile market, although the prices of termination of calls originating from a fixed-line network and directed towards a mobile network were determined by mobile operators. The CC found that every operator concerned held a monopoly position in the market of termination of calls in its own network.

Definition of a dominant position

The CC examined the mobile-to-mobile, fixed-to-mobile and mobile-to-fixed calling services in the retail market. It found that mobile operators had the following market shares on the retail market: Westel900 - 50 %, Pannon GSM - 40 %, Vodafone - 10%. However, the market shares in themselves are not enough to the definition of a dominant position of the undertakings, the characteristics of the market must also be taken into account. From this point of view, the size of the network of the mobile operators play an important role, because the more subscriber the network has the less important role the possibility of being reached by the customers of other mobile operators for its own subscribers plays. This network effect can be greatly reduced by the interconnection of the networks, since the consumers of the smaller operators can be connected to the customers of the bigger operators through interconnection of the networks. The bigger network externality lay the foundations of a dominant position only in case the mobile operator has the possibility to determine the termination fees to its own network at an unfairly high level. This was not the case on the Hungarian market as operators have determined the same termination fees against each other having referred to the fact that mobile traffic from one operator to another was more or less the same as traffic in the opposite direction. Therefore the CC pointed out that none of the mobile operators held a single dominant position on the retail market of mobile telecommunication services.

The CC also examined the question, whether mobile operators possessed a collective dominant position on the retail market. The existence of collective dominant position of the undertakings was investigated according to the conditions determined by the Court of First Instance in the Airtours vs Commission case. The CC found that some factors may have indicated the existence of a collective dominant position of the mobile operators on the retail market, but others contradicted them, so a collective dominant position of the undertakings could not be established.

As far as the wholesale market was concerned, the CC considered the termination of calls as the relevant wholesale product. The wholesale market can be divided into several parallel distinct markets, within which only the respective operators are able to terminate calls originated in other networks and terminated in its own network. Therefore every operator concerned holds a monopoly position in the market of termination of calls in its own network. Nevertheless, this fact in itself is not enough to establish the dominant position of any mobile operator on the wholesale market and the regulatory framework of the market must also be observed. The legal background of the mobile telecommunications services significantly changed during the period examined by the CC. The mobile operators had the obligation to interconnect their networks from the beginning, however the question of price determination was regulated differently between times. Before the beginning of 1998 a broad price regulation was imposed on the sector and the prices of the retail mobile services were regulated according to a price cap formula while interconnection charges were announced in a ministerial decree. After July 2001 - according to the new Telecommunications Act - two of the four mobile operators were designated as SMP-operators thus obliged to set the prices of termination based on the underlying costs calculated according to the so-called LRIC-method. Within the above-mentioned timeframes the operators were free to set their prices concerning all of the services, including termination fees and calling tariffs and consequently, the termination fees were set as a result of the deal of the mobile operators. Therefore, the CC found that the dominant positions held by Westel 900 and Pannon GSM could be established against the smaller mobile operators (Vodafone , Westel450). The CC also stated that all of the four mobile operators possessed dominant position against fixed-line operators.

Distortion of competition

Agreements or concerted practices between undertakings and decisions by social organisations of undertakings, public corporations, associations or other similar organisations (hereinafter referred to together as `agreements`), which have as their object or potential or actual effect the prevention, restriction or distortion of competition, are prohibited.

The HCA investigated whether the termination fees of fixed-to-mobile calls were in line with the underlying costs. It found that from technological point of view, the mobile-to mobile calling tariffs should have been higher than the calling tariffs of both mobile-to-fixed and fixed-to-mobile calls. In reality, the average price level of mobile-to-mobile calls were lower and the average price level of mobile-to-fixed and fixed-to-mobile calls were higher than it could have been expected. These distorted price levels could affect disadvantageously both the customers of the mobile operator and the customers of the fixed-line operator.

Clauses of network agreements which aimed or were suitable to distort competition

The CC examined the network agreements of the mobile operators which were concluded in 1999 and 2000 and found several provisions which were suitable for developing distorted price levels on the relevant markets. (However, the actual preventing / restricting / distorting effect of the provisions could not be proved.) These provisions were the following:

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    The mobile operators agreed that tariffs of mobile-to-mobile (off-net) calls might not be higher than those of mobile-to-fixed calls. By applying this provision, the mobile operators deliberately created such a distorted price level of calls which was not in line with the underlying costs of the calls.

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    The network agreements did not contain any provisions concerning the absolute or relative price level of the fixed-to-mobile calling tariffs, but stated that mobile-to-mobile termination fees have to be set at 40 % of the calling tariffs of fixed-to-mobile calls. By fixing mobile-to-mobile termination fees to the level of fixed-to-mobile calling tariffs, mobile operators were able to concert their behaviour concerning the determination of their fixed-to-mobile calling tariffs.

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    The obligation of setting mobile-to-mobile termination fees at 40 % of the calling tariffs of fixed-to-mobile calls made it inevitable that mobile operators had to inform each other of the changes of fixed-to-mobile calling tariffs. The exchange of business information by the mobile operators was suitable for concerting the price level of the fixed-to-mobile calling tariffs set by the mobile operators.

The CC found that the above-mentioned provisions of the network agreements were suitable for distorting competition through creating prices that were not in line with the underlying costs and therefore the agreements in question qualified as restrictive ones.

Presumption of infringement by setting fixed-to-mobile termination fees and calling tariffs at an unfairly high level

In the beginning of the investigation, the HCA assumed that mobile operators had abused their dominant position they had on their own termination market by setting the termination fees and calling tariffs of fixed-to-mobile calls at an unfairly high level.

To the establishment of an infringement committed by setting unfairly high prices, the authority must be able to determine the "correct price" of the service, since the infringement can be proved only if the price /fee set by the undertakings considerably exceeds the "correct price". Authorities may use two methods for the determination of the "correct price": the method of cost analyses or the so-called benchmark method.

The benchmark method could not be used in the present case, because the fixed-to-mobile termination fees of the comparable foreign companies were determined by regulatory principles and not by competitive circumstances. The analyses of the termination fees of the mobile operators showed the prices of some of the services of the operator not to be in line with the underlying costs, but there were only indirect evidences to the infringement, since the lack of cost calculation of the companies prevented the investigators from determining the "correct price" of the single services. Therefore the CC found that excessive pricing could not be proved.

Footnotes

  • :: d1e110

    Executive summary in English is available at the homepage of the HCA; http://www.gvh.hu.

  • :: d1e143

    The fines were calculated on the basis of the Notice on Fines in Antitrust Cases. The Notice in English is available at the homepage of HCA; http://www.gvh.hu.