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Competition policy in telecommunications*
Why competition policy?
Despite the recent setbacks
faced by telecommunication markets, the ongoing trend has been
towards greater competition. For
the majority of countries, competition has become the regime of
choice. The number of countries
introducing competition in basic
telecommunications and wireless
services has increased steadily
since the late 1990s (see Figure 1).
In 2001 for instance, 79 countries
allowed some competition in local
services, an increase from 68 in
2000. In long-distance services, 66
allowed some form of competition
in 2001 as compared to 53 in 2000,
while in international services, 69
allowed competition against 57 in
2000.
Growth in competition — especially in a fast-moving sector like
telecommunications — naturally
raises a host of complex issues.
While competition has proven eco-
nomic benefits and can help drive
down prices and improve service
provision, lack of appropriate
competition policy can result in
abuses of market dominance and
anti-competitive practices. The
role of policy provisions, including
telecommunication regulations
and competition law, is therefore
paramount in safeguarding
meaningful competition.
Anti-competitive
behaviour
The costs of anti-competitive
behaviour affect the economy as
a whole, not just the sector. For instance, the European Commission
estimates that barriers and bottlenecks in the ICT market slowed
GDP growth by around half a percentage point during the 1990s.
Anti-competitive behaviour may
include conduct intended to harm
competitors or abuse of dominant
position. Some competition policy
* An ITU New Initiatives workshop — the tenth
in the series organized by the ITU Strategy and
Policy Unit (SPU) — was held at ITU headquarters from 20 to 22 November 2002, on the subject of competition policy in telecommunications. On the basis of country case studies (including Chile, Denmark, India and the United
States), an ITU background paper and presentations, participants looked at the relationship
between competition law and telecommunication regulation. They identified and considered
a number of key competition policy issues such
as: Are competition agencies or national telecommunication regulators best placed to deal
with telecommunication competition issues?
How are relevant markets and significant market power determined? The workshop sought
to highlight general trends and policy options
that could be used by countries that have recently introduced, or are planning to introduce,
competition into their telecommunication markets. Countries seeking to maintain or increase
the level of competition may also find these
trends and policy options useful.
More information about the workshop is
available at: www.itu.int/competition.
To order the CD-ROM and report produced
on the basis of the workshop, please visit:
www.itu.int/publications/cd-rom/index.html.
Figure 1– Telecommunications competition just keeps growing
Growth of competition in selected services
Countries
Markets
140
67%
120
63%
62%
57%
Cellular mobile
100
43%
38%
Local
80
International
60
33%
37%
Long distance
40
20
Mobile
0
1995
1997
2000
2001
Monopoly
Local
International
Long distance
Competition
Source: ITU Trends in Telecommunication Reform 2002.
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authorities also regulate deceptive
or misleading conduct or discrimination among customers. The major difficulty in applying competition
law in the fast-changing ICT environment is that it may sometimes
take several years to resolve a particular case, during which time the
market, the technology and the actors involved can change significantly. For instance, a case brought
by MFS (now WorldCom) against
KPN in the Netherlands in 1998 is
not due for resolution until 2003,
possibly too late to assist the complainant.
Areas in telecommunications,
especially mobile communications,
where accusations of anti-competitive behaviour have been made include:
Fixed-to-mobile call termination, especially in Europe, where
rates are considered to be well above
costs (see for instance research at:
www.itu.int/fmi). Australia decided
to regulate this market in 2000 by
encouraging operators to mirror reductions in retail tariffs in their termination charges, and by using the
threat of ex post action if there was
evidence of anti-competitive behaviour. The UK Competition Commission is conducting an enquiry, to be
reported in January 2003.
Mobile roaming, where users
typically have little or no information about the rates they will be
charged, may not receive the bill
until much later, and where no one
jurisdiction may be able to handle
complaints.
Pricing for SMS (short message
service), where the trend has been
for prices to rise, despite a huge increase in the volume of SMS traffic
being generated. As SMS is carried
over the signalling channel, the
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costs should be relatively low, but
prices are not. Because of the bundling of SMS with other services
though, meaningful price comparisons can be difficult to establish.
State aid to former incumbents. Several incumbent operators
have debts that run to tens of billions of US dollars. Should such
companies, in some cases still
partly State-owned, be permitted to
receive State aid?
Mergers, acquisitions
and alliances
Mergers, acquisitions and other
corporate alliances may be subject
to review by competition authorities
and/or sector-specific regulators on
an ex ante or an ex post basis. While
ex post merger regulation theoretically involves a lighter regulatory
burden on business, it raises problems in undoing anti-competitive
aspects of mergers after they have
been implemented. Competition
authorities typically consider the
effects on competition, applying
tests such as whether there has
been a “substantial lessening of
competition”. Sector regulators may
apply similar tests, but may also
apply broader sector-related policies
or “public interest” standards,
which can sometimes appear to
conflict with competition concerns.
Another potential problem is the
risk of conflicting decisions where
both agencies oversee mergers.
One solution is to have the sectorspecific regulator provide recommendations, including sector-specific policy recommendations, for a
final decision to be made by a competition authority. This solution can
overcome problems of jurisdictional
overlaps, the danger of industry
capture and the relative inexperi-
ence of sector-specific regulators in
dealing with the analytical techniques of competition law. A more
common approach is to promote
cooperation and information sharing between the agencies.
Industry consolidation seems set
to continue (especially given the
dynamics of the market over recent
years) and can be seen as a result
of a correction in the market structure stemming from over-capacity
in the industry. As such, industry
consolidation does not necessarily
lead to a lessening of competition.
Seen in this light, it may be inappropriate to protect certain industry players from financial failure in
the name of maintaining competition levels.
Institutional approaches
While international and global
arrangements are likely to lead to
a greater harmonization of institutional arrangements, the institutional framework must be consistent with the constitutional framework of each country. A wide range
of institutional approaches have
been adopted to implement competition policy in telecommunication markets. At one end of the
range, in some countries, generic
competition legislation is simply
applied by the judicial system. At
the other end of the range, many
countries have only telecommunication sector-specific regulators,
and no generic competition authorities. In between lie the increasing number of countries with
both sorts of agency. For this dual
system to function smoothly, cooperative mechanisms can be developed between the agencies to
clarify their respective roles, and to
share information and analyses to
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reduce duplication of efforts and
inconsistent rulings.
One approach that is consistent
with good competition and telecommunication policy involves defining
the relevant product and geographical markets and determining if
there are dominant firms in relevant
markets based on competition
policy analyses. Dominant service
providers can be regulated by sector-specific regulators on an ex ante
basis in the markets where they are
dominant. Markets with no clearly
dominant service providers can be
deregulated or made subject to
much lighter regulation. However,
in those markets, competition authorities may be able to intervene
on an ex post basis, to apply competition law-based remedies, for
instance to deal with cross-sectoral
market entry by firms that have a
dominant position in a different
market segment.
Multilateral approaches
The most significant multilateral
instrument governing telecommunication sector regulation has been the
Reference Paper on Regulation developed by the World Trade Organization (WTO) as part of its 1998
Agreement on Basic Telecommunications. While many countries
applied competition policy to the
telecommunications sector before
the WTO Agreement, the more than
70 countries that have adopted the
Reference Paper are now legally required to do so as part of their obligations under WTO’s General Agreement on Trade in Services (GATS).
Depending on the country, some of
these competition policies are being
applied by both multisectoral competition authorities, but most are
applied by sector-specific regulators
under sector-specific legislation.
In addition to sector-specific instruments, such as the Reference
Paper, an increasing number of
countries have adopted competition policies and laws of general
application. At the multilateral
level, a number of WTO Member
governments have proposed the
development of a “multilateral
framework on competition policy”,
which will be discussed as part of
the new round of multilateral trade
negotiations.
At present, bilateral cooperation
agreements on anti-competitive activities represent the most concrete
form of international cooperation in
this area, but the importance of a
multilateral framework to enhance
the contribution of competition
policy to international trade and
development is reflected in the WTO
Ministerial Meeting at Doha in 2001,
which may help pave the way for
greater progress in the development
of a multilateral competition policy
framework. Competition policy in the United States:
Policy in practice
This article is based on a specially-commissioned case study on competition in telecommunications in the United
States, prepared by John Alden, Vice President of Freedom Technologies. The entire text of this and other case studies
produced within the scope of the recent ITU New Initiatives workshop on competition policy in telecommunications
can be found at: www.itu.int/casestudies. Opinions expressed in this study are those of the author, and do not
necessarily reflect the views of ITU, its membership, or the US Government.
T
he United States provides a
good example of the application of competition policy
concepts in the context of antitrust
law enforcement and sector-specific
telecommunication regulation. For
instance, the regulator, the Federal
Communications Commission
(FCC) and the Department of Justice (DoJ) — and in some cases the
Federal Trade Commission (FTC) —
present similarities and differences
in their approaches to market intervention.
Certain elements of competition
policy are identical or similar in
analyses carried out by both FCC
and DoJ. These include:
Defining markets in product
and geographic terms.
Analysing markets to determine the extent of concentration.
Analysing markets to determine whether any single entity or
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group of entities does or can exercise market power.
Examining ease of entry and
exit.
Identifying whether any market player controls essential facilities that are required by competitors as inputs to their own offerings.
There are, however, significant
distinctions in how these analytical principles are applied. Perhaps
the greatest of them lie in:
The purposes for which analyses of market power are carried out.
The overall standard of review
utilized.
Box 1– The FCC’s public interest standard
In its order approving the 1998 merger of MCI Communications Corp.
and WorldCom, Inc., the FCC outlined the differences between its
public interest standard and DoJ’s antitrust standard:
The FCC examines not only the potential effect of the merger on
competition, but also the balance of other potential benefits or harm
to the public. While the FCC’s analysis of competitive effects is
“informed” by antitrust principles, it is not “governed” by them.
The Commission must implement and enforce the Telecommunications Act of 1996, in which Congress established a “clear national
policy that competition leading to deregulation, rather than continued regulation of dominant firms” should be paramount.
The FCC acknowledged that its competitive analysis was derived
not only from its own Competitive Carrier and non-dominance
proceedings, but also from the 1992 Horizontal Merger Guidelines
employed by DoJ and FTC. In approving the merger, the Commission
defined the affected markets as: domestic long-distance services; US
international services; Internet backbone services, and local exchange
and exchange access services.
The Commission found no potential impairment of competition in
the long-distance or international service markets. It also accepted
commitments from executives of both companies that they would seek
to enter additional local service markets, thereby actually increasing
competition. During the concurrent DoJ and FCC reviews, however, it
became apparent that one or both of those agencies were concerned
about Internet infrastructure concentration, particularly in the backbone market. To head off this problem, the merger partners agreed to
divest MCI’s Internet assets to Cable & Wireless plc. After that, the
merger was allowed to proceed.
The degree to which specific
remedies and requirements are
spelled out in statutes.
In concrete terms, the FCC generally carries out market analyses
either as part of a proceeding to
alter sector-specific, ex ante regulations, or as part of its review of
licence transfers required to complete mergers. Antitrust authorities,
meanwhile, conduct analyses either
as part of investigations to seek
ex post enforcement of antitrust
laws or through pre-merger reviews.
As Box 1 shows, even in the
seemingly similar act of authorizing mergers, there are important
differences in the standards the
FCC and the Justice Department
or FTC apply. The DoJ employs a
narrow standard focusing purely on
competition—whether or not the
proposed business combination
will violate the Sherman or Clayton
antitrust Acts. The FCC, on the
other hand, employs a much
broader “public interest” standard.
There is also a distinction between the nature of statutes governing the FCC’s actions and those
governing antitrust enforcement.
The Communications Act, particularly with its Telecommunications
Act amendments, contains more
specific, direct mandates and instructions, many of which, when
implemented by the FCC, embody
proactive, ex ante requirements.
The antitrust laws on the other
hand, are by necessity more general, and they apply punishment for
proscribed behaviour after it has
occurred. For further information on Policy and Strategy Trends, please contact: ITU Strategy and Policy Unit, International Telecommunication Union,
Place des Nations, CH-1211 Geneva 20 (Switzerland). Fax: +41 22 730 6453. E-mail: spumail@itu.int. Website: www.itu.int/osg/spu/
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